How much term cover a household actually needs

Three methods for sizing term cover, worked with numbers, and why the income-multiple rule of thumb is a starting point rather than an answer.

The short answer: Term insurance replaces the income a household loses if an earner dies, so the cover should be sized on what the household actually needs rather than on a multiple of salary. Three methods produce a figure. The income-replacement method takes annual expenses the household could not otherwise meet, multiplied by the years until dependants are self-supporting. The needs-based method adds outstanding liabilities and future obligations, then subtracts existing assets. The multiple-of-income rule is the crudest and the most quoted. Run at least two of them: where they agree the answer is easy, and where they diverge the divergence tells you which assumption is doing the work.

Key points

Size cover on the household's shortfall, not on a multiple of the earner's salary — the two differ substantially.
Subtract existing assets and any existing cover; buying cover you already hold is a recurring cost for nothing.
Include outstanding loans in full, because a liability does not shrink when the income servicing it stops.
Term insurance is protection, not investment — mixing the two produces poor cover and a poor return simultaneously.

Three ways to size it

Each method approaches the same question from a different direction. Running two of them is the useful discipline, because the gap between the answers is where your assumptions are hiding.

Income replacement: Cover = Annual shortfall × Years of dependency

Annual shortfall — household expenses the surviving members could not meet from their own income.
Years of dependency — until the youngest dependant is self-supporting, or the surviving partner's own income suffices.
Deliberately ignores investment returns on the payout, which is a conservative simplification.

Needs-based: Cover = Liabilities + Future obligations + Living costs − Existing assets − Existing cover

Liabilities — outstanding loan balances, in full.
Future obligations — education, and anything the household is committed to.
Living costs — the income-replacement figure above.
Existing assets — liquid savings and investments the household could actually use.
Existing cover — employer group cover and any policy already held.

Both methods on one household

Household annual expenses: ₹9,00,000
Surviving partner's income: ₹5,00,000
Annual shortfall: ₹4,00,000
Years until youngest is independent: 16
Income replacement figure: ₹4,00,000 × 16 = ₹64 lakh
Outstanding home loan: ₹35,00,000
Education provision: ₹25,00,000
Existing investments and employer cover: ₹30,00,000
Needs-based figure: ₹35L + ₹25L + ₹64L − ₹30L = ₹94 lakh

The two differ by ₹30 lakh, and the difference is entirely the loan and the education provision that the income-replacement method does not capture. A cover of roughly ₹1 crore is defensible here; ₹64 lakh leaves the loan unfunded.

What to subtract, and what not to

Subtract employer group cover — carefully. It is real while you are employed and disappears the day you are not, which is frequently correlated with the moment you need it. Subtract it at a discount, or not at all if your role feels insecure.
Subtract liquid investments. Money the household could genuinely access reduces the gap.
Do not subtract the family home. A surviving family living in it cannot spend it, and selling under pressure is not a plan.
Do not subtract retirement savings you would not want touched. If the intention is that a corpus survives to fund retirement, spending it on a shortfall defeats the purpose.

LifeMap: LifeMap projects the household position across decades, which is where the shape of the declining need becomes visible rather than assumed.

Why protection and investment do not mix

Products that combine life cover with an investment component are widely sold and are almost always worse than the two bought separately. The cover is smaller for the premium, and the investment component carries charges that are difficult to see and a return you cannot compare with an ordinary fund.

The separation test is simple: can you state what the cover costs and what the investment returns, independently? If a product does not let you answer both, it is not a product you can evaluate — and the reason for the opacity is rarely in your favour.

The same argument applies to the tax deduction sometimes used to justify these products. A deduction reduces the cost of something you wanted; it does not make an expensive, opaque product into a good one — the point made in tax-saving investment.

Two operational details are worth getting right at purchase because they are difficult to correct later. Nominate someone, and keep the nomination current after a marriage, a birth or a death — a policy paying into a disputed estate defeats the point of buying it. And tell the person who would need to claim that the policy exists and where the document is, because a term policy nobody knows about pays nothing at all.

Frequently asked questions

Is ten times annual income enough cover?

It is a starting point that happens to be roughly right for some households and badly wrong for others. It ignores how many years of dependency remain, how much debt is outstanding, and what assets already exist. A household with a large home loan and young children needs considerably more; one with no dependants and no debt may need none at all. Compute rather than adopt the multiple.

Should a non-earning spouse have cover?

Consider it, because the household would need to buy services currently provided unpaid — childcare, eldercare, household management — and that cost is real even though no salary stops. Size it on the replacement cost of those services for the years they would be needed, which is usually a smaller figure than an earner's cover but rarely zero.

Why not a policy that returns the premium if I survive?

Because you are buying two products, both priced worse than buying them separately. The premium on a return-of-premium policy is substantially higher, and the difference is invested for you at a return you cannot see and generally would not choose. Buy the cover you need as pure term insurance and invest the difference where you can inspect what it earns.

Sources

IRDAI — consumer information on life insurance