Rising living costs, larger home loans, longer education expenses and increasing life expectancy mean that a family’s financial needs can vary significantly even among individuals earning similar incomes.
Why the income-multiple rule has limitations
According to insurance experts, the biggest drawback of the traditional thumb rule is that it focuses primarily on income while overlooking individual financial responsibilities.
“The 10 to 15 times income rule is a starting point, not a finish line,” said Nochiketa Dixit, Managing Director – Industries, EDME Insurance Brokers,
an IRDAI-registered composite insurance broker.
Two individuals earning the same salary may require vastly different levels of protection depending on factors such as outstanding loans, the number of dependents, children’s education needs and support for ageing parents.
Paramdeep Singh, Founder of Long Tail Ventures, an early-stage venture capital firm, said the more important question is not how much an individual earns but what financial obligations would remain if that person were no longer around.
What experts recommend instead
Experts stress using the Human Life Value (HLV) approach, which estimates the economic value of an individual’s future earnings and financial contribution to the family.
Ranjit Mishra, Executive Vice President and Head of Products at Kotak Life, a private life insurance company backed by Kotak Mahindra Bank, said the HLV method takes into account family expenses, liabilities, future goals and the number of years dependents would need financial support.
Similarly, Sumit Bajaj, Director at Choice Insurance Broking, a specialised subsidiary and the insurance arm of the Mumbai-headquartered Choice Group, said insurance planning should move beyond “crude multipliers” and reflect a person’s actual financial situation, including future obligations and years remaining until retirement.
Key factors to consider while deciding the sum assured
Experts suggest evaluating the following before choosing a term insurance
cover:
- Outstanding home, vehicle and personal loans
- Monthly household expenses
- Children’s education and other future goals
- Financial support for ageing parents
- Number of dependents
- Years of income replacement required
- Existing savings and investments
- Inflation and rising living costs
Shruti Oke, Senior Vice President and Head of Product Management at Tata AIA Life Insurance, a joint venture life insurance company in India formed by Tata Sons and the AIA Group, said individuals should assess three broad areas: income replacement needs, outstanding liabilities and future financial commitments.
Why inflation matters
Inflation emerged as one of the most commonly cited concerns among experts.
At inflation levels of 6-7%, the cost of education, healthcare and household expenses can rise sharply over time, reducing the real value of insurance coverage.
Singh noted that costs can roughly double over a decade at such inflation rates, increasing the risk of families discovering they were underinsured when they need protection the most.
Bajaj added that a cover amount that appears adequate today could lose nearly half of its purchasing power over a 20-year period if inflation is not factored into calculations.
Could many households need more than 15x income cover?
Experts caution that there is no universal number. However, for households with large loans, young children or multiple dependents, coverage requirements may exceed traditional benchmarks.
Dixit said that for many urban families, the required cover could comfortably exceed 20–25 times annual income once liabilities, future expenses and inflation are considered.
When should policyholders review their cover?
Term insurance should not be treated as a one-time purchase.
Major life events that warrant a review include:
- Marriage
- Birth of a child
- Taking a home loan
- Significant salary increases
- Addition of dependent parents
- Major changes in financial goals
Choice Insurance Broking recommends reviewing coverage every three to five years, while insurers offer life-stage benefits that allow policyholders to enhance coverage as responsibilities grow.
ALSO READ | A five-year delay in term insurance buying can cost you lakhs. Here’s how
