For a family with an annual income of ₹15 lakh, a life cover of ₹1 crore (for the primary earner) will last roughly 8.5-9 years, assuming the family requires the entire ₹15 lakh each year and the remaining corpus is invested conservatively.
On an expense-only basis—accounting only for essential household expenses along with major costs such as school fees and medical expenses—the ₹1 crore corpus may last longer, around 13 years.
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Left to chance, you may end up financially protecting your family for only a fraction of the time you intended. Depending on the age of your dependants, they may require income replacement for 15-20 years or more in the event of your untimely death.
A life cover that lasts only 10-12 years is therefore unlikely to be sufficient.
“The financial risk that term insurance covers is the loss of future earning potential. When deciding on the policy’s duration, it must directly mirror the active working lifespan of the breadwinner.
Structurally, the sum assured should function as a surrogate retirement corpus for your dependents, sustained until they are either financially independent or no longer require support,” said Sumit Ramani, co-founder and actuary, ProtectMeWell.com
Also Read | Why Term Insurance is Essential Even If You Invest in ULIP Plans
What is a reasonable life cover?
But what is a sufficient amount? Insurance companies’ eligibility norms generally suggest life cover of 10-15 times annual income. Thus, for someone earning ₹1-2 lakh a month, a life cover of ₹1-3 crore may appear reasonable.
However, this is only a rule of thumb and does not account for a family’s specific financial circumstances. For a family of four with a home loan and a car loan, such a cover may be inadequate. Conversely, for a family with one minor child, no debt and an investment corpus of ₹5 crore, it may be sufficient. The life cover you choose should reflect your family’s individual requirements.
Estimating the required life cover is only the first step. You must then consider the type of policy, the insurer and the riders you wish to add.
Here’s a guide to optimising your family’s protection plan.
Calculate the sum assured you need
Begin with your outstanding loan principal. Then calculate your non-negotiable monthly expenses, annualise them, and add one-time annual expenses such as school fees, medical expenses and other essential costs.
Finally, include major financial goals such as your children’s higher education and marriage expenses.
“Clients come to us for comprehensive financial planning and this step is the foundation, it cannot be skipped. Ideally, the life cover you need is an amount that covers any outstanding liability, needs of all dependents and the value of any visible and important goals (until retirement). An assessment of the current lifestyle is done to ascertain a ballpark figure for future goals. Plus, the medical history of the individual being covered is also taken into account as a risk factor,” said Nisha Sanghavi, CFP and director, Promore Fintech
If you already have life cover through another insurer, your employer or a credit card, reduce the required cover by that amount.
Don’t mix savings and protection
The insurance market is flooded with investment-linked plans, savings-cum-protection plans and return-of-premium policies.
None of these is necessary if your objective is simply to protect your family’s finances in the event of your death. What you need is a plain term insurance policy. For a ₹1 crore cover, a savings-cum-protection guaranteed-return endowment plan may cost a 40-year-old around ₹10 lakh a year in premiums.
A pure term insurance policy offering the same cover would cost around ₹15,000 a year.
Over 20 years, the endowment plan could cost 30-35 times more (Table 1).
Ramani said: “Term life insurance is a pure protection product, making it the single most cost-effective mechanism to hedge against the financial impact of an untimely death. Its primary advantage lies in its absolute pricing efficiency. In contrast, savings-cum-protection plans try to achieve two opposing financial goals at once: investment growth and risk coverage. Because a portion of the premium must back the investment pool, the cost for a comparable sum assured in a bundled plan is exponentially higher.”
Choose an insurer
Once you have decided on the cover amount and policy type, compare insurers carefully.
While the claim settlement ratio is important, experts recommend looking beyond the overall average and examining individual death claim settlement ratios, both by number of claims settled and by the value of claims paid.
A high settlement ratio by value indicates that larger claims are not routinely rejected. The claim settlement turnaround time is also relevant.
These figures are available on insurers’ websites and comparison portals such as Policybazaar.com.
Also examine the insurer’s solvency ratio, available in its annual report, and the 13th-month persistency ratio, which indicates the proportion of customers who continue their policies beyond one year and serves as a measure of how appropriately policies are being sold.
The stated reasons for claim rejection are worth analysing too.
Together, these indicators provide a better picture of an insurer’s long-term reliability.
Riders to consider
The final step is deciding whether to add riders to the base policy. Riders provide optional additional cover for specific risks, while the base policy covers death.
Some riders also provide benefits if the policyholder suffers a critical illness or disability. Critical illness, accidental death benefit and waiver of premium are among the riders most commonly recommended by experts. Since riders increase the premium, the decision should be based on your family’s specific needs.
Once you have determined the cover amount and riders, you may also consider splitting the cover between two insurers to reduce dependence on a single company.
Life is uncertain. Protecting your family from financial hardship in your absence is therefore essential. Ensure you have adequate life cover while continuing to build your investment corpus (Table 2). Both are fundamental pillars of sound financial planning.