In this article
- The income replacement rule of thumb
- Factor in outstanding liabilities
- Factor in future goals
- Subtract existing assets and cover
- Putting it all together
The income replacement rule of thumb
A commonly cited starting point is 10–15 times your annual income — the idea being that your family could invest the payout and generate an income stream roughly equivalent to what you were earning. It's a reasonable baseline, but it ignores your specific liabilities and goals.
Factor in outstanding liabilities
Add any outstanding home loan, car loan, or other significant debt to your cover requirement. The goal is that your family shouldn't have to sell assets or struggle with EMIs if your income suddenly stops — your life cover should be enough to clear major debts outright.
Factor in future goals
Estimate the future cost of major goals your income currently supports — children's education, a wedding, or a parent's retirement care. These are real, large future expenses that a payout needs to fund on your family's behalf, not just day-to-day living expenses.
Subtract existing assets and cover
Subtract any existing life insurance, employer-provided cover, and liquid savings or investments that could be redirected to support your family. The goal of new term cover is to fill the actual gap, not to duplicate protection you already have.
Putting it all together
A simple formula: (10–15x annual income) + (outstanding loans) + (future goal costs) − (existing cover and liquid assets) = your ideal term insurance sum assured. Revisit this calculation every few years, or after major life events like a new loan, a child, or a significant income change.
