Guidelines for Determining Sum Assured in a Term Insurance Plan

When considering the purchase of a term insurance plan, one of the most critical decisions you'll make is the sum assured. This amount needs to be just right to ensure your family's financial security in case of your untimely demise. Considering the various factors and understanding how the sum assured should be calculated can help you make an informed decision.

Factors Influencing the Sum Assured

The sum assured SA of a life insurance policy should be sufficient to cover your family's financial needs in your absence. Here is a detailed guide on how to determine the ideal sum assured:

Estimating Your Current Monthly Income

The first step is to estimate your current monthly income. This should form the base of your calculations as it will help you understand how much monthly support your family would need to maintain their living standard.

Calculating the Ideal Sum Assured

To calculate the ideal sum assured, follow these simple steps:

Estimate Current Monthly Income: This is the first step in determining the sum assured. Multiply by a Factor: The sum assured should be such that the interest earned from investing it in a fixed income instrument (like a Fixed Deposit) should be sufficient to equate your total current monthly income. Output Ideal SA Needed: The resulting sum assured is the amount that, when invested, should provide a sufficient income to maintain your current standard of living.

Adjusting for Inflation and Life Events

Your sum assured should be reviewed and possibly increased periodically to keep up with inflation and major life events such as childbirth, marriage, and taking a home loan. Some life insurance companies offer policies with increasing cover for an additional premium or the option to increase coverage at specific life stages.

Reducing Sum Assured Based on Financial Situation

The sum assured can be reduced if you already have sufficient savings that can cover your financial dependents. Conversely, if you don't have any dependents or are not the sole breadwinner, the sum assured may be further reduced.

A Shortcut to Calculating Sum Assured

There are simpler rules of thumb you can follow when considering the sum assured:

Thum Rule: A common recommendation is that the sum assured should be at minimum 3 times your annual income and at maximum 10 times your annual income. This is a widely accepted rule of thumb. Underwriter Requirements: The exact sum assured may vary depending on your age, financial position, health, assets, liabilities, work status, and annual income. Insurers typically consider these factors comprehensively. Multiply Income: A quick and easy method is to multiply your annual income by 10. After subtracting the sum assured from existing policies, the remaining amount is your required sum assured. Absolute Figures: As a thumb rule, the sum assured should be at least 10 times your annual salary or at most 15 times your annual salary.

In Summary: The sum assured in a term insurance plan should be sufficient to cover your dependents' financial needs in your absence. While the exact amount needs to be calculated considering various factors, these guidelines can help you estimate it effectively. By keeping these factors in mind, you can make an informed decision that provides the best level of financial security for your loved ones.