A life insurance policy can play a key role in your financial planning by ensuring sound financial assistance to safeguard you and your family against the uncertainties of life.
The first step to getting suitable financial coverage from your life insurance is to understand the concept of sum assured, which determines the coverage level of your policy.
Let’s dive into what sum assured is and its relevance when buying a life insurance policy.
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Sum Assured Meaning: What is Sum Assured?
Sum assured is the fixed amount that an insurance company guarantees to a policyholder or their legal heirs on occurence of the insured event, in return for receiving premiums under a life insurance policy.
This amount can increase or decrease over the policy tenure, depending on the terms and conditions of the policy plan that you sign up for.
One can choose to get maturity benefits under specific types of life insurance plans.
For instance, the increased uncertainty of health risk amid the Covid-19 pandemic is driving people to buy higher sum assured under health insurance. The average sum assured, which was usually in the range of INR 2-3 lakh has suddenly surged to INR 5-7 lakh and in some cases has even gone upward to INR 10 lakh and above.
Insured events for sum assured
Depending upon your choice of the life insurance plan, the insured event changes.
- In savings-oriented plans: Two insured events, maturity of the policy tenure or death of the life insured, are considered.
- In pure protection plans: The insured event is only death.
- In health-oriented plans: The insured event could be the survival post occurrence of the insured event such as a critical illness or a disability.
Riders
In case you do end up choosing an insufficient sum assured due to any reason, you always have the option of increasing the sum assured by topping it up either with another life insurance policy or with available specific riders that may offer additional protection benefits.
A rider is a separate contract that can be attached to a life insurance policy that adds benefits to your basic insurance policy. A few examples are:
- Term rider (for all-cause death benefit)
- Accidental death and disability rider (to provide enhanced death/disability cover in case of an accident)
- Critical illness rider (upon survival and diagnosis of the listed illnesses)
- Waiver of premium rider (waiving of all future premiums under the policy in case of death or pre-defined critical illnesses)
How to Choose Optimum Sum Assured
An adequate sum assured will help your family deal with tough times without worrying about arranging funds at a time of any mishap such as sudden death or an accident by ensuring guaranteed financial protection.
The key to choosing optimum sum assured is primarily undertaking proper research and considering these five factors.
Age
Your age is a major determinant that helps you to decide the extent of coverage you require and the right sum assured. The younger you are, the more sum assured you should secure.
There are two advantages to doing this:
- The premium for a higher sum assured is lower when one buys life insurance at an early age.
- A younger person investing in the right sum assured can retire early (in case of endowment plans).
So, age should be looked at 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.
Income
Your income is an important element while considering sum assured. Over a period of time, you can also plan to increase the sum assured if your income increases as the life stage need arises.
Ideally, your budget should be the last factor to consider while choosing sum assured as a lower coverage can render you underinsured. It will further negate the concept of life insurance, and your family may suffer unanticipated financial consequences in your absence.
Lifestyle
Your lifestyle should be factored in while choosing sum assured to cover all the possible contingencies.
If you are employed in a job with high-stress levels, then you must consider:
- Greater protection in the form of a higher sum assured.
- Making sure you convey details about your habits such as alcohol or tobacco consumption to your insurer. This will ensure that the beneficiary doesn’t face any complications at the time of claiming the sum assured.
If you live a healthy lifestyle, then you must know:
- The chances are high that you will outlive the policy period.
- Since the basic life insurance plan like a pure term plan does not offer any benefits on survival, you can choose the return of premium cover (if you have opted for the return of premium rider) to get back the premiums paid as maturity benefit in accordance with the policy conditions.
Inflation
The inflation index of a country fluctuates each year and so do household, medical and education expenses.
To fully factor in any change in your annual financial budget and your future finance planning for your child or your retirement, you should invest in a life insurance policy considering the inflation rate.
Medical History
An account of your past medical records are crucial from the point of view of selecting a sum assured that will cover related treatment charges in case one suffers from any chronic ailments.
It is advisable to opt for a higher sum assured and include a critical illness rider if you or any of your dependents have had a medical history of serious illnesses. Doing so will help you pay for the expenses of treatment you may need while also covering for any unfortunate event of death.
How Much Should Your Sum Assured Be?
Various life insurance plans protect against death, disease and disability. What is most important while buying a life insurance plan is that it provides the right amount of sum assured. The factors you must consider include:
Annual Income
- Typically, a rule of thumb is your sum assured should be 10 times your annual income.
- For younger individuals less than 30 years of age, sum assured 14-15 times of their annual income and for those who are older above 50 years, 7-8 times works well.
- If computed in terms of expenses, it should be at least 12-15 times the annual expenses with debt obligations such as outstanding home loan amount, personal loans, etc. accounted for..
Have a Sum Assured Checklist
You should be sure not to make the mistake of blindly buying life insurance to merely get it off your financial protection checklist.
If you are the sole breadwinner of the family, then providing financial protection to your family members is your responsibility. Your sum assured checklist must include:
- Selecting a sufficient amount of sum assured by paying a premium regularly to protect your family financially.
- Consider adding a critical illness cover to your life insurance plan to ensure coverage against various life-threatening diseases.
- Think of it as an added benefit that can help your family deal with future adversities such as a health crisis or depletion of income earning capability.
- If you have already invested in a life insurance policy, ask your insurer about ways to increase the sum assured at different life stages.
Featured Partners
1
Max Insurance
Price
2 Crore Term Plan Starting From INR 1046/Month
Income Tax Benefits
Upto INR 54,600
Additional Benefits
Covers 64 Criticall Illnesses, 20% Savings on Premiums for Women and Zero Additional Cost on Terminal Illness Coverage
Bottom Line
Life as we know it has changed due to the pandemic. Safeguarding our health and that of our loved ones is important more than ever and having a life insurance policy would be of utmost necessity to meet the contingency needs of the future.
Making the right decision on the sum assured — an important component of your policy, will help you win the battle of securing the financial future of your loved ones.
