The Buyt Desk
When you purchase a pure protection term life insurance plan, the insurance provider promises to provide financial protection to your dependents in the unfortunate event of your death. The amount that is paid out to your selected beneficiary is called the sum assured. It is based on your income, requirements of your dependents, maturity benefit, death benefit, future goals, and others. The thumb rule is that it must be a minimum of 10 times of your yearly earnings. The sum assured along with other crucial factors such as the age and health of an applicant determines the premium he/she has to pay for the policy.
Meaning of Sum Assured
The fixed amount paid to the chosen beneficiary in the unfortunate event of the policyholder’s demise is known as a sum assured. The insurer pays this amount according to the sum selected by a policyholder while buying a policy. That figure is the assured amount of money that the policyholder’s family members will get in his/her absence if all their premiums have been paid in full.
This amount can decrease or increase over the policy tenure, based on the plan’s terms and conditions. An applicant can select to receive maturity benefits under certain types of life insurance plans.
Way to Calculate the Sum Assured
It is easy to compute the sum assured. You can use an online Human Life Value (HLV) calculator to figure out the sum assured for your policy. What you would have to do is input some important details like estimate current and future expenses, age, income, and others. It will account for inflation in future years and provide an estimated ideal sum assured needed to cover your family’s spending.
Factors to consider while choosing optimum sum assured
Here are 5 important factors to consider to choose an optimum sum assured.
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Age
The coverage you will need and the right sum assured is based on your age. Buying a plan at an early age will require a lower premium for a higher sum assured. A younger candidate investing in the sum assured can retire early.
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Lifestyle Habits
Your lifestyle habits like drinking alcohol, smoking, and others can affect the premium and the sum assured. It can result in a higher premium. You may need a higher sum assured because for drinkers and smokers, the life expectancy decreases.
When you’re employed in a high-stress level job, consider the higher protection as a higher sum assured and convey information about your habits to an insurer to avoid problems while claiming the sum assured. Living a healthy lifestyle often results in outliving the policy period. Select the return of premium cover to receive the premiums paid like maturity benefits according to the policy conditions.
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Income
Your income matters while selecting sum assured as a lower cover can render you underinsured and reject the life insurance concept.
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Medical Background
Medical history records are important from the perspective of choosing a sum assured that will include associated treatment charges if a person has any serious illness.
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Inflation
The country’s inflation index fluctuates yearly and so do medical, education, and household expenses. So, consider the inflation rate while investing in a life insurance policy.
How To Decide The Sum Assured?
Several insurance policies protect against disease, disability, and death. While purchasing an insurance plan what matters a lot is that it offers the correct sum assured amount. You must consider annual income. As per the thumb rule, your sum assured must be 10x your yearly income.Less than 30 year old person’s sum assured should be 14-15x of their yearly income and those who are above the age of 50 years their sum assured should be 7-8 times of the annual income. When calculated in expense terms, it must be at least 12-15x the yearly expenses with debt obligations like due personal loans, home loan amount, and others accounted for.
Understanding the meaning of sum assured can help you select an appropriate insurance policy for your needs. Choose enough amount of sum assured by regularly paying a premium. Add critical illness coverage to the insurance plan to make sure coverage against multiple life-threatening diseases. When you already have a life insurance policy, ask your insurer how to increase the sum assured at various life stages.
