Term insurance is the simplest form of life insurance: if you pass away during the policy term, your nominee receives a fixed sum. It is pure protection, and for most families with dependants, it is the foundation of a sound financial plan.
The hardest question is usually not whether to buy it, but how much cover to buy. You will often hear rules of thumb such as "ten or fifteen times your annual income". They are easy to remember, but they ignore the things that really matter: your loans, your goals, and what you already have. Here is a more considered approach.
Step 1: What would your family need to live on?
Start with your family's annual living expenses, not your income. Then ask how many years they would need support. For a young family, that might be until your youngest child is financially independent; for a couple, it may extend to your spouse's retirement.
Remember that expenses rise with inflation, so the amount needed in fifteen years will be considerably more than today.
Step 2: Add what you owe
Add every significant liability that your family would otherwise have to repay:
- outstanding home loan;
- car or personal loans;
- any business borrowings you have personally guaranteed.
Step 3: Add the goals you would want protected
Some commitments matter regardless of what happens, most often children's education and, sometimes, a child's wedding or a parent's care. Estimate these in future rupees.
Step 4: Subtract what is already in place
Now deduct the resources your family could draw on:
- existing life cover (personal policies);
- savings and investments that could realistically be used;
- any other dependable sources of support.
Be cautious with employer group life cover. It is valuable, but it usually ends when you change jobs, and it may not be there when your family needs it.
An illustration
The figures below are hypothetical and rounded, purely to show the method.
| Amount | |
|---|---|
| Family's living expenses for the years they would need support (allowing for inflation) | ₹1.6 crore |
| Outstanding home loan | ₹45 lakh |
| Children's education goals | ₹40 lakh |
| Total need | ₹2.45 crore |
| Less: existing personal life cover | – ₹25 lakh |
| Less: investments that could be used | – ₹30 lakh |
| Indicative cover required | ₹1.9 crore |
Your own numbers will be different, which is exactly why a formula alone is not enough. You can try your own figures in our term cover calculator.
Choosing the policy term
Choose a term that lasts until your financial responsibilities are expected to end, typically until your children are independent and your major loans are repaid, often close to retirement age. Cover that ends too early can leave a gap just when it is needed.
Things that matter as much as the amount
- Disclose everything. Your health, lifestyle, habits and existing policies must be disclosed accurately. Non-disclosure is one of the main reasons claims run into difficulty.
- Riders are optional. Add-ons for accidental death, critical illness or waiver of premium can be useful, but each one adds cost. Choose them deliberately, not by default.
- Keep it separate from investing. A standard term plan pays nothing if you outlive it. That is what keeps it affordable. Plans that combine insurance and investment tend to provide much less cover for the same premium.
- Review it. A new home loan, a child or a significant rise in income are all good reasons to revisit your cover.
How we help
We work through these numbers with you, explain the features and terms of relevant plans from the insurers we work with, and support you through the proposal, medical tests and documentation. If your family ever needs to make a claim, we help them with the paperwork too.
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