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Term life insurance: how much cover does your family need?
Term cover is the simplest protection for a family that depends on your income. Here is how to think it through. Education only.
From The Wealth Shelf · Book 6: Cover First · 5 min read · Chapter 2
Education only. Not investment, tax or legal advice.The books recommend no fund, share or product: every fund and company in the examples is invented. Tax is explained in principle, without rates; check current rules with your CA. ProShelf is not a SEBI-registered adviser.
Term cover should replace what your family would lose: future income for the years they depend on it, plus loans and big goals, minus what you already have.
The idea
How term insurance works
Term insurance is the simplest life cover. You pay a premium every year for a set term (say until 60). If you die during the term, your nominee receives the sum assured. If you survive, nothing is paid. Because most people survive, the premium is small compared with the cover.
Term plan
Endowment / money-back
Pays on death
Large sum assured
Smaller sum assured
Pays on survival
Nothing
Maturity amount
Premium for the same cover
Low
Many times higher
Purpose
Protection only
Savings with some protection
The method
Two ways to size cover
Method
How
Strength
Weakness
Income multiple
10–15 times yearly income
Quick
Ignores loans, goals, existing savings
Needs method
Income the family would lose + loans + goals − what you already have
Fits your family
Takes 20 minutes
Income multiple check, Arjun
Take-home a year
About ₹25.8 lakh
10–15 times
About ₹2.6–3.9 crore
Needs method (next pages)
About ₹2.23 crore
The method
The needs method, step by step
Yearly gap. What the family would spend each year without you (leave out loans that cover clears), minus the other income that would continue.
Years of support. Until the youngest child is independent, or your partner retires.
Income need. Yearly gap × years, adjusted for inflation and returns (the planner does this).
Add loans. Everything outstanding.
Add big goals. Children’s education, at today’s cost.
Subtract what you have. Financial assets (not your home) and existing life cover.
Example
Arjun’s and Neha’s cover
Step
Arjun
Neha
Yearly gap
₹1.75 lakh a month − Neha’s ₹85,000 = ₹10.8 lakh a year
About ₹6.6 lakh a year (costs beyond Arjun’s income, plus childcare)
Years
20 (Kabir is 5)
20
Income need (1% real)
About ₹197 lakh
About ₹120 lakh
+ Loans
₹66.2 lakh
Covered by Arjun’s income
+ Education (today’s cost)
₹50 lakh
₹25 lakh of extra help
− Financial assets
₹90 lakh
—
Need
About ₹223 lakh
About ₹145 lakh
Bought
₹2.5 crore to age 60
₹1.5 crore to age 60
The method
How long, and other choices
Choice
Sensible default
Why
Term
Until your planned retirement (say 60)
After that, savings should support the family
Premium
Level, paid yearly
Simple; avoid long single premiums
Payout
Lump sum, or part lump sum + monthly income
Monthly income helps families who’d struggle to invest a lump sum
Riders
Few, if any
Separate covers (Ch. 7) are often clearer
Insurer
Strong record of settling claims; easy process
Check IRDAI’s data and reviews
Try it yourself
Questions from the worksheet: Your cover need
Work it out for each earning or caring partner. The Excel planner does the arithmetic.
Yearly gap: family spending without you (excluding loans) minus other income that continues
Years of support needed
Income need (planner, at 1% real return)
Loans outstanding + children’s education at today’s cost
Minus financial assets the family would use and existing cover
Cover to buy (rounded up), and term
In three lines
What to remember
Term insurance gives the most protection per rupee: it pays only on death, so it’s cheap.
Size cover with the needs method: income gap × years + loans + goals − assets; round up.
Cover both partners, to your working age, with honest disclosure.
Needs method
Sizing cover from what the family would lose and owe, minus what it has.
Rider
An add-on to a policy, such as accidental death.
Non-disclosure
Leaving out facts on a proposal form, which can void a claim.
This article is adapted from the book. Examples marked “Example” use invented names and numbers; company stories are based on public sources listed in the book. Education only: not investment, tax or legal advice.
