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How To Choose the Right Sum Assured Under a Term Plan?

Along with growing health concerns, the price of receiving quality medical care is also rising, which causes people to worry about a lack of resources. A term plan purchase is a simple way to give your loved ones’ financial security.

  • 3,348 Views | Updated on: May 22, 2024

When you finally decide to purchase a term insurance plan because you have dependents and want to protect their financial interests, the next step is to determine how much coverage you need. The coverage amount you choose is essentially the sum assured of the policy.

In other words, the sum assured in a term plan is the maximum pre-defined amount that the insurance company pays the nominee in the event of the policyholder’s demise during the policy period. It is important to choose the right sum assured as it has a significant impact on the premium you pay for the policy.

Also, it must be adequate for your family to take care of their future expenses. So how can you choose the right sum assured when purchasing term insurance? Let’s find out.

Choosing Sum Assured Amount

Calculating a sum assured amount for your term insurance must be done by keeping the below factors in mind. These factors eventually will decide how much would be enough for your family.

The sum assured amount must:

- act as a replacement for your income in your absence

- cover all of your outstanding debts

- allow your family to maintain their standard of living

- allow your family to meet their future financial goals

But it can be difficult to accurately ascertain an exact figure just by looking at the above points. You may get a rough idea, but you cannot predict precisely how much would be enough for your family. To do that, you can follow the steps given below:

Step 1: Calculate your remaining earning years

First and foremost, you must calculate when you’d be retiring and how many years more you’d be earning. For example, if you are 30 years old and plan to retire at 58, you have 28 earning years left. This strongly impacts the sum assured you need since a term plan is an income replacement tool. If you have lesser earning years, you may need a higher assured sum and vice versa.

Step 2: Calculate your total annual expenses

Your annual expenses at present are taken care of by your earned income. Even in your absence, your family would need a source of funds to carry out those same expenses. And hence your term plan can come to the rescue. That is why when you calculate your assured sum, you must calculate your annual expenses. Add up all your recurring expenses like school fees, medical expenses, grocery and utility bills etc. Find out what your total outgo for these expenses is at the current price.

When you assess your income and expenses, you can use the following formula to decide the sum assured of a term plan accurately.

Minimum sum assured = Annual Income x 10times + Loans/Liabilities

Step 3: Factor in Major Life Expenses

Some expenses are not recurring but one-time expenses like higher education fees, wedding expenditures, vacations, etc. Your family will rely on your term plan for these expenses as well. So, you must chart out a detailed projection of when they’d need these amounts and what the amount would be. Based on your calculation, add these amounts to the sum assured calculation.

Step 4: Add liabilities and remove assets

Once you get a figure, add liabilities like a home loan, car loan and other debt. This is the total sum assured you need. But you may also have some assets like stocks and savings. Subtract those from the final figure, and the amount you get is the total assured sum you must choose for your term plan.

What Else Should You Consider While Buying a Term Plan?

You must comprehend the idea of a sufficient sum assured when purchasing a term insurance plan for you and your family. It is frequently stressed because it establishes the basis for your financial stability. Making an informed choice when buying a term plan is necessary since it will have a significant impact on your financial portfolio.

You can also purchase additional riders, such as critical illness insurance, disability insurance, accidental death insurance, waiver of premiums, and many others, in exchange for an additional sum assured premium.

When purchasing a term plan, remember that the sum assured premium shouldn’t be your only consideration. If you currently have a term plan but are unclear if it offers enough life insurance, you can balance it out by purchasing a new term plan from a reputable insurer.

Along with sufficient life cover and affordable sum assured premium, here are a few more things you must check before investing in a policy:

Insurer’s Claim Settlement Ratio

The claim settlement ratio, sometimes referred to as the CSR or claims paid ratio, is a statistic that illustrates the proportion of life insurance claims that an insurer has resolved (paid out) over the course of a fiscal year. The settlement ratio is, in other words, the proportion of total insurance claims paid out by an insurance company to the total number of claims received.

Inclusions and Exclusions of Chosen Term Plan

It is advisable to comprehend how term insurance operates and what it covers exactly before making an investment. When selecting a term plan, be sure to examine several insurers based on the premium for the sum assured and the protection they offer against it.

To prevent such misunderstandings and claim denials, it is crucial to fully understand the inclusions and exclusions of the life insurance plan.

Medical process and filling proposal form

Every insurance company has a series of inquiries regarding your health, occupation, and way of life. It is crucial that you provide accurate answers because they will determine whether you qualify for a telemedicine visit or a traditional physical examination. Regarding your claims process, both of these medicals (the ones you’ve had) are equally important.

Choose the Right Term Plan with Affordable Sum Assured Premium

The cost of providing for all current necessities while also securing the future of one’s family varies depending on the individual. If you are the only provider for your family, you must think through every possibility and be well-prepared for it. You can live a stress-free life if you choose the term insurance coverage that is appropriate and sufficient. You and your loved ones may face financial difficulties if your life insurance is insufficient. So, before investing in a term plan, thoroughly consider all of its components and how they connect to your life.

Therefore, choose the appropriate sum insured in life insurance to ensure your financial security.

Conclusion

Thus, if you’re planning to buy a term plan, don’t just choose an arbitrary number or go with a number suggested by the insurance agent. Do the necessary calculations as mentioned above and figure out how much your assured sum should be.

FAQs

1. Is it essential to add riders with a basic term plan?

A term insurance rider, which carries an additional premium, adds further protection or coverage to a term insurance policy. These add-on benefits that are included with these riders oftentimes benefit the insured. There is no guarantee that everyone will find these riders useful or necessary, though.

2.Is it more beneficial to buy term plans online?

By purchasing a term plan online, you help the insurer cut back on distribution costs, commissions, and various other charges. They reduce your premiums in exchange for passing the savings along to you.

Key takeaways

Calculating a sum assured amount for your term insurance must be done by keeping the below factors in mind. These factors eventually will decide how much would be enough for your family.

The sum assured amount must:

    Act as a replacement for your income in your absence

  • Cover all of your outstanding debts
  • Allow your family to maintain their standard of living
  • Allow your family to meet their future financial goals

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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