Term Insurance: How Much Life Cover Do You Actually Need?

The most important financial decision most Indians get wrong. Too little: family is stranded. Too much: wasted premium. The right cover is calculated, not guessed. Rule of thumb is outdated. Use income replacement method plus liability coverage for a precise number.

Income replacement method (the right way): Step 1: Take your annual income (say ₹12L). Step 2: Multiply by years remaining to retirement (say 30 years). Step 3: Apply present value factor at 7% inflation discount (approximately 14× for 30 years). Step 4: Add outstanding liabilities (home loan ₹40L, car loan ₹5L). Step 5: Subtract existing assets (savings ₹10L, existing policies ₹20L). Formula: ₹12L × 14 = ₹1.68Cr + ₹45L liabilities − ₹30L assets = ₹1.83Cr. Round up to ₹2Cr cover. Common mistakes in calculating cover: Using the old "10× income" rule: ₹12L × 10 = ₹1.2Cr. But inflation at 7% means ₹1.2Cr today equals ₹61L in 30 years in real terms, not enough. Second mistake: not including liabilities. A ₹50L home loan must be separately accounted, family still needs to service it. Third: not reviewing every 5 years.