Term Insurance Sum Assured

Friend on a chai-call last week asked if his Rs 2 crore term cover was enough. Salary Rs 25 lakh. The brochure rule that says "buy ten times income" said yes. Did the math on a napkin while the chai went cold. His family runs out of money in year nine.

The brochure rule is a shelf number. Convenient. Lazy. And almost always wrong in the same direction.

Here is the math the rule skips. He is 35. Career runway to 60 is 25 years. Salary grows 8 pct a year on a long-run base. Discount future rupees at 7 pct because today's rupee is worth more than tomorrow's. Present value of the earnings stream his family loses the day he does not come home is roughly Rs 6.5 crore. Not Rs 2.5 crore. The rule under-buys by Rs 4 crore.

The part that breaks people is the cost. Rs 2.5 crore cover at age 35 non-smoker on a 25-year term runs about Rs 18,000 a year. Rs 6.5 crore cover runs about Rs 38,000. Differential is Rs 20,000 a year. About Rs 55 a day. You are buying 2.6x the rupees the family actually sees for the cost of two filter coffees a day.

Term insurance is the cheapest financial product money can buy. It is also the one most households under-buy. Because the brochure prints a multiple and the math prints the number.

Three rules I tell anyone who asks. One. Ten times income is a shelf number not your number. Two. Sum assured is the gap . human capital minus net worth . not a multiple. Three. Do not under-insure to save Rs 1,700 a month.

Walk through the human capital math here