A couple of days ago, one of our advisors was on a call with a client. The client wanted to purchase a term insurance plan from a top-notch term insurer. All was going great till our advisor asked what kind of a sum assured he had in mind. His reply was, “I saw on a social media platform that ₹2 crore term insurance plans have become pretty popular. I would want that!”
Can you spot his error?
Well, our client didn’t know that term insurance plans are not a one-size-fits-all product. While a ₹2 crore term insurance plan might be an exact fit for him, it might also become the completely wrong choice that defies the purpose of purchasing a term insurance plan.
In the case of term insurance plans, sum assured is a major consideration. You must know what the ideal sum assured for you and your family is, what factors can affect this calculation, and more. Unless you are absolutely thorough with this idea, you may end up losing the benefits of term insurance on a whole.
What is Sum Assured in Term Insurance Policies?
Sum Assured in term insurance is the cover amount that is paid out as a death benefit when the policyholder passes away during the tenure of the policy.
So, let’s say Sumit avails of a term insurance policy with a cover amount of ₹2 crores when he is 28 years old till he turns 65. A decade later, he passed away following a cardiac event. His nominee receives the ₹2 crores as a death benefit payout.
This ₹2 crores is the cover amount or sum assured in term insurance.
What are the Factors that Impact the Sum Assured in Term Insurance?
As established before, term insurance plans are not an umbrella product. It takes into account the HLV (Human Life Value) of the policyholder. So, term insurance plans are supposed to act as income replacements for the policyholder. Such policies are crafted to kick in when the policyholder passes away (during the policy tenure) and ensure the streamlined achievement of the family’s financial life stage goals.
However, each family has different life goals, standards of living, and costs of living. Thus, the predicted amount to be set aside for a family’s future also varies from one family to the other.
The factors that impact the sum assured of a term insurance plan are -
- Age of the policyholder and Policy tenure - The age of the policyholder is a reflection of the years left until retirement and since term insurance plans are supposed to act as “income” replacement, the insured can put in a suitable year of ending the policy.
Please remember that if you end up choosing a higher policy tenure to be on the safe side, you will be looking at steep premiums since you are posing higher risks of payout for the insurers.
- Number and age of dependents - The number and age of your dependents determine your cover amount.
For example, if Samita, with one 15-year-old son and a 30-year-old spouse, needs a ₹1 crore cover, then Tanishtha, with a 10-year-old son, a 7-year-old daughter and a 30-year-old spouse, will almost definitely require a cover amount that is more than ₹1 crore.
However, this is just one factor influencing your ideal cover amount.
- Existing financial liabilities - Your existing financial liabilities, including your monthly expenses, EMIs, and loans, will influence the calculation of your sum assured. Please remember that the sum assured is merely an accrued amount that is supposed to help you continue with your family’s life stage goals. To ensure this, you need to take into account your current monthly expenses.
- Current financial bandwidth - While having a higher sum assured than what you know is optimum for your family may seem like a good move, it really isn’t. With a higher sum assured, you are looking at higher premiums. A redundantly high premium may dig a hole in your pocket and create a hassle for your current financial bandwidth. You may end up having to compromise on your other expenses, investment options, or daily household chores.
- Inflation rate - The inflation rate has been shooting north over the years. When calculating the sum assured, you need to factor in this inflation rate, or else the ₹1 crore sum assured, which seems like a lot today, might be half its real value 25 years later, when the claim is made by your beneficiaries.
How to Calculate the Ideal Sum Assured In Term Insurance Plans?
There are two ways to calculate the ideal sum assured in term insurance plans -
- Approach an expert insurance advisor and offer the exact details that they ask for
- Use a free ideal term insurance cover calculator and input details like - your age, protection duration, monthly expenses, and outstanding loans.
