Term insurance — calculating the right sum assured

Term insurance is pure life insurance — no investment component, no maturity benefit, no surrender value. If the insured dies during the policy term, the nominee receives the sum assured; otherwise, the premium is the cost of the cover. Because it has no investment component, the premium for a given sum assured is a fraction of what bundled "ULIP" or "endowment" products charge. For protection, term insurance is the right tool.

Why bundling protection and investment is inefficient

Insurance products that combine life cover with investment (ULIPs, endowment, money-back, whole-life) charge premium for both functions. The result:

• The protection portion is small (sum assured typically 10-15× annual premium).
• The investment portion has high expenses (3-5% per year for ULIPs in early years).
• Surrender during the first 5-7 years usually loses a large fraction of premium.

The same money split into (a) term insurance and (b) a direct mutual fund SIP delivers much higher protection AND higher investment outcomes.

The sum assured rule

For a primary breadwinner:

• Base rule: 15-20× annual income.
• For a ₹15 lakh/year earner: ₹2.25-3 cr sum assured.
• For a ₹30 lakh/year earner: ₹4.5-6 cr sum assured.

The reasoning: if the breadwinner dies, the survivors need a corpus that, at 5-6% withdrawal rate, replaces the income for 15-20 years.

Adjustments for liabilities and dependents

The 15-20× rule is a starting point. Adjust upward for:

• Outstanding home loan: add the principal balance to the sum assured.
• Education obligations: add projected child-education cost.
• Elderly dependents: add 10× their annual support amount.
• Spouse not earning: base on the joint household expense, not just your salary.

Adjust downward for:

• Significant existing assets (a paid-off home, large mutual fund corpus, parental wealth that will pass to dependents).
• Spouse with independent income that can fully cover essential expenses.

Term insurance basics

• Policy term: 15, 20, 25, 30 years are common. Typically take it to retirement age (e.g. age 28 to age 60 = 32-year term).
• Premium payment: annual is most common. Some policies offer one-time payment for the entire term (single premium).
• Premium structure: level (constant throughout term) or increasing (with inflation indexed).
• Maturity benefit: nothing. If you survive the term, the policy ends with no payout. This is the cost of cheap protection.

Premium comparison

For a 30-year-old non-smoking healthy male, ₹1 cr sum assured for 30-year term:

• Pure term: ~₹10,000-15,000 per year.
• ULIP with ₹1 cr cover: ~₹1.5-2 lakh per year.
• Endowment with ₹1 cr cover: similar or higher.

The pure term is roughly 1/10th the cost. The difference goes to the bundled investment component which underperforms direct mutual fund investing.

Premium variation by age

Term insurance premium rises sharply with age:

• Age 25, ₹1 cr cover for 30 years: ~₹8,000-12,000/year.
• Age 30: ~₹10,000-15,000/year.
• Age 40: ~₹20,000-30,000/year.
• Age 50: ~₹50,000-80,000/year.

The earlier you buy, the cheaper the premium (locked in for the full term).

Riders to consider

• Accidental death benefit: additional payout if death is due to accident.
• Critical illness rider: lump sum on diagnosis of specified critical conditions.
• Premium waiver rider: premium waived if insured suffers disability or critical illness.
• Terminal illness rider: accelerated payout if diagnosed with terminal illness.

Each adds a small premium. Critical illness rider is the most valuable for most investors — health costs can be catastrophic.

Smoker / health considerations

Insurers underwrite based on health and lifestyle. Smokers pay 50-80% higher premium. Pre-existing conditions (diabetes, hypertension) may attract loading. Honest disclosure is essential — undisclosed information voids the claim.

If you have multiple health conditions, get a quote with full disclosure to know the actual premium.

Buying online vs through agent

Online term insurance from the insurer directly:

• Premium 10-25% lower (no commission to intermediary).
• Faster issuance (often within hours).
• Less hand-holding.

Offline through agent:

• Higher premium.
• More guidance on policy structure.
• Better for first-time buyers.

For repeat buyers comfortable with the product, online is cleaner.

Claim settlement ratio

The percentage of claims an insurer settles vs receives. IRDAI publishes this annually. Top insurers have ratios above 98%. Lower ratios indicate either bad claim handling or aggressive rejection. Check the latest IRDAI data before choosing.

Nominee designation

Be specific about the nominee. Including age, relationship, percentage allocation. If you have multiple beneficiaries, list each with percentage. Update nominee on major life events (marriage, divorce, child).

Term insurance for non-earning spouse

Even non-earning spouses (homemakers) have economic value through household labour, child-rearing, etc. A modest term insurance for the homemaker spouse (₹50 lakh - ₹1 cr) covers the cost of replacing those services. Particularly important if children are young.

What term insurance does NOT cover

• Death due to deliberate self-injury (typically excluded for first 12 months).
• Death due to war, civil unrest (varies by policy).
• Pre-existing conditions undisclosed at the time of policy.
• Adventure sports (typically requires specific rider).

Read the exclusions carefully.