February 21, 2024

Buying a life insurance plan soon? Know how to choose the right sum-assured

Term insurance is widely recognized as an essential component of any financial plan. And there is a reason why financial experts recommend it: term insurance essentially protects your family financially after your demise.

For those who are not aware of it, the sum assured in life insurance plans like term insurance is what the nominee will receive if the life assured dies within the policy period. So, selecting the appropriate term plan with proper coverage is critical, and the decision for the same cannot be made in a rush. It must be done with extreme precision because the best life insurance policy sum assured amount ensures that your family will be financially supported in the event of your untimely death. 

If you choose an insufficient sum assured, it may not be enough to cover your family’s monthly household expenditures or settle any loans or debts, if any. As a result, life insurance plans with a low sum assured lose the value for which it was intended in the first place. On the other hand, if you choose a large sum assured, you will have to pay a higher premium for the same. Thus, carefully select the term plan coverage that will allow your family to live their lives without financial strain even after your demise. 

If choosing a term plan sum assured is overwhelming for you, or if you have queries like: Should you get a term plan with Rs. 50 lakh coverage or a Rs. 1 crore term plan? Continue to read this post for the same.

Factors to consider when determining the total sum assured you should choose

Let us go through each of these aspects one by one.

Your Annual Income: Your annual income is an important factor in determining the sum assured of any life insurance plans you choose to buy. The reason why annual income is taken into consideration is primarily because of two reasons. Term insurance is solely a death benefit plan; it is based on human life value. It is difficult to quantify the emotional loss that loved ones experience as a result of a family member’s death, but financial loss is still manageable. Thus, insurers consider an individual’s annual income when compensating for financial loss. Secondly, your annual income is what keeps your family financially afloat, so it helps determine the sum assured because your family requires a percentage of your current earnings to survive. 

So, financial experts advise you to invest 15-20 times your annual salary. If your net annual income is INR 6 lakhs, you can choose a term plan that provides coverage of up to INR 1 crore or INR 1.2 crore. This amount should be sufficient to cover household expenses, education fees, debt repayment (if any), and other expenses. 

Take into account your Monthly Household Expenses and Family Lifestyle: The best life insurance policy sum assured would be the one wherein your monthly household expenses are taken into account. You want to ensure that your family recovers financially and can continue to live as you have planned. And, for that, you need to work out how they are going to handle their monthly household bills, rent (if any), groceries, medical expenses, college fees, and other day-to-day lifestyle expenses. Essentially, the sum assured should be more than enough to sustain their life even in your absence.

Number of Financially Dependent Family Members: You should determine how many family members are financially dependent on you. Also, how much money do they require for day-to-day life and other lifestyle-related expenses? If the number of family members reliant on you is big, you may have to consider a substantial cover. However, if you are living in a tiny nuclear family, you may choose a relatively small cover, and that would suffice. In case you have children, you need to ensure to select a large enough insurance for completion of their schooling in case of your untimely demise so that their education doesn’t stop owing to insufficient cash. However, if you are buying at a later stage of life when your children are financially independent and well-situated, you may choose a cover just enough to leave that as a legacy or corpus for your family.

Consider Loans/Debts/Liabilities Before Finalizing Term Plan Cover Loan(s) / Debt(s) Amount: One of the most significant elements to keep in mind when determining the sum assured for the best life insurance policy you are choosing is the amount of debt/loan on yourself. If you have taken any loan such as a vehicle loan, business loan, or home loan or have mortgaged property, you need to get a term life insurance that is sufficient enough to cover the amount of loan and debts. Because you don’t want your family to be burdened with the repayment of big loans without financial help in case you pass away before you can settle all your loans. Make sure your household isn’t stressed about clearing the dues without sufficient finances or revenue sources.

Consider the inflation rate: Every year, inflation has a significant impact on our lives. The annual inflation rate will be useful in determining the term insurance sum assured. As yesterday’s monthly expenses differ from today’s, so will tomorrow’s. The smart option would be to factor in a 7% yearly inflation rate when calculating the total amount. Only then will the sum assured be sufficient to cover lifestyle necessities and maintain a stress-free life.

Other considerations for Term Plan Sum Assured should include future financial milestones. 

You should also consider your long-term financial goals. For example, if you have young children, you may have considered education and additional studies, but you need to also consider their wedding expenses. If you do not have any debts or a house loan but intend to buy one in the future, you should consider this before deciding on the term insurance sum assured. Similarly, you may want to consider your spouse’s retirement money, medical bills, and so on. 

Important Note: 

Even if you want a higher sum assured, you must first determine your eligibility. A variety of factors are considered when calculating the sum assured you would be eligible for the best life insurance policy. For example, your annual income, age, smoking status, and so on. 

So, we are saying, 

If you believe the present sum assured amount is insufficient for your family and want to increase it, you may be able to do so provided your income is getting improved, or you have additional income which you can use to request that your insurer raise your coverage accordingly.

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