Chapter 4 of 12
How Much Term Insurance Do You Need?
Calculate the right sum assured for your family.
Suvash had just decided to get term insurance. That part was easy. The hard part was the next screen: "Enter your desired sum assured."
₹50 lakh? That felt like a lot. ₹1 crore? That felt like a random number he'd seen on Instagram ads. ₹2 crore? Was he being greedy?
He typed ₹75 lakh into the box, then deleted it. Then typed ₹1 crore. Then deleted that too. He went to Policybazaar, then Ditto, then back to Policybazaar.
He called his only financial-jargon-fluent friend in Bengaluru. The friend said: "Depends on how much you earn and your liabilities." Then the friend was on another call and hung up.
Suvash sat back and decided to actually work through the numbers himself.
Why "As Much as Possible" Is Not an Answer
The sum assured in a term insurance policy is the guaranteed amount your nominee receives if you die during the policy term. It's the entire point of buying the policy, and getting it wrong in either direction is costly.
Too little and your family can't maintain their lifestyle after you're gone. Too much and you're overpaying in premiums every month for cover you don't need.
There are three real methods for calculating the right number. Suvash worked through all three.
Method 1: The Income Replacement Method
The most commonly cited formula: 10 to 15 times your annual income.
Suvash earns ₹9 lakh/year (₹75,000/month).
- 10x = ₹90 lakh
- 15x = ₹1.35 crore
The logic: your family takes the lump sum, invests it conservatively at 7–8% returns, and lives off the interest without touching the principal. At 8% on ₹1 crore, that's ₹8 lakh/year, close to what Suvash was earning.
This method is simple and fast. But it doesn't account for existing debts, dependants' specific needs, or how long the income needs to last.
Suvash earns ₹9L/year. Using 12x multiplier:
Target sum assured = ₹9L × 12 = ₹1.08 crore ≈ ₹1 crore (round up)
At 7.5% FD rate, ₹1 crore generates ₹7.5L/year = ₹62,500/month
Suvash was sending ₹20,000 home. His family also needs to pay for his sister's education (₹60,000/year for 4 more years) and his parents' medical expenses (₹50,000/year).
₹62,500/month is more than sufficient, the family could even save part of it.
Method 2: The Liability + Dependants Method
This method starts from what you owe and who needs you:
- Add up all outstanding loans (home loan, car loan, personal loan)
- Add up future obligations (children's education, parents' medical, marriage)
- Add income needed until dependants are self-sufficient
Suvash's calculation:
Outstanding loans: ₹0 (no loans yet, but he plans a home loan in 2–3 years)
Future obligations:
- Sister's college education: ₹60,000/year × 4 years = ₹2.4 lakh
- Parents' medical: ₹50,000/year × 20 years = ₹10 lakh
- Emergency buffer: ₹5 lakh
Income replacement (until his 27-year-old sister starts earning in 4 years + 5-year buffer):
- ₹20,000/month × 12 × 9 years = ₹21.6 lakh
Total: ₹2.4L + ₹10L + ₹5L + ₹21.6L = ₹39 lakh
Wait, that's only ₹39 lakh? The income replacement method said ₹1 crore. Which is right?
The liability method works well when your dependants will become self-sufficient quickly. For Suvash, his parents will never be fully self-sufficient, they have no income, no savings, and a health condition. The liability method only goes 9 years out. But his parents need support for potentially 20–25 more years. The income replacement method (₹1 crore) is more appropriate in his case.
Method 3: Human Life Value (HLV) Method
HLV is the most rigorous method. It calculates the present value of your future income, essentially, what your life is "worth" in financial terms to your dependants.
The formula:
HLV = (Annual income − Personal expenses) × Present value factor for remaining work years
Suvash's numbers:
- Annual income: ₹9 lakh
- Personal expenses (rent, food, his own needs): ₹3.6 lakh
- Net income available for family: ₹5.4 lakh
- Working years remaining (retirement at 60): 34 years
- Discount rate: 6% (inflation-adjusted)
Present value of ₹5.4 lakh for 34 years at 6% discount rate ≈ ₹77 lakh
HLV = approximately ₹77 lakh
Income Replacement (12x): ₹1.08 crore
Liability Method (9-year horizon): ₹39 lakh
HLV (34 working years, 6% discount): ₹77 lakh
These three methods give very different answers. The income replacement method is the most conservative (highest number). The liability method is the most optimistic (lowest). HLV sits in between.
For someone with Suvash's profile, many dependants, long support horizon, no existing savings safety net, ₹1 crore is the prudent choice.
So ₹50 Lakh vs ₹1 Crore vs ₹2 Crore?
Let's compare what each actually costs Suvash (26-year-old, non-smoker, 40-year term):
| Cover Amount | Annual Premium (approx) | Monthly Cost | Family Gets | Suitable For |
|---|---|---|---|---|
| ₹50 lakh | ₹4,500–6,000 | ₹375–500 | ₹50L lump sum | No dependants, single, minimal obligations |
| ₹1 crore | ₹8,000–11,000 | ₹666–916 | ₹1Cr lump sum | Sole breadwinner with family obligations |
| ₹1.5 crore | ₹11,000–15,000 | ₹916–1,250 | ₹1.5Cr lump sum | Sole earner with home loan + multiple dependants |
| ₹2 crore | ₹14,000–20,000 | ₹1,166–1,666 | ₹2Cr lump sum | High income, large EMIs, business obligations |
For Suvash at his current stage: ₹1 crore is the right number. When he takes a home loan (say ₹40 lakh in 3 years), he should port-up or buy an additional ₹50 lakh plan to cover the liability.
If Suvash buys ₹1 crore today at ₹8,500/year and needs ₹50 lakh more in 5 years (for a home loan), he buys a separate ₹50 lakh plan at 31. The 31-year-old rate is higher, but at least the ₹1 crore is locked in at a 26-year-old rate. The strategy: buy what you need now, add more when liabilities grow.
What If You Have Existing Savings?
If Suvash already had ₹30 lakh in PF + FDs, that's a buffer. You can subtract existing liquid assets from your cover requirement:
Required cover = (10x income + loans + obligations) − existing liquid assets
₹1 crore − ₹30 lakh savings = ₹70 lakh minimum. Suvash would still round up to ₹1 crore because the savings aren't earmarked for family support and he'd prefer not to depend on them.
Your provident fund at 26 is semi-liquid. Your family home is illiquid. A plot of agricultural land is extremely illiquid. Only count assets your family can actually access quickly, savings accounts, FDs, liquid mutual funds, when calculating the deduction.
The Home Loan Question
Suvash plans to take a ₹40 lakh home loan in 3 years. Does that change his term insurance cover?
Yes. Outstanding loans should be fully covered by your term insurance, separately from the income replacement calculation. Banks often sell loan-linked term plans (decreasing cover term plans) alongside home loans. These are usually worse value than a standalone term plan.
Better approach: when you take the home loan, buy an additional standalone ₹40 lakh term plan for the loan tenure. Stack it on top of your existing ₹1 crore base plan.
The Final Number Suvash Landed On
Working through all three methods:
- Income replacement (12x): ₹1.08 crore → round to ₹1 crore
- Liability method: ₹39 lakh (undercounts for his situation)
- HLV: ₹77 lakh
Decision: ₹1 crore now. ₹50 lakh more when the home loan happens.
Total eventual cover: ₹1.5 crore. Annual premium: ₹9,200 for now (₹12,500 when he adds the ₹50L plan later).
That's ₹1,025/month for ₹1.5 crore in protection for his entire family. He spent more than that on two restaurant meals last month.
Key Takeaways
- Three methods: income replacement (10–15x income), liability method (add up debts + obligations), HLV (present value of future earnings)
- For most Indians with dependants, income replacement gives the safest (highest) number: use it as your floor
- Subtract liquid assets from the requirement, not illiquid ones like property or PF
- Outstanding loans must be added to the cover separately: don't skip them
- Buy ₹1 crore now; add more when liabilities grow (home loan, children's education)
- Premium difference between ₹50L and ₹1 crore is roughly ₹300–400/month: worth every rupee for a sole breadwinner
Now that Suvash has his number, the next step is picking which plan to actually buy. That's a different question, claims settlement, insurer reliability, rider selection. Go to How to Compare and Choose a Term Insurance Plan.
Or if you want to run the numbers yourself, use the Term Insurance Calculator.
Suvash has an annual income of ₹9 lakh, a home loan of ₹30 lakh, and ₹10 lakh in liquid savings. Using the income replacement method (12x) adjusted for assets and loans, what should his term insurance cover be?