A 10–15 times income rule is only a starting point for term insurance. Experts explain how loans, children’s education, dependants, inflation, future goals and existing assets can change the cover you need.
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Buying term insurance is often reduced to a simple rule of thumb of opting for a cover worth 10 to 15 times your annual income. But that calculation can fall short once you factor in a home loan, children’s education, dependent parents, household expenses and the future financial needs of the family.
The right amount of cover depends not just on what you earn today, but also on the financial responsibilities your family would have to shoulder in your absence. Experts say the calculation should therefore account for future liabilities, existing assets and the length of time dependants may need financial support. This becomes particularly important as income, family responsibilities and financial goals change over the years.
Income multiple is only a starting point
A cover of 10 to 15 times annual income can provide a starting point, but it should not be treated as a universal formula. Vikas Gupta, chief product officer at ICICI Prudential Life Insurance, said term insurance should be viewed as replacing the financial future that a salary was expected to create for the family.
For instance, a person earning ₹15 lakh a year could arrive at a basic cover of ₹1.5 crore to ₹2.25 crore using the income-multiple approach. However, the actual requirement could be higher depending on the person’s liabilities and dependants.
Aditya Mall, appointed actuary at Generali Central Life Insurance, said a more practical approach is to calculate the income that needs to be replaced for dependants, add outstanding liabilities and future financial goals, and then subtract existing assets and insurance cover.
This means two people earning the same income may require very different levels of life cover depending on their financial responsibilities.
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