Calculating Sum Insured For Life: A Simple Guide

When you purchase a life insurance plan, the insurance provider signs a contract to offer financial protection to your chosen beneficiary in the unfortunate event of your demise. This is known as the sum assured. The sum assured is a fixed amount that is paid to the nominee of the plan in the event of the policyholder's death. It is an instrumental component of a life insurance plan as it dictates the premiums of the policy.

The sum assured is calculated based on income, expenses, dependents, and goals. Insurers typically consider 10-20 times your annual income, outstanding debts, final medical bills, funeral expenses, the number of dependents and their needs, education and retirement goals, and business succession planning (if relevant).

There are two simple ways to calculate the sum assured:

1. Your sum assured should be at least ten times your annual income. In case you have long-term liabilities, then consider adding them too.

2. Human Life Value (HLV) Calculator: Some insurance companies provide an online HLV Calculator to calculate the sum assured. It allows you to consider various factors while calculating a desired sum assured, such as your age, occupation, policy payment term, policy duration, and payment frequency.

Sum Assured Calculation: Use a Human Life Value (HLV) calculator to calculate the sum assured based on your current and future expenses, income, age, etc

When it comes to life insurance, the sum assured is a critical component. It is the predetermined amount that will be paid out to your beneficiaries in the event of your death. This amount is guaranteed by the insurance company and is usually ten times your annual income.

There are several methods to calculate the sum assured, but one of the most popular is the Human Life Value (HLV) method. This approach takes into account your current and future expenses, income, age, and other factors to determine the ideal sum assured. You can find HLV calculators online, which will help you calculate the right sum assured for your specific situation.

• Financial Goals: Understand your financial goals and ensure that the policy's benefits align with your needs.
• Dependents: Consider the number of dependents you have. The more dependents you have, the higher the sum assured should be to cover their needs.
• Expenses: Make a list of your monthly expenses, including groceries, utility bills, and other regular costs. This will help you estimate your family's monthly expenses and ensure that the sum assured is sufficient to maintain their standard of living.
• Loans and Income: Evaluate your long-term liabilities and include them in the sum assured. Your family may need to pay off these loans, so it is crucial to provide for them.
• One-time Expenses: Include significant but non-recurring expenses, such as education, marriage, or purchasing an asset, in the sum assured.
• Age: If you are in your 20s or 30s, it is the ideal time to opt for a higher sum assured as you have more years to work and invest.

By using the HLV calculator and considering the above factors, you can determine the sum assured that best suits your needs and provides adequate coverage for your loved ones.

Sum Assured vs Sum Insured: Sum assured is a fixed amount paid to the beneficiary in the event of the policyholder's death. Sum insured is the reimbursement for the loss covered by the policy

Sum assured and sum insured are two of the most important terms in the insurance domain, but they are often confused and used interchangeably. However, they have distinct meanings and implications for insurance policies. Understanding the difference between the two is crucial for policyholders to make informed decisions about their financial planning and ensure they have adequate coverage.

Sum Assured

Sum assured is a term primarily associated with life insurance policies. It is a predetermined, fixed amount that the insurance company is obliged to pay to the policyholder's nominee in the unfortunate event of their death. This amount is specified at the time of purchasing the policy and remains unchanged throughout the policy period. The sum assured is an essential component of a life insurance plan as it dictates the premiums of the policy. The premiums paid by the policyholder are dependent on the total sum assured, so a higher life cover (sum assured) will result in higher insurance premiums.

The sum assured is calculated based on the Human Life Value (HLV), which takes into account factors such as current and future expenses, income, age, and inflation rates. Online HLV calculators can help individuals determine the ideal sum assured for their policy.

Sum Insured

The term sum insured is commonly used in general insurance policies such as health insurance, motor insurance, home insurance, and property insurance. It refers to the maximum amount that the insurance company agrees to pay in the event of a covered loss or claim. Sum insured policies work on the principle of indemnity, which means that the insurer reimburses the policyholder for their financial loss, up to the specified coverage limit. The sum insured is typically based on the value of the insured asset and can be subject to annual review, allowing policyholders to adjust their coverage based on changing circumstances.

Sum Assured vs Sum Insured

The key differences between sum assured and sum insured are as follows:

| Sum Assured | Sum Insured |

|---|---|

| Applicable to life insurance policies | Applicable to non-life insurance policies such as health, motor, and property insurance |

| Paid as a fixed, predetermined amount in the event of the policyholder's death or maturity of the policy | Paid as reimbursement for the covered loss or damage, up to the specified coverage limit |

| Provides a financial benefit to the insured person or their beneficiary | No monetary benefit beyond the reimbursement of the loss or damage |

| Remains constant throughout the policy term | Can be adjusted based on changing needs and circumstances |

| Offers financial security for the long term | Ideal for managing immediate or unforeseen expenses |

Sum Assured Factors: When deciding on the sum assured, consider your age, income, expenses, loans, and dependents

When deciding on the sum assured, it is important to consider your age, income, expenses, loans, and dependents. Here are some factors to keep in mind:

Age

Your age will help determine the coverage you need. Generally, it is advisable to secure a higher sum assured at a younger age when premiums are usually more affordable. The age and health condition can affect the sum assured and the premium paid.

Income

Your income is essential for assessing your living standards and determining the sum assured. The sum assured should ideally be equal to 10 times your annual income to maintain your lifestyle and secure your family's future.

Expenses

Consider your family's monthly and annual expenses, such as utility bills, groceries, healthcare, and education costs. Calculate the total amount of outstanding loans, including home loans, car loans, or any other debts.

Loans

Factor in any outstanding loans, mortgages, or credit card debts. The sum assured should be sufficient to settle these debts so that your family is not burdened.

Dependents

The sum assured depends on the total number of dependents. If you are the primary breadwinner, your family relies on your income for financial support. The higher the number of dependents, the higher the sum assured needed to maintain their standard of living.

Remember, there is no one-size-fits-all answer to determining the sum assured. It is crucial to strike a balance between adequate coverage and a comfortable premium that fits your budget. Consult a financial advisor to help you calculate a precise amount based on your specific circumstances.

Sum Assured and Premiums: The sum assured directly influences the premiums of the life insurance policy

When purchasing a life insurance plan, the insurance provider signs a contract to offer financial protection to your chosen beneficiary in the unfortunate event of your demise. The sum assured is a fixed amount that is paid to the nominee of the plan in the event of the policyholder's death. This figure is the guaranteed amount of money that your loved ones will receive in your absence, provided all your premiums have been paid in full. The sum assured is an instrumental component of a life insurance plan as it dictates the premiums of the policy.

Calculating the Sum Assured

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.

Sum Assured and Premiums

The premiums paid by policyholders to insurers are dependent on the total sum assured. A higher life cover (sum assured) means a higher insurance premium. Therefore, when deciding on the sum assured, it is important to keep in mind that a higher sum assured will result in higher premium payments.

Factors to Consider when Selecting the Sum Assured

• 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.

Sum Assured and Maturity: Sum assured is paid to the beneficiary in pure term life insurance policies. In other types of life insurance policies, the sum assured may be paid on maturity along with bonuses

Sum assured is a crucial aspect of life insurance, representing the guaranteed benefit amount that the policyholder's beneficiaries will receive in the event of their death. When choosing a life insurance plan, it is essential to consider both the sum assured and the maturity benefits offered.

In pure term life insurance policies, the sum assured is paid to the beneficiary upon the insured's death. This provides financial security for the family, covering living expenses and future costs such as education. The sum assured should be sufficient to meet the family's ongoing financial needs and future goals.

Other types of life insurance policies, such as term insurance with return of premium (TROP) plans and unit-linked insurance plans (ULIPs), offer maturity benefits in addition to the sum assured. In these cases, the policyholder may receive a payout at the end of the policy term, which includes the premiums paid and additional benefits offered by the insurer. Endowment plans, for example, provide a guaranteed sum assured amount as a lump sum, while ULIPs offer market-linked returns based on the fund value.

When selecting a life insurance plan, it is important to consider your income, financial liabilities, and future expenses to ensure that the sum assured is sufficient for your family's needs. Additionally, understanding the maturity benefits offered can provide added financial security and help you achieve your life goals.

Frequently asked questions