How much term insurance do you need?

Term insurance pays a fixed sum to your family if you die during the policy term. It has no maturity or investment value, which keeps it low-cost, and it is the simplest way to make sure your family can carry on if your income stops. The harder question is how much cover to buy.

Method 1: A multiple of your income

A common rule of thumb is cover of 10 to 15 times your yearly income. It is quick, but it ignores your loans, your savings and how many years your family will depend on you.

Method 2: Add up what your family would need

The needs method adds up what the money would have to pay for, then subtracts what is already there.

• Loans: home, car and personal loans still outstanding, so your family is not left with the EMIs
• Future goals: children's education and marriage, at what they will cost then
• Household expenses: your share of the family's spending, for the years they depend on you
• An emergency reserve: six to twelve months of expenses

From the total, subtract any life cover you already have and the savings and investments your family could use.

A worked example

Ravi is 35 and earns ₹15 lakh a year. His family spends ₹60,000 a month, he has a home loan of ₹40 lakh and two young children.

*Kept simple by assuming the money earns roughly what inflation takes away.

Ravi would round this up to ₹2 crore. The income multiple suggests ₹1.5 to 2.25 crore, so here the two methods land in a similar range. For someone with a large loan or young children, the needs method usually gives the higher figure.

How long the cover should last

Cover is needed until your family no longer depends on your income: usually until your youngest child is independent, your loans are repaid and your retirement savings are enough on their own. For many people that means up to age 60 or 65.

Other things to check

• Disclose your health, habits and income truthfully. Not disclosing something can lead to a claim being rejected.
• Look at the insurer's claim settlement record over several years, not just one.
• Review your cover after marriage, a child, a new loan or a big pay rise.
• Cover from an employer usually ends when you leave the job, so treat it as extra, not as your main cover.
• Keep the nominee details up to date, and tell your family where the policy is.

Health insurance is a separate need. Term cover replaces income; health cover pays hospital bills. Most families need both.