Sarthak is a 30-year-old primary earner for his family of four in Bangalore, earning ₹30 lakh per annum and bearing expenses of ₹18 lakh each year. His insurance advisor has previously said that his family is underinsured. He feels that his family is well covered through the existing Term Insurance policy of ₹1 crore and his employer-provided group life insurance cover of ₹60 lakh. Still, he and his wife decided to crunch the numbers to find out if his advisor’s claims are true. Sarthak has to repay a home loan of ₹1 crore and a business loan of ₹40 lakh. His current liquid savings and investments amount to ₹40 lakh. This family also has many unavoidable financial goals: Higher education for their two children after 13 years and 16 years, and retirement in 30 years. For their calculations, Sarthak and his wife used a shortcut and reached a final corpus value of ₹3 crore. Seeing the coverage gap, they immediately contacted their advisor for an update of their existing term cover. The insurance advisor was happy to save this family from a possible financial crisis, but he could not agree with their cover requirement. Upon closer inspection, he discovered many misconceptions applied in the insurance cover calculations. The advisor had to lay out the numbers produced side-by-side to show them how grossly they were miscalculating. He also told them of one method that actually gets this right, called Human Life Value, or HLV. After that, he walked them through exactly why the other shortcuts they had used were about to cost them crores. Misconception 1: My salary determines how much insurance I need – The Salary Multiple rule Fail Based on this rule, the required cover amount for Sarthak and his family would be: Sarthak’s cover using the 10×Salary rule = 10× ₹30 lakh = ₹3 crore Sarthak’s cover using the 15×Salary rule = 15× ₹30 lakh = ₹4.5 crore This method gives a quick number, but Sarthak has no way of knowing if this output matches his family’s needs or if it is incorrect. Misconception 2: 20 Years of Income Replacement Should Be Enough – The DIME rule Fail Sarthak’s Cover using the DIME rule, also called the needs-based method: Total cover needed = Debts (not home loans) + Income Replacement + Mortgage + Education Extra cover needed = Total need − existing assets − existing term cover Debts = ₹40 lakh