How Much Term Insurance Cover Do I Need in 2025?

Determining the appropriate amount of term insurance coverage is a crucial step in safeguarding your family's financial future.

The question - "How much term insurance do I need?" is one that often arises when individuals are considering purchasing a term life insurance policy.

It's important to evaluate and assess various factors carefully after which you can arrive at an informed decision regarding the ideal amount of term insurance coverage that will provide your loved ones with the necessary financial protection and support in the event of an unforeseen circumstance.

Term insurance is a type of life insurance that pays a sum of money to your chosen person (nominee) if you pass away during the policy period. It can also include extra benefits, like an additional payout if you die in an accident.

When choosing a term insurance plan, make sure the coverage amount is enough to help your family keep their current lifestyle, pay off any debts, and cover daily expenses.

The coverage you choose today will decide the amount your family will receive in case of your unfortunate demise, and it will be the total amount your family would depend on for their finances. If you choose low coverage, your family might need more money due to the rising cost of living and inflation. 

On the other hand, selecting a very high coverage beyond your requirement might be a financial burden due to their high premium and might lapse if there is any default in premium payment.

Hence, it is crucial to understand how much term insurance one should take. Let us take an example to understand how to calculate your coverage:

Understanding Term Insurance Coverage Scenarios with Illustration

Nitin, a 35-year-old working professional, is the sole earner of his family. His family's monthly expenses are ₹60,000, aside from a ₹30,000 monthly EMI for their home loan, with a remaining balance of ₹70 lakh. Annually, their expenses amount to ₹7.2 lakh.

To ensure his family’s financial stability in case of his untimely demise, Nitin opted for life insurance coverage of 10-15 times his annual expenses, totalling ₹1.08 crore. This amount accounts for inflation and future financial needs.

Let’s assume Nitin has a mutual fund SIP of ₹30 lakh. This money is readily accessible to the family upon his demise, which means he can deduct it from his life insurance coverage requirements. Nitin estimates a required corpus of ₹80 lakh for his retirement, underscoring the importance of adding this to the life insurance coverage.

Your age and current wealth are key factors in determining how much term insurance you need. For example, Nitin needs a lot of term insurance because he has debts, high monthly expenses, and five dependents, including young children.

However, if you are in your 20s and single, you don’t need as much life insurance. Similarly, if you are in your 50s, have a good investment portfolio, and your children are independent, your life insurance needs will be lower.

Disclaimer: The above illustration is a hypothetical example created for educational purposes only and does not represent a real-life scenario. Please read your policy documents to understand the terms and conditions clearly.

Future Financial Goals

Annual Income

The Period of Coverage

Age

Liabilities

There are various kinds of liabilities that each one of us has, and they only keep increasing with age. There are regular household expenses, monthly bills, EMIs, rents, premium payments and rents. Not just that, there would be future liabilities like child education or marriage.

You might also have dependent parents or siblings whom you want to secure financially. These liabilities only keep on increasing with inflation and progressing lifestyles. Hence, the liabilities must be considered on all fronts.

1. Expense Replacement

A method commonly suggested by most financial planners, the Expense Replacement method considers all the expenses of an individual, like day-to-day expenses, future expenses like children's education, marriage, financial requirements of dependents, loans, and debts.

After arriving at this expenditure figure, we deduct the present value of our savings, like investments and any other life cover. Here, we do not consider assets like homes and cars in the calculation since we want our family to keep using them as utility and not depend on their monetary value.

This final figure gives us an idea of the insurance coverage amount required by a person.

2. Income Replacement

This method is based on the premise that the insurance proceeds must be sufficient to replace the lost earnings of the deceased breadwinner of the family. So, by this method,

Insurance Cover= Current Annual Income X Number of Years left for Retirement

It is a simple method that gives you a close idea of the required sum Assured, but a significant drawback is that it does not factor in the inflation, income rise, and the major expenses on the way.

3. Human Life Value

To find how much Insurance someone needs, the major factor widely used across the insurance industry is the Human Life Value or HLV. HLV, in simple terms, is the monetary value attached to a person.

It is the present value of all future income a person would expect to earn for their family. It directly indicates the financial loss a family would suffer in case of the untimely death of the family's breadwinner.

How to calculate HLV?

The exact method of calculating HLV is a bit complex and involves the following steps:

• Step 1: Determine your current income.
• Step 2: Subtract your expenses, insurance premiums, and income tax payments.
• Step 3: Identify the number of earning years remaining before your retirement.
• Step 4: Find the inflation and discounting factor rate.

You can use our online Human Life Value Calculator for the above calculation.

4. Underwriter's Rule

A common thumb rule for calculating the minimum amount of cover needed by a person, the Underwriter's rule states that the sum Assured = 10 x Annual Income. So, if your annual income is 10 lacs, you should have a life cover of 10 x 10 = 1 crore, i.e., 10 times the annual income.

While this formula has become widely prevalent due to easy calculation, it is believed to give a minimum figure as an indicator for the required sum assured.

5. Use Insurance Calculators

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