How much sum assured should you take when buying life insurance?

How much sum assured should I take while buying life insurance?

- Gopala Krishna Eemani, Chodavaram

To get comprehensive and right life insurance coverage, one must know the terminologies of the insurance policy. Because the most important aspect while purchasing a life insurance policy is choosing a sufficient and correct amount of sum assured. Life insurance is planned financial assistance that takes care of the expenses of the insured's family in case of the demise of the insured. Sum assured is an important word or denomination when buying life insurance. It determines the coverage level of the insurance policy. 'Sum assured' refers to the pre-decided amount payable to the insured person (policyholder) or beneficiary on the occurrence of an insured event. Maturity or death are two insured events in 'Endowment Policies,' while in 'Term Insurance plans, the insured event is only death. The insurer or the company that sells and underwrites the insurance policies guarantees to pay the sum assured to the insured in return for receiving regular premiums. In the case of term insurance, the sum assured is cheapest as it covers several multiples of the insurance premium paid.

You should have mentioned clearly whether you are considering term insurance or other life insurance products like Endowment, Money Back, and Whole Life Insurance Plans. When purchasing a life insurance policy, the Life Cover or Sum Assured should be at least ten times the annual income or twenty times the annual expenses. This means the Sum Assured should be Rs 2 crores if the insured's yearly earnings are Rs 20 lakh and Rs 3 crores if the insured's annual expenses are Rs 15 lacks. However, Ten times of annual income may not be sufficient for most people. In this scenario, the individual needs to be analysed, and various parameters must be considered while calculating the Life Cover or Sum Assured. The sum assured in an insurance policy is the amount the nominees or beneficiaries will get to fund their future needs in case of the insured's untimely death during the policy term. Hence, individuals must carefully consider selecting an adequate sum assured to create a financial cushion for their family. Therefore, choosing a sum assured is very important based on the number of dependents, the kind of lifestyle, and taking other specific needs like Children's education, health expenses, retirement fund etc., into consideration while arriving at the sum assured.

IRDA (Insurance Regulatory and Development Authority) has prescribed a minimum level of insurance for various types of insurance policies in order to restrict insurance companies from selling insurance as investment products. The minimum sum assured depends upon the insured person's age and policy term. The minimum sum assured on a life insurance policy is seven times the annual premium for people above 45 years or the insured whose life is covered by an insurance policy. For insured persons or individuals below 45 years of age, the minimum sum assured on a life insurance policy will be more than ten times the annual premium. One must do a thorough analysis to ensure that one opts for the best life insurance possible. Sum assured is the life cover amount that the insured's nominee or dependents receive from the insurance company in the event of the policyholder's demise. However, one should be able to pay premiums as the premium amount depends on the Sum Assured.

At least start with five times of annual income if you cannot afford the premiums and enhance the cover over a period of time. One needs to consider the annual income and present value of one's medium- and long-term goals. We must also deduct the current liabilities from the minimum sum assured by the life insurance policy. Ideally, we must take a sum assured amount that adds the present value of medium and long-term goals and current annual expenses. One must factor in loans and other debt while calculating the life cover. Every insurance policy has a cap on the minimum amount that can be assured, which is known as the minimum basic sum assured. The basic sum assured under life insurance policies is the guaranteed cover amount payable to the assigned beneficiary on the death of the life insured. Based on the sum assured, insurance companies charge a premium amount payable by the life insured. The policy stands terminated on the settlement of the basic sum assured and other benefits under a policy by the insurer. Some insurance policies do not have an upper limit or limit on the maximum sum assured.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)