How Much Term Insurance Cover You Need

The right term insurance cover is the amount your family would need, invested sensibly, to replace your contribution to household expenses until they no longer depend on it, pay off outstanding loans, and fund goals you would otherwise have paid for, minus assets they could already use. It is a calculation, not a multiple.

Rules such as “ten times annual income” are quick, but they ignore loans, the age of your children and what you already own. For many people they undershoot badly.

The four components

1. Income replacement. The present value of the household expenses your income currently pays for, over the years your dependants will need it.
2. Outstanding liabilities. Home loan, car loan, personal loans. Your family should not inherit EMIs without the income that paid them.
3. Future goals. Children’s education, a daughter’s or son’s wedding if you intend to fund one, a parent’s care.
4. Less existing resources. Investments your family could use, and any life cover that will genuinely continue.

A worked example

Rohit is 35. His take-home pay is ₹12 lakh a year. His spouse does not currently earn. They have one child aged 6.

Income replacement

The family needs ₹5.76 lakh a year, rising with inflation, for 25 years. If the payout is invested to earn about 8% while inflation runs at about 6%, the real return is roughly 2% a year.

The present value of ₹5.76 lakh a year for 25 years, drawn at the start of each year, at a 2% real return is about ₹1.15 crore.

Working in real terms, today’s rupees with a return net of inflation, handles rising expenses automatically. The 8% and 6% assumptions are illustrative. A more conservative investment assumption raises the cover needed.

Liabilities and goals

Add the home loan, ₹35 lakh, and the education goal, ₹25 lakh. Because the education figure is already at today’s prices, it does not need a separate inflation adjustment in this real-terms calculation.

Less resources

Subtract the ₹15 lakh of investments. The employer’s group cover is left out because it ends when the job does, and Rohit may change jobs, lose his job, or fall ill and stop working, which are the circumstances in which the cover matters most.

The total

About ₹1.6 crore. Ten times income would have said ₹1.2 crore, leaving the family ₹40 lakh short, roughly the value of the home loan.

Adjusting the assumptions to your situation

• The continuing share of expenses. 70 to 85% is typical, because some costs leave with the person. Use your own judgement about travel, food and personal spending.
• The years. If your spouse earns, or will return to work, the need may be shorter or smaller. If you support parents, it may be longer.
• The return assumption. A family receiving a lump sum after a death is unlikely to invest aggressively. Assume a modest real return; a lower one produces a larger, safer figure.
• Goals. Include only goals you genuinely intend to fund. Every goal added raises the cover and the premium.

If your spouse earns

A working spouse changes the calculation in two ways. The income replacement need falls, because part of the household’s expenses would continue to be met from their salary. And the spouse probably needs cover of their own, because the family now depends on two incomes, not one.

Run the calculation twice, once for each earner, each time assuming the other income continues. A household where both incomes are needed for the home loan EMI usually finds that both partners need substantial cover, even if one earns considerably less. A spouse who does not earn but runs the home and looks after children also has an economic value to the family: replacing that work costs money, and some families insure it for that reason.

Choosing the term

Cover should run until your dependants are financially independent and your major loans are paid, commonly to around 60 or 65. Beyond that, most people have fewer dependants and more assets, and the premium for very long terms rises. There is no need to insure an income you will no longer be earning.

Revisit it

Recalculate when something large changes: a new home loan, a second child, a spouse leaving or re-entering work, or a large rise in your savings. Many people increase cover with a second policy rather than replacing the first, which keeps the older, cheaper policy in force.

Things this calculation does not decide

It does not tell you which insurer or plan to buy. Compare claim settlement records published by the regulator, the exclusions in the policy wording, and whether the plan pays a lump sum or monthly income. Disclose your health and habits fully on the proposal form; non-disclosure is a common reason for claims being disputed.

Where this fits

• Why pure term cover and investment should be separate: term insurance vs ULIP · endowment vs term plus investing
• Sizing the other protection: how big your emergency fund should be
• Goals in future money: child education planning calculator · goal planning calculator
• Working out present values: present value calculator