A breakdown of the income-replacement method for sizing term insurance.
1. The Income-Replacement Method
Term insurance should provide enough money that, if invested by your family, can pay them a monthly income for as long as they need it — even as that income grows with inflation. This is the SEBI-recommended approach for sizing life cover, and it's more accurate than rules of thumb like "10× annual income".
2. The Math: Present Value of a Growing Annuity
Your monthly income need grows at inflation. The corpus earns a return rate. The corpus required is the present value of that growing income stream:
A = M × 12 × [1 − (1+rd)−n] / rd where rd = (1+r) / (1+i) − 1 is the real discount rate
The real discount rate captures the gap between corpus growth and inflation. If your return rate equals inflation, the corpus only sustains the income at its purchasing power — no real growth.
3. Adjusting for Reality
The corpus is the starting point. We then adjust:
Net Insurance Required = A + B − C − Existing Cover
Where B is current liabilities (loans your family would have to clear), C is usable assets (liquid investments they could deploy), and Existing Cover is what your current term plans already provide.
4. Premium Estimate
The premium estimate uses ≈0.40% of cover per year as a rough indicator. Actual premiums vary widely — a healthy 30-year-old might pay closer to 0.20–0.30%, while a 50-year-old smoker could pay 1%+. Always get quotes from multiple insurers.
5. Year-by-Year Schedule
The schedule shows how the corpus is drawn down each year. Monthly income grows at inflation. The corpus earns the return rate annually, then the annual income draw is subtracted. By the end of year n, the corpus should be approximately zero — that's the design.
Caveats & Disclaimer
For illustrative purposes only. Assumes constant inflation and return rates — actual values vary. Premium estimates are indicative; consult a IRDAI-registered insurance advisor and an authorised insurer for personalised quotes. Term insurance is the most cost-effective form of life cover, but specific product features (riders, claim settlement ratio, premium guarantee) matter — choose based on total value, not premium alone.
