Term life · income replacement
Most people pick a term cover figure because it sounds like a lot. Human life value works it out instead: the income your family would lose, for as long as they would have relied on it, plus the debts that would outlive you.
Multiply your annual income by the number of years until you would have retired. That is the income stream your family loses. Add the loans that would fall due, because a home loan does not pause for a death. Subtract the life cover already in force, since that part of the gap is filled.
What remains is the additional cover to buy. For most earners in their thirties it lands between ten and twenty times annual income, which is considerably more than the round figure people usually choose.
This is the income-replacement method, and it is deliberately simple. More elaborate versions discount the future income stream to present value and add expected inflation to expenses, which pull in opposite directions and, for the term of an ordinary policy, largely cancel.
The single most common error is treating employer group term life as permanent cover. It is real while you are employed and gone the day you are not, and it disappears exactly when a job loss has already made the family's position fragile. Count it, but know what it is.
The second error is counting endowment and money-back policies at their sum assured. A twenty-lakh endowment taken twelve years ago is a savings product with a modest death benefit attached, and it is not doing the job a term policy does. Include the death benefit, but do not let a large premium outgo create the impression of a large cover.
Loans are the obvious addition and the calculator asks for them. A home loan, a vehicle loan, and for a business owner, personal guarantees given to a bank against a company facility, which lenders enforce against the estate.
Two more are worth adding manually to the figure this produces. A specific provision for children's education, because the cost falls in a fixed window whether or not the income continues, and any lump sum a spouse would need to keep a home running while they re-establish their own earning.
Business owners should also look separately at keyman cover and at partnership or buy-sell arrangements. Those protect the business, which is a different question from protecting the family, and one does not substitute for the other.
Term insurance buys the death benefit and nothing else, which is why the same sum assured costs a fraction of what a savings-linked policy costs. A one-crore term cover for a healthy thirty-five-year-old is an ordinary monthly expense; a one-crore endowment is not a product most people can afford at all.
Buy the cover you need in term form, and make investment decisions separately with the difference. Mixing the two into one product tends to produce inadequate insurance and mediocre returns at the same time.
Disclose everything on the proposal: medical history, tobacco use, income, occupation and existing policies. Section 45 of the Insurance Act limits when an insurer can repudiate after three years, but a non-disclosure discovered inside that window is the most reliable way for a family to receive nothing at all.
Enough to replace the income your dependants would lose until you would have retired, plus outstanding loans, less the cover already in force. For most earners this works out at ten to twenty times annual income, which is usually higher than the figure chosen by instinct.
The present economic value of a person's future earnings to the people who depend on them. It is used to size life cover against a real loss rather than against a round number that sounds adequate.
Count it, but treat it as temporary. Group term life is typically a multiple of salary and ends when the employment ends, so it disappears at precisely the moment a family is least able to absorb the loss.
Include their death benefit, which is the part that pays out on death. Do not treat the premium you pay as a measure of the protection you hold: savings-linked policies carry a small death benefit relative to their cost.
Usually to the age at which you would have stopped earning and your dependants would have stopped relying on that income, commonly sixty or sixty-five. Cover beyond that point costs a great deal and replaces income that would have ceased anyway.
Related: Term life insurance · Health insurance · Personal accident cover