The most common approach to this question, picking a round number that sounds sufficiently large, is also the least reliable one. Life insurance need is a calculation, not a guess, and it changes as circumstances change.
The starting point is what the policy actually needs to replace: the income the family would lose, the debts that would otherwise fall on survivors, and the future costs, like a child’s education or a spouse’s retirement, that the person’s earnings were funding. A commonly used starting framework is the “human life value” approach, which estimates the present value of future income the insured would have earned and contributed to the household, adjusted for expenses, inflation assumptions, and the number of working years remaining.
A simpler and widely used rule of thumb multiplies annual income by a factor, often somewhere between ten and fifteen times, though this is a rough starting point rather than a precise calculation, and it doesn’t account for existing debts, dependents’ specific needs, or assets already available to the family.
The more accurate method adds up outstanding liabilities (home loan, other debts), future goals (children’s education, marriage, spouse’s retirement corpus), and ongoing living expenses for dependents until they’re financially independent, then subtracts existing assets and insurance already in place. What’s left is the coverage gap that new insurance needs to fill.
This number isn’t static. A young professional with no dependents needs far less than the same person a decade later with a home loan and two children in school, and coverage should be revisited at major life events rather than bought once and forgotten.
Term insurance, which offers pure life cover without an investment component, is generally the most cost-efficient way to secure a large sum assured, leaving investment goals to be pursued separately through dedicated investment products.
Ashutosh Financial Services helps individuals work through this calculation properly rather than relying on a generic multiple. Ashutosh Financial Services runs educational sessions on insurance planning as part of comprehensive financial planning.
