29-year-old Ananya earns ₹65,000 a month. An agent also pitched her a plan recently that would cost her ₹8,000 a month. That is close to ₹96,000 a year, more than 12% of what she earns. She liked the idea of being covered, but something about the number felt off. That’s because Ananya was not sure if that was simply what insurance costs or if she was being oversold.
This is a question many people have. Nobody wants to remain underinsured, but they also don’t want to pay a premium that cuts into rent, groceries, or savings either. The honest answer is that there is a workable range, and once you know it, you can tell whether a plan fits your budget or is priced for commission.
What Percentage Of Your Income Should Insurance Premiums Take Up?
Most financial planners in India work with a rough band of 5% to 10% percent of your annual income for all your insurance premiums combined. This generally involves a life cover, health cover, and anything else like a personal accident add-on. It’s a practical range that doesn’t even affect your financial goals.
On Ananya’s income of about ₹7.8 lakh a year, that band works out to roughly ₹3,250 to ₹6,500 a month across every policy she holds. Her agent’s pitch alone was already higher than the top end of that budget.
What Happens If You Are Spending Too Little On Insurance?
If your total premium is well under 5% of your income, the more common problem is that your cover is too thin.
A very low premium on a life insurance policy usually means a very low sum assured. That completely defeats the purpose of buying the cover in the first place. The same applies to health insurance bought purely to save on the premium rather than actually to protect against a real hospital bill.
What Happens If Your Premium Is Eating Up Too Much Of Your Salary?
This is usually where the real damage happens, and it is almost always because of the type of plan, not the amount of cover.
Endowment and money-back plans, and some investment-linked policies, can charge five to ten times what a plain term plan costs for the same amount of life cover, because part of that premium is going toward investment or bonus payouts rather than pure protection. Ananya’s ₹8,000 a month is a textbook example of this.
What Does A Term Plan Actually Cost For The Same Cover?
A pure term plan for a ₹1 crore sum assured costs somewhere between ₹600 and ₹800 a month for a healthy, non-smoking person around Ananya’s age. That is generally based on standard market rates for a policy running to age 60.
It’s close to ₹7,200 to ₹9,600 a year, roughly a tenth of what she was quoted, for the same ₹1 crore of protection her family would actually need if something happened to her.
Rates do vary by insurer, health history, and habits like smoking. So, make sure to check premium options directly against your age, income, and health profile before you sign anything.
So What Should Your Own Insurance Budget Actually Look Like?
Take your annual income, apply the 5% to 10% band, and that is your total ceiling for the year across all policies. Inside that ceiling, a term life insurance plan should usually take up the smallest share, since it is the cheapest way to buy a large amount of cover.
Health insurance for yourself and your dependents should take a bigger share, since medical costs rise every year and a single hospitalization can cost lakhs. Whatever is left can go toward a personal accident cover or a top-up health plan if you want one.
What Does This Look Like Across Different Life Stages?
| Life Stage | Rough Share of Income For All Insurance | What to Prioritize |
| Single, no dependents, healthy | 3% to 5% | Basic term cover plus individual health insurance |
| Married, one income, young children | 7% to 10% | Higher term cover, family floater health plan |
| Dual income household | 5% to 7% per earner | Term cover sized to each person’s contribution |
| Self-employed or freelance income | 8% to 10%, built into a monthly buffer | Term cover plus a larger health cushion, since there is no employer backup |
| Close to retirement, children settled | 3% to 5% | Lower term cover, higher health and critical illness cover |
Who Should Not Just Stick To The Standard Percentage?
A flat percentage is a starting point, not a rule that fits everyone.
Anyone who is the sole earner for a large joint family should prioritize enough term cover first, even if it briefly pushes past 10% of income, since the cost of being underinsured there is far higher than a slightly tight month.
A person already covered by a reasonably large employer group policy should check that cover before buying a full personal policy from scratch, so they are not paying twice for the same protection.
Those with irregular income, like a freelancer or a small business owner, should budget on their average income over the last two or three years, not the best month they have had recently.
Does The Tax Deduction Change What This Premium Actually Costs You?
All premiums paid toward eligible life insurance policies qualify for a deduction of up to ₹1.5 lakh under Section 123 of the Income Tax Act, 2025. Maturity or death benefit payouts are also exempt under Section 11, subject to conditions on the policy.
Whether this applies to your specific plan and your tax slab is something a tax advisor should confirm for your situation, since it depends on the policy type and the regime you are filing under.
What Should You Do Next?
Before you agree to any number an agent gives you, work backward from your own income using the 5% to 10% band, and separate how much of that should go to life insurance versus health cover.
Calculate the premium for a term plan against your own age and income first, since that comparison alone will tell you whether the number you were quoted is reasonable or inflated. A policy that protects your family without straining your month is the only version of insurance actually worth paying for.
