In every batch I teach, and in most investor conversations I have in Ahmedabad, the life insurance question arrives in the same form. “Sir, which term plan is best?” That is the wrong first question. Which insurer and which plan can wait. The first question is how much cover your family needs if your income stops tomorrow. Planners use two standard methods to answer that, and this article works through both for a hypothetical 35-year-old, before looking at why the endowment pitch refuses to die and which riders are worth the extra premium.
A note on the numbers. The tax rules and regulations cited here are from the sources listed at the end, checked this week. Every figure in the worked examples (premiums, returns, expenses) is illustrative and labelled as such; your own numbers will differ.
Why the amount comes before the product
Term insurance has one job. If the earning member dies during the policy term, the insurer pays the family a lump sum. There is no maturity value and no investment component. Because the product is this simple, the only decision that really matters is the sum assured.
Get the amount right and almost any mainstream term plan will do the job. Get the amount wrong and the best plan in the market still fails your family. A ₹25,00,000 policy from the finest insurer is a failure if the family needed ₹2 crore.
Planners size that number using one of two methods, and usually both.
Method 1: Human Life Value
Human Life Value (HLV) asks a blunt question: in rupee terms, what is the present value of everything you would have earned for your family between now and retirement?
The method, step by step, for a hypothetical 35-year-old. Say he earns ₹1,20,000 a month, plans to work till 60, and spends roughly 30 percent of his income on himself (his own expenses, his taxes, his premiums). That self-consumption stops with him, so the family loses only the remaining 70 percent.
Step 1: Annual income = ₹1,20,000 × 12 = ₹14,40,000
Step 2: Family’s share = ₹14,40,000 × 70% = roughly ₹10,00,000 a year
Step 3: Working years remaining = 60 − 35 = 25 years
Step 4: Choose a real discount rate. If the claim money can earn about 7 percent and inflation runs about 5 percent, the real rate is 1.07 ÷ 1.05 − 1 = 1.9 percent, which I round to 2 percent. Discounting at a real rate lets us keep the income figure in today’s rupees without separately inflating it each year.
Step 5: Apply the present value of annuity formula, the same one used in the retirement corpus article:
PV = Payment × [1 − (1 + r)^−n] ÷ r
PV = ₹10,00,000 × [1 − (1.02)^−25] ÷ 0.02
(1.02)^25 = 1.6406, so (1.02)^−25 = 0.6095
PV = ₹10,00,000 × (1 − 0.6095) ÷ 0.02 = ₹10,00,000 × 19.52 = ₹1.95 crore
Any spreadsheet reproduces this with =PV(2%, 25, -1000000). You will also recognise where the common “10 to 15 times annual income” thumb rule comes from: it is this same formula with fewer working years or a higher discount rate.
HLV’s weakness is that it looks only at income, so it misses the home loan and the children’s education, and it ignores the assets the family already owns. A high earner with no dependants ends up with an absurdly large HLV, while a modest earner carrying a ₹60,00,000 loan ends up with a dangerously small one.
Method 2: The needs-based balance sheet
The needs-based method is the one most CFPs actually rely on. Instead of valuing the earner, it prices what the family would need, line by line, and subtracts what already exists. Think of it as a small balance sheet drawn up for the worst day of the family’s life.
For the same 35-year-old, say the household runs on ₹50,000 a month of family expenses, which is ₹6,00,000 a year. There is a ₹40,00,000 home loan outstanding, one child whose higher education would cost about ₹30,00,000 in today’s money, and the family holds ₹22,00,000 across EPF and mutual funds. All figures are illustrative.
| Need | Working | Amount |
|---|---|---|
| Living expenses for 25 years | ₹50,000 × 12 = ₹6,00,000, then × 19.52 (PV factor at 2% real, as above) | ₹1,17,12,000 |
| Home loan closure | outstanding principal | ₹40,00,000 |
| Child’s education | today’s cost, already in real terms | ₹30,00,000 |
| Final expenses and buffer | one-time | ₹5,00,000 |
| Gross need | ₹1,92,12,000 | |
| Less: existing investments | EPF + mutual funds | (₹22,00,000) |
| Net cover needed | ₹1,70,12,000 |
So the needs-based answer is about ₹1.7 crore, which a planner would round up to ₹1.75 or ₹2 crore. Cover is cheap at 35, and the next child or the next loan is rarely in the spreadsheet yet.
Notice one deliberate omission. This person also has ₹30,00,000 of group life cover from his employer, and I did not subtract it. Group cover ends the day the job ends, and people change jobs, take career breaks, or start businesses precisely in the years the family is most exposed. In my experience teaching this module, treating employer cover as permanent protection is the most common sizing mistake I see, ahead of simply buying too little.
Which number to use
The two methods gave us ₹1.95 crore and ₹1.70 crore for the same person. That closeness is a coincidence of the example. For a family with large loans, the needs-based number can be far higher than HLV. For a single person with no dependants, the needs-based number can be close to zero while HLV still shows crores.
In practice, compute both and buy the higher of the two, rounded up to a clean slab. The insurer will in any case test the figure against your income proofs during underwriting, so a ₹10 crore proposal on a ₹12,00,000 income will not pass regardless of what the spreadsheet says. Revisit the number after every big life event. A second child or a bigger loan changes the balance sheet, and that is what should trigger a top-up, not a new product feature.
Why endowment gets pitched so hard
Walk into most bank branches or sit with most traditional agents with this ₹1.75 crore requirement, and the conversation will drift, gently and reliably, toward an endowment or money-back policy. “Term is a waste, you get nothing back.” The economics behind that drift are worth understanding.
Commission in life insurance is a percentage of premium. Since April 2023, under the IRDAI (Payment of Commission) Regulations, 2023, the earlier product-wise caps on commission are gone. Each insurer now pays commission as per its own board-approved policy, within the overall Expenses of Management limits set by IRDAI. Percentages aside, the structural fact is unchanged: the agent’s rupee income scales with your premium, and first-year commission rates on traditional policies are the highest in the business.
Now apply that to our example. An illustrative endowment policy might charge ₹50,000 a year for a sum assured of ₹10,00,000. At that ratio, insuring the actual ₹2 crore need through endowment would cost about ₹10,00,000 a year, which nobody can pay. A pure term plan covering the full ₹2 crore might cost this 35-year-old somewhere around ₹30,000 a year (an assumed figure; get live quotes). So the endowment route delivers one-twentieth of the protection at a premium that generates many times the commission. The gap in the family’s protection does not show up on the day of sale; it shows up at a claim.
I should state my own position here. I earn my living as a mutual fund distributor and a CFP educator, and I have no commission stake in which life policy anyone buys. My reading is that the people selling endowment are mostly not villains. They are responding rationally to how they are paid, which is exactly why the buyer has to do the sizing arithmetic before entering the room.
What an endowment actually returns
The reframe a CFP offers is simple: price the two jobs, protection and saving, separately.
Take the illustrative endowment above. ₹50,000 a year for 20 years, total outgo ₹10,00,000, with a projected maturity of ₹16,00,000 (an assumed, mid-range illustration; real policies vary with bonuses). The internal rate of return solves:
50,000 × [((1 + r)^20 − 1) ÷ r] × (1 + r) = 16,00,000
Try r = 4.4%: (1.044)^20 = 2.366, so the factor is (2.366 − 1) ÷ 0.044 × 1.044 = 32.4, and 32.4 × ₹50,000 = ₹16,20,000. So the IRR is a touch under 4.4 percent a year, before considering that inflation alone has been running near 5 percent. You can verify this in a spreadsheet with =RATE(20, -50000, 0, 1600000, 1).
The unbundled alternative with the same ₹50,000: buy the ₹2 crore term plan for the assumed ₹30,000, and invest the remaining ₹20,000 a year. At an assumed 11 percent equity return over 20 years:
FV = 20,000 × [((1.11)^20 − 1) ÷ 0.11] = 20,000 × 64.20 = ₹12,84,000
At these assumptions the unbundled corpus comes out somewhat smaller than the endowment maturity, because only ₹20,000 of the ₹50,000 is being invested. What changes is the protection: ₹2 crore against ₹10,00,000, twenty times the cover for the same annual outgo. That is the trade a planner makes deliberately, and the endowment brochure does not put it in front of you.
The tax rules that changed the endowment pitch
Two sourced points, because “tax-free maturity” is the endowment pitch’s second leg.
First, the death benefit under a life policy remains exempt under Section 10(10D) without any premium ceiling. CBDT Circular 15 of 2023 states explicitly that the new premium conditions do not apply to sums received on death. Your family’s term claim is not taxed.
Second, for non-ULIP policies issued on or after 1 April 2023, the maturity proceeds lose the 10(10D) exemption if the premium payable in any year exceeds ₹5,00,000, aggregated across such policies. Large endowment maturities are now taxable events, which removes the headline benefit for exactly the big-ticket policies where the pitch was strongest.
And the Section 80C deduction of up to ₹1,50,000 on life premiums exists only in the old tax regime. A taxpayer in the new regime gets no deduction for that ₹50,000 endowment premium at all. For how planners think about deductions and exemptions more broadly, see the tax alpha guide.
Riders worth paying for
Riders are small add-on covers bolted onto the base term plan. In my view some are worth the money and some are better bought elsewhere.
Waiver of premium on disability is the one I rarely skip. If an accident or illness ends your earning ability, this rider keeps the base policy alive without further premiums, for a small cost. It protects the protection.
Critical illness riders pay a fixed sum on diagnosis of listed illnesses. Read one clause before buying: whether the rider is “accelerated” (the payout is carved out of your death cover, reducing it) or “additional” (paid over and above it). An accelerated CI rider quietly shrinks the very sum assured you calculated above. A standalone health and critical illness cover is often the cleaner tool, and health insurance premiums carry their own deduction under Section 80D (₹25,000 for self and family under 60, under the old regime), separate from the life insurance math.
Accidental death benefit costs very little, which should tell you how narrow it is. It pays extra only if the death is accidental, and your family’s needs-based number does not change with the cause of death. Take it if the cost is trivial, but never let it substitute for sizing the base cover correctly. Terminal illness cover, which advances the payout on a terminal diagnosis, is included free in many modern term plans, so check before paying extra for it.
On payout structure, insurers offer a lump sum, a monthly income, or a mix of the two. If the nominee is comfortable handling money, a lump sum invested as per the family’s plan gives the most flexibility. The staggered options exist mainly for families who would struggle to manage a large cheque, and that is a judgement worth making deliberately rather than leaving to whatever the form defaults to.
When you do not need any of this
If you have no dependants and no co-signed loans, your needs-based number may genuinely be near zero, and then the correct amount of term insurance is none. Do not let anyone, including an educator, talk you into a policy for “tax” or “discipline”.
The check takes one afternoon with a spreadsheet. Write down the same lines as the table above: annual family expenses multiplied by the PV factor for the years of dependency, the outstanding loan principal, education costs in today’s money, and a one-time buffer. Subtract what you already hold in EPF, mutual funds and other investments. Keep employer group cover out of this sum, for the reason given earlier. If what remains is smaller than the personally owned cover you already hold, you are done, and you need neither a planner nor a course for that. For business owners, there is a separate layer of key person and loan-linked cover, covered in the business owner planning article.
For those who want the full machinery, including mortality-adjusted HLV, policy comparison, and how insurance fits inside a complete plan, this is the risk planning portion of the CFP curriculum, which we teach in depth in the CFP programme.
Frequently asked questions
Is ₹1 crore of term insurance enough?
₹1 crore is a marketing default, not an answer. In the worked example above, a family spending ₹50,000 a month with a ₹40,00,000 home loan needed about ₹1.7 crore even after counting ₹22,00,000 of existing investments. Run the needs-based table with your own numbers. A round figure chosen without the arithmetic is wrong in both directions equally often.
Should I count my employer’s group life cover while sizing my own policy?
Planners generally do not, and I teach students not to. Group cover lapses when you leave the job, and job changes and layoffs tend to arrive unannounced. Treat employer cover as a bonus layer on top of a personally owned term plan sized to the full need, not as a substitute for it.
Which method should I use, Human Life Value or needs-based?
Compute both. HLV caps the number at what your income can justify, which is also roughly how insurers underwrite. The needs-based method captures loans and goals that HLV ignores. Most planners buy the higher of the two, rounded up to a clean slab, and revisit it after every major life event.
Till what age should the term plan run?
Broadly, until the people who depend on your income stop depending on it, which for most families means your planned retirement age, when the accumulated corpus takes over the protection job. Policies running to age 85 or 99 insure years in which, if the plan has worked, nobody needs your income, and you pay for that extra cover every year in between.
Is a return of premium plan better, since I get my money back?
The “returned” money is simply your own premiums, refunded after 30-odd years with zero growth, which after inflation is a significant real loss, and you pay a visibly higher premium throughout for that refund. The arithmetic of buying plain term cover and investing the premium difference almost always comes out ahead. The refund feels good, but you have already paid for it.
Sources
- CBDT Circular No. 15 of 2023 dated 16 August 2023, guidelines under Section 10(10D) (full text reproduced by GConnect): https://www.gconnect.in/personal-income-tax/guidelines-clause-10d-section-10-income-tax-act-1961-2.html
- IRDAI (Payment of Commission) Regulations, 2023, effective 1 April 2023 (text via TaxGuru): https://taxguru.in/corporate-law/irdai-payment-commission-regulations-2023.html
- Cafemutual explainer on the 2023 commission regulations and EoM framework: https://cafemutual.com/news/insurance/28916-irdais-new-commission-regulations-here-is-what-matters-to-you
- ClearTax, Section 80C deduction limit, FY 2025-26: https://cleartax.in/s/80c-80-deductions
- ClearTax, Section 80D health insurance deduction limits, FY 2025-26: https://cleartax.in/s/medical-insurance
