Understanding The Fundamentals Of Minimum Sum Assured In Term Insurance

Term insurance is a type of life insurance that provides financial coverage to the policyholder's family for a fixed period of time. This type of insurance offers a death benefit to the nominee in the event of the policyholder's death during the policy term. The coverage amount or minimum sum assured is one of the most important aspects of the policy to consider. It should be carefully corroborated with the policyholder's family's existing needs as well as any potential future needs. The minimum sum assured can be paid out in a lump sum or disbursed in staggered amounts over a predetermined period.

The minimum sum assured should be 12-15 times your annual expenses

Term insurance is a type of life insurance that provides financial coverage to the policyholder's family for a fixed period of time, known as the 'term' of the policy. This type of insurance offers a death benefit to the nominee in the event of the policyholder's death during the policy term.

When purchasing term insurance, the coverage amount or minimum sum assured is one of the most important aspects of the policy to consider. The minimum sum assured should ideally be 12-15 times your annual expenses, including any loans. This will ensure that your family remains financially secure even after your death.

• Regular Household Expenses: Calculate your annual household expenses and multiply this amount by 15-20 times to get the base sum assured. This calculation should take into account the number of dependents and the expected number of years you will be working.
• Current/Future Income & Inflation: Consider your current and future income, especially if you are the sole breadwinner. Account for expected increases in salary due to inflation, as this will impact your household expenditure.
• Existing Assets, Debts & Liabilities: List all your assets, such as investments and property, and balance them against your liabilities, such as debts and loans. This will ensure that your family does not bear any financial burdens after your death.
• Tenure: Choose an appropriate tenure based on the number of years you expect to remain in the workforce and draw a steady income. Longer tenures typically involve higher premium payments.
• Future One-Time Expenses: Consider saving for future one-time expenses, such as your children's education or wedding.
• Retirement Fund: Include funds for the retirement of your spouse or dependents to ensure they can maintain their standard of living.

By carefully considering these factors, you can estimate the ideal minimum sum assured for your term insurance policy, providing sufficient financial security for your family.

The sum assured should be 8-10 times your annual income

Term insurance is a type of life insurance that provides financial coverage to the policyholder's family for a fixed period of time, known as the 'term' of the policy. In the event of the policyholder's death during the policy term, the beneficiary or nominee will receive a death benefit.

The sum assured is the fixed amount that the insurance company guarantees to the policyholder's legal heirs in the event of the insured's death. This amount can increase or decrease over the policy tenure, depending on the terms and conditions of the policy plan.

When it comes to purchasing a life insurance policy, it is recommended that the sum assured should be at least 8-10 times your annual income. This is to ensure that your family will be able to maintain their current lifestyle and meet any future financial obligations.

• Regular household expenses: It is important to have an idea of your annual household expenses and ensure that the sum assured is sufficient to cover these costs.
• Current and future income: In the event of the policyholder's death, the sum assured should compensate for the loss of income. This is especially relevant for single-income households, and future income increases due to inflation should be taken into account.
• Existing assets, debts, and liabilities: By listing your assets and balancing them with your current liabilities, you can ensure that there are no unaccounted financial burdens left for your family after the death benefit is paid out.
• Tenure: Choosing an appropriate tenure is crucial. Longer tenures often involve higher premium payments, while shorter plans may make premium returns and investment options more important.
• Future one-time expenses: Consider any future one-time expenses such as children's education or weddings.
• Retirement fund for spouse/dependents: Term insurance coverage should include funds for the retirement of your spouse or any other dependents to ensure they can maintain a comfortable lifestyle.

By carefully considering these factors and choosing an appropriate sum assured, you can ensure that your family's financial needs are taken care of in the event of your untimely death.

Consider your regular household expenses

When determining the ideal minimum sum assured for your needs, it is important to have an idea of what your annual household expenses will look like. This is an important first step in estimating the coverage amount. The base amount taken in your calculations for the sum assured should ideally be 15-20 times your annual household expenses, depending on the tenure of your policy and the number of years you are expected to remain in the workforce. The number of people requiring coverage will also affect this.

• Housing and rental costs
• Transportation and car insurance
• Travel expenses
• Food and groceries
• Utilities
• Childcare and school costs
• Pet food and care
• Clothing and personal upkeep
• Health insurance
• Monthly memberships and subscriptions
• Life insurance
• Homeowners insurance
• Entertainment expenses
• Savings and investments

Account for current/future income and inflation

When determining the ideal minimum sum assured for your needs, it is important to account for your current and future income, as well as inflation. In the event of the policyholder's death, the coverage amount will need to compensate for their source of income, especially for single-income households. This is crucial to ensure that the policyholder's dependents can maintain their standard of living.

To do this, you should consider the expected increases in your salary over time, particularly due to inflation. Inflation refers to a general rise in prices compared to a suitable base year. It erodes the value of money over time, meaning your money won't stretch as far in the future. In India, the average inflation rate between 1969 and 2010 was 7.99%. Healthcare and education, two major areas of future consumption for families, have witnessed higher inflation rates than other items.

When choosing a term insurance plan, look for one that offers protection against inflation. Some plans may increase the sum assured over the tenure of the policy to address inflation. You can also consider increasing the sum assured by investing in increasing term insurance policies, which raise premiums by a certain percentage each year to hedge against inflation. Additionally, you can use a term insurance calculator to estimate the amount of term cover you would require, taking into account expected inflation.

By accounting for current and future income, as well as inflation, you can ensure that your chosen term insurance plan provides adequate financial protection for your family in the event of your untimely death.

Assess your existing assets, debts and liabilities

When determining the ideal minimum sum assured for your needs, it is important to assess your existing assets, debts, and liabilities. This involves listing off all your assets, such as securities, investments, property, vehicles, fixed deposits, or mutual funds, and balancing them with your current liabilities, such as debts, loans, and mortgages. By doing this, you can ensure that there are no unaccounted financial burdens left on your family's income after your death. This is especially important if you have dependent children or other family members who rely on your income.

When assessing your assets, it is helpful to group them based on their liquidity, or how quickly they can be turned into cash. The most liquid asset is typically cash, followed by marketable securities, inventory, and accounts receivable. On the other hand, illiquid assets include real estate, vehicles, and machinery, which may take longer to sell.

Similarly, when evaluating your liabilities, it is useful to categorize them as current or long-term. Current liabilities are those that are due within the next year, while long-term liabilities have longer repayment requirements. Examples of current liabilities include accounts payable, short-term debt, dividends, and notes payable, as well as income taxes owed. Long-term liabilities, on the other hand, may include mortgages, loans, or other financial obligations that extend beyond one year.

By understanding your assets and liabilities, you can make informed decisions about the level of coverage you need from your term insurance policy. This will ensure that your family has sufficient financial resources to maintain their standard of living and meet any future expenses, such as education costs or retirement funds.

Frequently asked questions