Term insurance: how much cover is actually enough?
Ask ten people how much term cover they hold and you'll hear 'one crore' from most of them. It's a reasonable number for many families and the wrong number for many others. The trouble is that it's usually chosen because it sounds substantial, not because anyone worked it out. Here's a way to work it out.
Start with what the money needs to do
A term policy pays a lump sum if you die during the policy term. That sum has to do four jobs: clear debts, replace income for the years your family depends on it, fund specific future costs like education, and do all of that after accounting for what you already own. Write those four down as numbers.
1. Outstanding loans
Home loan, car loan, any personal or business borrowing in your name. Take the current outstanding balance, not the original amount.
2. Years of household expenses
Estimate your household's annual spending, then multiply by the number of years your family would need support. For a family with young children, that might be fifteen to twenty years. For a couple close to retirement with grown children, it might be five. Be honest about lifestyle inflation; expenses tend to rise, not fall.
3. Specific future costs
Children's higher education is the big one. Add a realistic figure for each child, in today's rupees plus a margin for cost inflation. Add a wedding or a parent's care if those are real commitments.
4. Subtract what already exists
Existing investments, provident fund balances, other life cover (including any employer group term policy) and property that could reasonably be sold. This is the step most people skip, and it's why some families are over-insured while others are under.
The rule-of-thumb check
A widely used shortcut is 10 to 15 times annual income. It's not a substitute for the calculation above, but it's a useful sanity check. If your four-line arithmetic gives you a number far outside that band, look again at the assumptions. If it lands inside, you're probably close.
Term length matters as much as the amount
Cover should last until your major responsibilities end: the loan is repaid, the children are independent, retirement savings can carry your spouse. A policy that expires at 55 while the home loan runs to 62 has a gap in exactly the years it was bought for. Conversely, paying for cover into your seventies, when dependants are gone and assets have grown, is usually money that could be invested instead.
Why old policies drift
Most term policies are bought around a big moment: a marriage, a child, a loan. Five years later, the loan is bigger, there's a second child, income has doubled, and the policy is exactly the same. It's not that the original decision was wrong; it's that life moved. A review every few years, or after any major change, is how you catch the drift.
Two things to check beyond the number
First, the nominee. Make sure the nomination reflects your current family and that your family knows the policy exists. Second, disclosures. Health, smoking status, occupation and income as recorded on the original proposal form need to match reality; an inaccurate disclosure discovered at claim time is the most common reason a term claim runs into trouble. If anything has changed, insurers have a process to update it, and it's far better done now.
The right amount of term cover is a calculation, not a feeling. Do the four lines once, revisit them when life changes, and the number takes care of itself.
Sources: IRDAI (Protection of Policyholders' Interests) Regulations on disclosure and nomination; general actuarial income-replacement guidance as commonly published by Indian life insurers. The 10 to 15x income figure is a widely cited industry rule of thumb, not a regulatory standard.