Nilesh Shah (an illustrative profile) is 36, lives in Ahmedabad and earns ₹15 lakh a year. His wife works part-time, and they have two children aged 7 and 3. There is ₹45 lakh left on the home loan. Nilesh has a ₹25 lakh term plan he bought at 28, and ₹30 lakh of group life cover from his employer, so he feels he has "₹55 lakh of cover".
Is that enough? The honest answer depends on what his family would need if his income stopped tomorrow, and for how many years. This chapter walks through that calculation step by step, so you can do the same for your own household.
In this chapter
- What a term plan is and who actually needs one
- Two ways to estimate cover: the income multiple and the needs-based method
- A full worked calculation with inflation built in
- How long cover should last, and which riders are worth their cost
What a term plan is, and who needs one
A term plan is the simplest form of life insurance. You pay a premium for a fixed number of years. If you die during that period, your nominee (the person you name to receive the money) gets the sum assured. If you survive, nothing is paid. There is no savings element, which is why the premium is low relative to the cover.
You need one if anyone depends on your income: a spouse, children, parents you support, or a co-borrower on a home loan. A homemaker's work also has real economic value; replacing childcare and household management costs money, and some insurers offer cover for non-earning spouses within limits. A single person with no dependants and no shared loans may need little life cover today.
Method 1: the income multiple
The quickest rule of thumb is 10 to 15 times annual income. For Nilesh, that is ₹1.5 crore to ₹2.25 crore. It is useful as a sense-check, because most people underestimate how much money it takes to replace an income for 20 years.
But a multiple ignores your actual situation. A 30-year-old with a large home loan and two toddlers needs more than a 50-year-old whose children are working. That is why the needs-based method is the one to rely on.
Method 2: the needs-based calculation
The question here is: what lump sum, paid today, would let the family continue the life they planned? You add up what they would need, then subtract what is already there. Two ideas matter. Present value means today's lump sum needed to fund future spending, after allowing for the interest it earns while invested. Inflation means that ₹50,000 a month of expenses today will cost more each year.
Worked example: Nilesh's cover
Assumptions, all illustrative: the family's household expenses, excluding Nilesh's own personal spending, are ₹6 lakh a year and are needed for 20 years. Expenses rise at 6% a year (the planning inflation assumption), and the lump sum is invested to earn 7% a year. The children's higher education will need about ₹40 lakh in today's money.
- Clear the debt: outstanding home loan = ₹45 lakh.
- Fund household expenses: the present value of ₹6 lakh a year for 20 years, rising at 6% and earning 7%, is about ₹1.10 crore. Notice how close this is to ₹6 lakh × 20 = ₹1.2 crore, because the return only just beats inflation.
- Fund goals: children's education ₹40 lakh, plus ₹5 lakh for emergencies and final expenses = ₹45 lakh.
- Total need: ₹45 lakh + ₹1.10 crore + ₹45 lakh = ₹2.0 crore.
- Subtract what exists: existing investments of ₹22 lakh, plus the personal ₹25 lakh term plan = ₹47 lakh. Do not subtract the ₹30 lakh group cover; it ends if Nilesh changes or loses his job.
- Additional cover required: ₹2.0 crore − ₹47 lakh = about ₹1.53 crore, so a fresh term plan of around ₹1.5 crore.
| Item | Amount |
|---|---|
| Outstanding home loan | ₹45 lakh |
| Household expenses for 20 years (present value) | ₹1.10 crore |
| Children's education and emergency/final expenses | ₹45 lakh |
| Total need | ₹2.00 crore |
| Less: existing investments | − ₹22 lakh |
| Less: existing personal term cover | − ₹25 lakh |
| Additional cover required | about ₹1.5 crore |
Sense-check: Nilesh's total personal cover would become ₹1.75 crore, inside the 10 to 15 times range. If your two methods disagree sharply, trust the detailed one and recheck your inputs. The free financial planner can help with the arithmetic.
How long the cover should last
Cover should last until the need ends: the youngest child is financially independent, loans are repaid and your retirement savings could support your spouse. For most people that means cover until around 60 or 65. Cover to 85 or 99 costs noticeably more and is rarely needed to replace income.
Needs usually fall over time, so some families use two policies: a larger one for 20 years while children are young and the loan is large, and a smaller one running to 60. This "laddering" can cost less than one big policy for the full period.
| Option | What it pays for | Worth considering? |
|---|---|---|
| Waiver of premium (disability/critical illness) | Future premiums waived; cover continues | Often good value |
| Accidental death benefit | Extra payout if death is accidental | A standalone personal accident policy is usually broader |
| Critical illness rider | Lump sum on diagnosis of listed illnesses | Compare definitions with a standalone policy |
| Return of premium | Premiums refunded if you survive the term | Raises cost sharply; plain term plus investing usually works out better |
Buying it well
Disclose your health history, smoking, alcohol use and existing policies honestly; non-disclosure is the most common reason death claims are disputed. Expect medical tests for larger covers. Check the insurer's claim settlement record in IRDAI's published data, and make sure your nominee knows the policy exists and where its documents are.
Common mistakes to avoid
- Counting group cover: it disappears with the job, so it cannot be the family's foundation.
- Ignoring the home loan: unless a separate loan cover exists, the family inherits the EMI.
- Buying once and forgetting: marriage, a child or a bigger loan all raise the need; review every few years.
- Choosing cover to 99 for "legacy": the extra premium is usually better invested if the goal is income protection.
- Hiding a habit or condition: a slightly higher premium is far cheaper than a disputed claim.
Try this yourself: Write down four numbers: outstanding loans, your family's yearly expenses without you, the years they would need support, and your current investments plus personal term cover. Multiply yearly expenses by the years as a rough present value, add loans and major goals, then subtract what exists. Compare the result with 10 to 15 times your income. You can refine it in the planner.
Frequently asked questions
How much term insurance do I need on a ₹10 lakh salary?
The rough check is ₹1 crore to ₹1.5 crore, but the right figure depends on your loans, dependants and existing savings. A young family with a home loan may need more; someone near retirement with grown children may need much less. Run the needs-based calculation before deciding.
Should my term plan run till 60 or 85?
For income protection, cover until your youngest child is independent and loans are repaid, typically 60 to 65, is usually enough. Longer terms cost more each year. Consider them only for a specific reason, such as an estate need, and compare the extra premium with investing the difference.
Can I have more than one term plan?
Yes. Many people add a second policy after marriage, a child or a new loan. You must disclose existing cover to each insurer, and in a claim each policy pays its own sum assured.
Does a home loan insurance policy replace term cover?
It covers only the loan, and the cover often reduces as the loan is repaid. A personal term plan large enough to include the loan is usually simpler and more flexible, because the family can decide how to use the money.
Money n Wealth distributes life and health insurance and can help compare options once you know your number. Next, see how to structure health cover, and for the family-wide picture read Goal Planning.