Term insurance is one of the simplest financial products to understand and one of the most poorly sized in practice. Most people either skip it — "I'll get to it" — or buy a round number that sounds reassuringly large (₹1 crore has become a kind of default) without checking whether it actually matches their situation. Both are a form of guessing. Here's a framework for doing better.
Start with what the cover is actually replacing
Term insurance exists to replace your income for the people who depend on it, if you're no longer there to earn it. That framing matters — the right cover amount isn't about your net worth or your assets, it's about how much income your family would need replaced, and for how long.
A practical calculation
A reasonable starting framework adds up these components:
- Income replacement. A common rule of thumb is 10–15x your annual income, adjusted for how many working years remain and how dependent your family is on that income continuing.
- Outstanding liabilities. Home loans, other debts — anything your family would otherwise have to repay from savings or by selling assets.
- Future goals that don't stop without you. Children's education, a wedding fund — these costs don't disappear if you're not there to fund them gradually.
- Minus existing cover and liquid assets. Any life cover you already have through an employer, plus savings and investments that could be drawn on, reduce the additional cover you need.
Add the first three, subtract the fourth, and you have a far more grounded number than a round figure picked because it "sounds like enough."
Why "I'll get a bigger cover later" is a risky plan
Term insurance premiums are locked in largely based on your age and health at the time you buy the policy. Waiting means paying more for the same cover later — and worse, if your health changes in the meantime, you may end up paying significantly more, or in some cases become difficult to insure at all. The cheapest time to buy adequate cover is almost always now, not after the next raise.
Term insurance is not an investment
It's worth saying plainly: term insurance pays out only if you die during the policy term, and has no maturity value if you don't. That's not a flaw — it's what keeps premiums low enough to buy meaningful cover. Confusing term insurance with an investment product (or being sold a more expensive investment-linked policy instead) is one of the most common and costly mistakes in personal finance. Keep insurance and investing as separate decisions, each sized and chosen on its own merits.
Revisit the number as life changes
A cover amount that made sense at 28, single, and renting doesn't necessarily make sense at 38, with a home loan and two children. Term cover isn't a "set once" decision — it's worth revisiting after major life events: marriage, children, a new loan, or a significant change in income.
The goal of term insurance isn't to leave behind a large number. It's to make sure the people who depend on your income today can keep living the life you're building for them, whether or not you're there to keep earning it.
If you're unsure whether your current cover — or lack of it — actually matches your situation, running the numbers properly is a short conversation that's worth having sooner rather than later.