Protection · 5 min read
How Much Term Cover
Do You Actually Need?
Not ten times your income. That rule of thumb was invented for convenience, and it under-insures almost everyone who uses it.
Ravinder Pal Singh Ubeja ·
Term insurance is the cheapest thing on your balance sheet and the one most often bought by guesswork. The right number is not a multiple of income — it is a calculation, and it takes about ten minutes.
Why "ten times income" fails
The rule is popular because it is easy, not because it is right. It ignores everything that actually determines how much money your family would need: how many years of income are being replaced, what you owe, what you have already saved, and what inflation does to a lump sum over twenty years.
A 30-year-old with a young child and a home loan and a 50-year-old with grown children and no debt can earn identical salaries and need wildly different cover. The rule gives them the same answer.
A method that works
Four steps. Do them in order.
- 1. Replace the income. Take your annual take-home and multiply by the number of years your family would depend on it — usually until your youngest child is financially independent, or until your spouse reaches retirement. For a 35-year-old with a 3-year-old child, that is often 20 years or more, not 10.
- 2. Add every liability. Home loan outstanding, car loan, business loan, personal loan, credit card balances, and any loan you have personally guaranteed for a business. All of it. The point of the cover is that nobody has to sell the house.
- 3. Add the funded goals. Children's higher education and marriage, at today's cost inflated to the year you will need it. Education inflation in India has run well above general inflation for two decades; using today's fees will understate the number badly.
- 4. Subtract what already exists. Current investments, provident fund, existing life cover including employer group cover, and any property the family would realistically sell. Be honest about the last one — most families will not sell the home they live in.
The result is your cover. For most working Indian professionals in their thirties with dependants and a home loan, the honest number lands between fifteen and twenty-five times annual income — not ten.
Four things people get wrong
- Counting employer cover as permanent. Group cover ends when the job ends, typically at the exact moment you are least insurable. Treat it as a bonus, never as your base.
- Buying an investment-linked policy for protection. Endowment and ULIP products have a place in a plan, but they are an expensive way to buy a death benefit. Pure term cover buys a far larger sum assured per rupee. Keep the two decisions separate.
- Under-declaring health history. A non-disclosed condition is the single most common reason a genuine claim gets contested. Declare everything, accept the loading if there is one, and the policy actually pays.
- Not insuring a non-earning spouse. If one partner runs the household full-time, replacing that work has a real cost. It is routinely ignored.
Term length, and riders
Cover should run until your dependants are independent or your liabilities are cleared, whichever is later — not to age 99. Paying for cover in decades when nobody depends on your income is money spent on the wrong problem.
On riders: a critical illness or accidental disability rider is worth considering, because losing your income to illness is statistically more likely than dying during your working years and is not covered by a death benefit. Waiver-of-premium is usually cheap and sensible. Most other riders are not.
One last thing
Tell your family the policy exists and where the document is. An unclaimed policy is a remarkably common outcome. Write it down, and register a nominee correctly.