Term insurance is the simplest and most affordable form of life insurance. If the policyholder dies during the policy term, the family receives the sum assured. There is no maturity benefit, which is why premiums are low. The most common question is how much cover to buy. Too little leaves your family exposed; too much means paying for cover you do not need.
The quick rule of thumb
A popular starting point is 10 to 15 times your annual income. It is easy to remember, but it ignores your loans, goals and existing savings. A needs-based calculation gives a much better answer.
A simple needs-based formula
Cover needed = Future household expenses + Outstanding loans + Major future goals − Existing savings and insurance
Step 1: Future household expenses
Estimate how much your family spends a year, excluding your own personal expenses. Multiply by the number of years your family would need support, for example until your youngest child is independent or your spouse retires. Add a buffer for inflation.
Step 2: Outstanding loans
Add your home loan, car loan, personal loans and credit card dues. Your family should not have to sell the house to clear a loan.
Step 3: Major future goals
Include big expenses you would want covered, such as children's higher education and weddings, and an emergency fund.
Step 4: Subtract existing resources
Deduct your current savings and investments (mutual funds, PPF, EPF, FDs) and any existing life cover.
Worked example
Suresh is 32, earns ₹12 lakh a year and has a spouse and a 3-year-old child.
- Family expenses: ₹5 lakh a year for 20 years, adjusted for inflation: about ₹1.4 crore
- Home loan outstanding: ₹40 lakh
- Child's higher education and other goals: ₹30 lakh
- Minus existing savings and EPF: ₹15 lakh
- Minus employer group cover: ₹10 lakh
Cover needed: about ₹1.85 crore. Rounding up, a ₹2 crore term plan would be sensible. The quick rule of 10 to 15 times income would have suggested ₹1.2 to ₹1.8 crore, which could fall short.
Choosing the policy term
Choose cover until your planned retirement age, usually 60 or 65, or until your major responsibilities end. Very long terms such as up to 85 cost more and are rarely needed if you build enough savings.
Other tips
- Buy early: premiums are lowest when you are young and healthy, and they stay fixed for the whole term.
- Disclose everything honestly: smoking, health conditions and family history. Hiding facts is a common reason for claim rejection.
- Do not rely only on employer cover: it usually ends when you leave the job.
- Consider useful riders such as accidental death and critical illness, but keep the base plan simple.
- Check the insurer's claim settlement record and service quality, not just the cheapest premium.
- Review every few years: marriage, children and new loans may require extra cover.
The bottom line
Term insurance is not an investment; it is protection. Use the formula above to find a realistic number, buy it early and keep the policy simple so your family is secure whatever happens.
Disclaimer: This article is for general information only and is not financial advice. Please consult a SEBI-registered adviser or tax professional before making investment decisions.
