Term insurance calculator: life value vs needs method

Two questions, two answers

There are two reasonable ways to size life cover. One asks what income your family would lose. The other asks what your family would actually have to pay for. They rarely give the same number. The term insurance calculator works out both, recommends the larger, and tells you when the answer looks out of line with the usual multiple of income.

Our earlier post on how much term cover you need builds the needs side by hand. This one walks through the calculator, where both methods run on the same inputs.

The inputs

Four assumptions sit in the code rather than on the form: working life ends at 60, income grows 7% a year, future money is discounted at 7% a year, and household costs rise with 6% inflation.

The outputs

Three boxes: Cover you need (with its multiple of income underneath), Human life value method and Needs method. A short table restates them as "Income the household loses, in today's money", "What the dependants actually have to fund" and "Recommended — the larger of the two". If the multiple is below 10 or above 20, an extra row says the figure "falls outside the usual 10 to 20 times income — worth checking your inputs".

Worked example: the defaults

Human life value. Your income less your own spending is ₹14 lakh a year. Over the 25 years from 35 to 60, with income growth and the discount rate both at 7%, the two cancel, so the present value is simply ₹14 lakh × 25 = ₹3.5 crore. Add ₹50 lakh of loans and ₹50 lakh of goals, subtract ₹30 lakh of savings: ₹4.20 crore.

Needs method. Household expenses of ₹9 lakh a year for 25 years, in today's money. With a 7% discount rate and 6% inflation, the real rate is under 1% a year, so the present value is about ₹2.0 crore, not far below 25 × ₹9 lakh. Add loans and goals, subtract savings: ₹2.70 crore.

Cover you need: ₹4.20 crore, the larger. The multiple shown is 22.5x, so the out-of-band row appears. That is not an error in this case. The ₹1 crore of loans and goals on top of income replacement pushes it past 20 times.

How the answer moves

Age moves the income method a lot, because each year of working life left is ₹14 lakh of lost income. It does not move the needs method at all, which depends on how long your dependants need support, not on your age.

Existing cover is subtracted rupee for rupee, so ₹50 lakh already held cuts the recommendation by exactly ₹50 lakh. The multiple stays at 22.5x because it is measured on the total requirement, not on the top-up you still have to buy.

How to read it

• The larger figure is deliberate. The page explains that under-insuring is the costly mistake and the premium difference between enough and generous cover is small. It suggests rounding up to the nearest ₹25 lakh.
• Discount employer group cover. It ends with the job. Enter it in "Life cover you already have" at a fraction of its face value, or not at all.
• Check the flag, then decide. A multiple outside 10 to 20 usually means an input is wrong, such as annual and monthly figures mixed up. When the inputs are right, as here, the number stands.

What the calculator does not do

• It does not quote premiums or compare insurers.
• It does not choose the policy term. Cover is usually needed until retirement, or until the youngest child is independent and the home loan is repaid, whichever is later.
• The four hidden assumptions are fixed. If you expect to work past 60, or your income to grow faster than 7%, the life value figure is understated.
• It does not value bundled policies. It is sized for pure term cover. Our posts on term versus endowment plans and ULIPs versus term plus a fund explain why, and the policy surrender vs mutual fund calculator handles a policy you already hold.

The guide Insurance is not an investment covers term plans in more depth. To fill in "Existing investments and savings" accurately, total them first in the net worth calculator. Then enter your own numbers in the term insurance calculator. The result is an estimate for planning, not insurance advice.