Haris Ashley
Sum assured is a term used in life insurance to refer to the guaranteed amount of money that the beneficiary of a policy will receive in the event of the policyholder's death. The sum assured is pre-decided at the time of purchasing the policy and is dependent on the policyholder's current and future expenses, income, age, and other factors. It is an important component of a life insurance plan as it dictates the premiums of the policy.
There are several ways to calculate the sum assured, but one of the most popular methods is to use a Human Life Value (HLV) calculator, which can be found online. This calculator takes into account factors such as age, income, and expenses to determine the ideal sum assured while also accounting for inflation.
The sum assured is different from the sum insured, which is typically offered by non-life insurance companies such as health or car insurance providers. The sum insured is a reimbursement for the costs incurred and is based on the value of the asset insured.
| Characteristics | Values |
|---|---|
| Definition of Sum Assured | The sum assured is the guaranteed amount that the beneficiary of your life insurance policy will receive in case of your death. |
| Calculation of Sum Assured | Calculating the sum assured can be done using a Human Life Value (HLV) calculator, which takes into account factors such as current and future expenses, income, age, and inflation. |
| Sum Assured vs Sum Insured | Sum assured is offered by life insurance companies, while sum insured is generally offered by non-life insurance companies such as health or car insurance companies. Sum assured is a fixed amount, while sum insured is a reimbursement for the loss incurred. |
| Factors Affecting Sum Assured | Age, income, lifestyle habits (e.g. smoking and alcohol consumption), and inflation are some key factors that influence the sum assured. |
What You'll Learn
Human Life Value (HLV) calculator
A Human Life Value (HLV) calculator is an online tool that helps individuals work out their insurance needs. It can help you analyse the amount your dependents would need to maintain their standard of living in your absence.
The HLV calculator takes into account your current and future expenses, income, age, and other details to estimate the ideal sum assured required to cover your family’s expenditure. It accounts for inflation in the coming years to ensure your loved ones are adequately covered.
The HLV calculator is based on the income replacement method and the need-based method. The income replacement method covers whatever income your family needs for support. The need-based method calculates the amount required to cover needs and goals in the event of the death of the sole breadwinner.
The HLV calculator considers the following factors:
- Current monthly expenses
- Savings and investments
- Loan amount to be paid
- Amount already covered by insurance
- Amount needed to fulfil future goals
To calculate your HLV, follow these steps:
- Calculate your current income.
- Deduct your expenses, premiums, and income tax payments.
- Calculate the number of earning years left before your retirement.
- Find the discounting factor rate and inflation rate.
- Determine the present value of the required income stream after including inflation.
The second approach is the income replacement method, which is calculated as follows:
Annual Income x Years till Retirement
Human Life Value is the monetary value of a person’s life. It is determined by the total benefits others depending on that person may expect to derive from their future efforts. Assessing HLV is a useful tool for insurance companies to determine the amount of money a family needs in the event of the death of the sole earning member.
Life Insurance and Skydiving: What's Covered in Accidents?
You may want to see also
Current and future expenses
When calculating the sum assured for your life insurance policy, it's important to consider your current and future expenses, as well as your present and future earnings, and age. This will help you determine the capitalised value based on the current inflation rate. One popular method for doing this is the Human Life Value (HLV) approach, which calculates the sum assured based on your current and future expenses.
- Income: Your income will determine how much you can pay in premiums. The higher the sum assured, the higher the premium. Therefore, you need to ensure you can afford the premium payments while also handling your expenses.
- Ongoing Financial Liabilities: If you have long-term loans, consider adding them to the sum assured of your life insurance plan.
- Future Expenses: Estimate future expenses such as your child's education, marriage, and monthly expenses. Choose a sum assured that will sufficiently cover these costs.
- Lifestyle Habits: Lifestyle habits like smoking and consuming alcohol can affect your premium and, ultimately, the sum assured. These habits may result in a higher premium as they reduce life expectancy.
- Age: Your age will determine the coverage you need.
- Human Life Value (HLV) Calculators: You can use online HLV calculators to estimate your sum assured by entering details like your current and future expenses, income, and age. The calculator will account for inflation and provide an estimate of the ideal sum assured to cover your family's expenditure.
Remember, it's important to choose a sum assured that will be sufficient for your family's future financial needs. You can consult a financial professional to help you calculate a detailed estimate of the sum assured based on your unique circumstances.
Whole Life Insurance: Age Limit for Buyers?
You may want to see also
Current and future income
When it comes to life insurance, it's essential to understand the difference between "sum assured" and "sum insured". The sum assured is a fixed amount that the insurance company guarantees to pay to the policyholder or their beneficiaries in the event of the policyholder's death. It is an important component of a life insurance plan as it dictates the premiums of the policy. The higher the sum assured, the higher the premium.
The sum assured is calculated based on the Human Life Value (HLV), which takes into account your current and future expenses, income, age, and other factors. It helps you determine the capitalised value based on current inflation. Online HLV calculators can assist in calculating the ideal sum assured.
When calculating the sum assured, it is crucial to consider your current income. This helps assess your living standards and determines how much your dependents will need to maintain their lifestyle in your absence. If your income increases over time, you may want to plan to increase the sum assured accordingly.
It is recommended that the sum assured should be equal to or greater than ten times your annual income. This ensures that your dependents have sufficient financial support. For younger individuals under 30, a sum assured of 14-15 times their annual income is suggested, while for those over 50, a sum assured of 7-8 times their income is considered adequate.
Additionally, consider any future income sources that may impact your dependents' financial situation. For example, if you expect to receive an inheritance or have investments that will generate income in the future, factor this into your calculations.
In conclusion, when determining the sum assured in life insurance, it is vital to consider both your current and future income prospects. This will help ensure that your loved ones have the financial support they need to maintain their standard of living in your absence.
Does Whole Life Insurance Payout Quickly?
You may want to see also
Age
Therefore, age should be viewed as an advantage to buy a higher sum assured since premiums are comparatively lower. With each passing year, your pure protection "term plan" could increase by 6% to 8%. Remember, the concept of sum assured is to look at a safety net rather than premiums payable.
If you are young and healthy, you can start with a lower sum assured and gradually increase it over the policy period. If you are middle-aged and experience some health problems, you can select a higher sum assured or add riders like critical illness cover. This will act as a shield against increasing medical expenses without causing any burden on your finances.
Life Insurance: Does It Expire or End?
You may want to see also
Lifestyle habits
When applying for life insurance, it is crucial to be transparent about any lifestyle habits such as alcohol or tobacco consumption. This information helps the insurance company assess the risk accurately and ensure that the beneficiary does not face any complications when claiming the sum assured.
Additionally, lifestyle habits can influence the premium amount, with smokers and drinkers often paying higher premiums than non-smokers and non-drinkers. This is because insurance companies consider these habits as risk factors that may increase the likelihood of health issues and premature death. Consequently, individuals with these lifestyle habits may need to pay higher premiums to obtain the desired level of coverage.
It is important to note that maintaining a healthy lifestyle can have a positive impact on the sum assured and premium amount. Individuals who live healthily are more likely to outlive the policy period, which can result in lower premiums and a higher chance of receiving maturity benefits.
In conclusion, lifestyle habits play a significant role in determining the sum assured and premium amount of a life insurance policy. Transparency about these habits during the application process is essential to ensure adequate coverage and avoid complications for beneficiaries.
Life Insurance and Taxes: What You Need to Know
You may want to see also
Frequently asked questions
Sum assured is the fixed amount that is paid to the nominee of the plan in the unfortunate event of the policyholder’s demise. The insurance company pays this money as per the sum chosen by the policyholder at the time of purchasing the policy.
Calculating the sum assured is easy. Even though most people struggle with determining the ideal amount for their family’s future needs, using a Human Life Value (HLV) calculator can help you find out the sum assured for your policy. The HLV calculator can be found online. All you need to do is enter some details like an estimate of your current and future expenses, income, age, and other details. The calculator accounts for inflation in the coming years and gives you an estimate of the ideal sum assured required to cover your family’s expenditure.
The sum insured is the amount that the insurance company pays to the policyholder in the case of an unpredictable event, such as an illness. The amount paid is a reimbursement for the costs incurred and not a fixed sum of money like the sum assured.
The sum assured is offered by life insurance companies and the sum insured is generally offered by non-life insurance companies, such as health or car insurance companies. The sum assured is calculated based on the HLV, while the sum insured is paid as per the value of the asset, such as in the case of a car insurance plan, the sum insured will be determined as per the damages incurred by the vehicle. The sum assured is a fixed amount that is decided at the time of buying the insurance plan. The sum insured, on the other hand, is compensation paid to you for the loss or damage incurred.
Here are some things to consider:
- Age: Your age will determine the cover you will need.
- Income: Your income dictates your standard of living and is important while calculating the sum assured.
- Lifestyle habits: Your lifestyle habits, such as smoking, consuming alcohol, and other habits affect your premium and ultimately the sum assured. These habits can result in a higher premium as you may require a higher sum assured since the life expectancy reduces for smokers and drinkers.
