The motive of taking a term insurance plan is to cover the risk of early death during one's working life.
The motive of taking a term insurance plan is to cover the risk of early death during one’s working life. So, the cover should be sufficient to replace the earning of your remaining earning life in case of unfortunate death as well as to create sufficient corpus for your dependents to survive the post working life after paying back all the outstanding liabilities.
Although, as a thumb rule, it is said that the term cover should be at least 8 to 10 times of your annual income, but your existing assets and liabilities will also have a say on how less or more cover you need. So, your lifestyle plays an important role in choosing the quantum of term cover.
In case you lead a lavish lifestyle by overspending through EMIs on luxury top-end products, which you really don’t need, you create unnecessary liabilities by putting even future earnings at stake, which push your earning obligations up and the requirement of higher term cover as well. Because, in case of any unfortunate eventuality, your dependents will not only have to maintain the normal standard of living out of the income string generated by investing the sum assured, but also need to repay the liabilities that have been left behind as your legacy.
However, you may not get that much extra cover, as the eligibility to get maximum cover is decided on the basis of actual earning of a person and not on the basis of overspending through EMIs. So, if you are enjoying a lavish lifestyle by going beyond your source of income, your dependents may have to suffer and downgrade their standard of living to prepay your liabilities in your absence.
On the other hand, if you lead a controlled lifestyle and spend on items that you need, you may be able to save substantial money. This will not only relieve you from taking that extra life cover, but a judicious investment of the money you save will actually reduce the requirement of the term cover. Because, in case of any unfortunate adversity, your dependents would not have any liabilities to repay and the savings on the other hand would boost their earnings apart from the source of earning generated by investing the sum assured.