1. The core trade-off
Every term insurance decision involves a trade-off. More cover means more protection for your family. But it also means a higher premium. The question is: is the extra protection worth the extra cost?
For most buyers, the answer is yes up to a point. Term insurance is cheap, and the protection it provides is enormous. But there's a practical limit — beyond a certain cover level, the marginal cost per lakh starts rising.
2. How premiums scale with cover
Term insurance premiums don't scale linearly with cover. Here's how a healthy 35-year-old non-smoker's premium typically changes (30-year term):
| Cover | Annual premium | Cost per lakh |
|---|---|---|
| ₹50 lakh | ₹7,500 | ₹150 |
| ₹1 crore | ₹13,000 | ₹130 |
| ₹2 crore | ₹22,000 | ₹110 |
| ₹3 crore | ₹30,000 | ₹100 |
| ₹5 crore | ₹55,000 | ₹110 |
Notice how cost per lakh falls from ₹150 at ₹50L to ₹100 at ₹3 crore — then starts rising. That's diminishing returns kicking in.
Cost per lakh = Annual premium ÷ (Cover amount in lakhs)
3. Why cost per lakh falls initially
Several reasons:
- Fixed costs are spread. The insurer's administrative costs, policy issuance, and servicing are largely fixed. Larger covers absorb these more efficiently.
- Better underwriting economics. Insurers compete harder for high-value clients and offer better rates.
- Actuarial pooling. The mortality risk at a given age is broadly similar regardless of cover amount, so the base cost per lakh should fall as the fixed component is spread.
4. Why cost per lakh eventually rises
Beyond a certain point, the trend reverses:
- Anti-selection risk. Very high covers attract buyers who know something about their health risk — insurers charge more to compensate.
- Stricter underwriting. Very large policies require detailed medical tests, which increases the insurer's cost.
- Reinsurance costs. Insurers themselves buy reinsurance for large policies, and those costs rise disproportionately.
- Moral hazard. A very large payout could theoretically create perverse incentives, so insurers charge a premium for the risk.
5. The concept of marginal cost per lakh
The most useful metric is marginal cost per lakh — how much extra you pay per extra lakh of cover. This tells you whether the next lakh is worth buying.
| From → To | Extra premium | Marginal cost per lakh |
|---|---|---|
| ₹50L → ₹1Cr | ₹5,500 | ₹110/lakh |
| ₹1Cr → ₹2Cr | ₹9,000 | ₹90/lakh |
| ₹2Cr → ₹3Cr | ₹8,000 | ₹80/lakh |
| ₹3Cr → ₹5Cr | ₹25,000 | ₹125/lakh |
The marginal cost is lowest in the ₹1Cr–₹3Cr range, where insurers are most competitive. Beyond ₹3 crore, marginal costs rise sharply.
✓ For most buyers, the ₹1Cr–₹3Cr range is the sweet spot — high cover at the lowest cost per lakh.
6. A worked example
Take a 35-year-old non-smoker with a ₹12L annual income. His HLV-based requirement is around ₹2.5 crore, but he's considering different cover levels.
| Cover | Premium | Cost/lakh | Total (30 yrs) | Value |
|---|---|---|---|---|
| ₹50L | ₹7,500 | ₹150 | ₹2,25,000 | Insufficient |
| ₹1Cr | ₹13,000 | ₹130 | ₹3,90,000 | Adequate |
| ₹2Cr | ₹22,000 | ₹110 | ₹6,60,000 | Optimal |
| ₹3Cr | ₹30,000 | ₹100 | ₹9,00,000 | Excellent |
| ₹5Cr | ₹55,000 | ₹110 | ₹16,50,000 | Over-insured |
The ₹2Cr–₹3Cr range offers the best value. It meets the requirement (₹2.5Cr HLV) with the lowest cost per lakh. Going to ₹5Cr adds ₹90,000+ over the term for cover the family doesn't actually need.
7. What counts as "enough" cover?
The right cover level should be based on your actual requirement, not just cost efficiency. A ₹3Cr cover is excellent value — but if your requirement is only ₹1Cr, you're over-insured.
Use these guidelines:
- Minimum: 10× annual income, or your HLV-based calculation (typically 15–25×).
- Adequate: HLV-based requirement, factoring in debts and future goals.
- Optimal: The cover that meets your requirement at the lowest cost per lakh.
- Over-insured: Cover significantly exceeding your HLV — some insurers cap at 20×–30× income.
8. Practical rules for choosing cover
- Calculate your requirement first. Use the Life Insurance Coverage or HLV calculator to find your real number.
- Aim for the sweet spot. Typically ₹1Cr–₹3Cr for most buyers — the range with the lowest cost per lakh.
- Check the marginal cost. Before increasing cover, check how much the next lakh costs. If it's above ₹130/lakh, you're in diminishing-returns territory.
- Don't buy less than you need just to save premium. Term insurance is cheap — under-insuring is the bigger risk.
- Don't buy more than you need. Extra cover costs money for protection your family won't use.
- Consider multiple policies. If your requirement exceeds one insurer's cap, split across two insurers — often cheaper than a single large policy.
9. Common mistakes
- Choosing the cheapest per-lakh cover. Cost efficiency matters, but so does CSR and insurer reputation.
- Over-insuring for "peace of mind." A ₹5Cr cover when your requirement is ₹1.5Cr wastes premium every year.
- Under-insuring to save ₹500/month. The premium difference is small; the protection gap can be devastating.
- Ignoring riders. A slightly higher premium with a critical illness rider often delivers more value than a marginally lower premium without one.
- Not reviewing as income grows. Your requirement rises over time — top up every 3–5 years.
10. Final thoughts
The premium-coverage trade-off isn't about finding the absolute cheapest cover. It's about finding the cover that meets your family's actual need at a reasonable cost.
For most buyers, that's the ₹1Cr–₹3Cr range — high cover at the lowest cost per lakh. Below that, you may be underinsured. Above it, you're paying for protection your family doesn't need.
Use this calculator to see the economics for your own profile. Then choose the cover that protects your family properly — without overpaying for cover you don't need.
