Importance of Sum Assured while buying Term Insurance
Rajeev (32-year-old) lives in Pune with his wife and a two-year-old daughter. Rajeev purchased a term life insurance plan five years back with Rs 70 lakh life cover. This term life policy was sufficient to cater to all his financial needs at that time because he had no financial dependents. But today, he is married and is a father of a two-year-old daughter. Now, he thinks his term insurance policy with Rs 70 lakh term cover is not adequate to meet the family’s financial expenses. He admits that this term life insurance cover was sufficient earlier, but now he has more responsibilities as his daughter grows, and it will increase in the future. To cover all these financial responsibilities, he needs a term life policy with higher coverage. Thus, every policyholder should pay attention to the sum assured while purchasing the best term insurance plans.
While purchasing the best term life insurance, selecting the right sum assured for your insurance plan is paramount. The sum assured in insurance is the amount that insurers will pay to the beneficiary in the case of the sudden or unfortunate demise of the policyholder during the tenure period. Therefore, before investing in your policy, you should understand the sum assured meaning and evaluate your current and future financial goal.
If you purchase an online term plan, you need to choose the coverage amount prudently. Unfortunately, most people often ignore some imperative parameters, including outstanding debts, loans, inflation, children’s education, marriage, retirement needs, and so on, while deciding the sum assured for their term plans.
Many financial experts believe that Indians are underinsured. Though awareness around various protection plans in India has increased exponentially over the past few years, still many Indians are not adequately covered. That’s why Indian families are still susceptible to the financial crisis in case of the death of the sole earner. A plethora of statistics has claimed that the average Indian has insured for Rs 8 lakh. However, his/her family demands an insurance coverage of Rs. 1 Crore in the case of the sudden death of the breadwinner.
You should choose the life insurance cover as per the evolving needs of various phases of your life. Many deft and professional experts suggest that a 35-year-old person should buy a cover 25 times of the annual income. Similarly, a person of 36-40 years old should buy a cover 20 times of the annual income, age 41-45 years should purchase a cover 15 times of the annual income, etc.
A 30-year-old guy with Rs. 20 lakh annual income should go for a life cover of Rs 5 crore. Though this may seem huge now, if you consider the inflation and other future expenses, then within this coverage, the family can maintain the current lifestyle without affecting their financial conditions.
The sum assured of your term life policy should meet the below-mentioned purposes of your family.
- In your absence, the sum assured amount should act as an income replacement for your family
- The amount can sufficiently cover all the outstanding debts you may have
- The amount should encourage your family to live an independent life without compromising their basic needs
- The amount should provide adequate financial assistance to help your family to fulfill all its financial goals
4 tips to choose the right sum assured for your term plan
- Take a look at your future working years
- Consider your family expenses
- Consider all major events of your family
- Assess your liabilities
Take a look at your future working years
Consider the number of years you are expecting to work. Since a term policy will act as an income replacement for your family members, the years of income it needs to substitute will strikingly affect the sum assured. Now, suppose you are a 30-year-old person, and you want to retire at the age of 60, and then your future earning years will be 30 years.
Consider your family expenses
Now, you have an idea about your future working years; next, you need to consider the recurring family expenses. Don’t forget to consider all the present and future expenses, including tuition fees, home loans, medical expenditures, utility bills, groceries, monthly expenses, etc. Your chosen term insurance policy should bear all these expenses every year. Now, consider the current insurance premiums that you are paying to your insurer and check whether you can pay more to get a higher sum assured with the same plan, or you may migrate to another term plan to get adequate coverage.
Consider all major events of your family
Before selecting the sum assured, consider all major events where your family needs to invest a humongous amount. These events could be higher education, marriage, purchasing a home, etc. These are various imperative events for which you need to prepare yourself financially at a young age. You should calculate and add these expected expenditures in your financial planning to meet your life goals.
Assess your liabilities
After calculating your liabilities, savings, and investments, you need to adequately choose the sum assured while purchasing the best term plans. First, consider your liabilities, including home loans, personal loans, credit card payments, other debts, miscellaneous expenses, and so on. Now, you need to detract the value of your existing life insurance and the value of your investment portfolio. The final total will give you an idea about the sum assured you should consider while choosing the term policies for your life.
While opting for term life insurance for your family, you should understand the concept of the sum assured. But also remember that the sum assured will not be the sole deciding factor when buying a term plan. If your term plan doesn’t provide sufficient life cover, you can purchase a new term plan from an established insurance company. You can even look for term plans with maturity sum assured or a return of premium that will compliment your financial needs and requirements.
