If you are the primary breadwinner of the family, then you would understand the level of financial planning and preparedness it takes to ensure THAT your loved ones live happily. While one can take definite steps to ensure this when one is alive, in one’s absence, their loved ones can suffer financial difficulties. This can be avoided by opting for well-designed term insurance plans. These plans aim to provide your family/loved ones with hefty financial compensation in the unfortunate event of the policyholder’s demise.
One question that concerns policyholders when buying a term plan is the amount of sum assured they should opt for: “What would be the most apt sum assured for my family?” This article aims to help you find the answers to this oft-repeated question.
What should you keep in mind when calculating the sum assured?
Several factors affecting term insurance premium and sum assured amounts need to be kept in mind when finalising the sum assured.
Your budget and affordability aspects
The sum assured you choose has a direct bearing on the premium you pay. A high sum assured means you will have to pay larger amounts as a premium. Similarly, a low sum assured means that you will incur lower premiums. However, this should not mean that you go for a lower premium. A term plan, after all, is about securing the future of your family.
Experts say that you should opt for a sum assured amount that is 10-15 times your present annual income. You can also opt for a monthly premium payment mode to keep the amount within the budget. A term insurance premium calculator can greatly help you in this scenario.
Your outstanding debts/liabilities
If you have taken a home loan or a car loan whose repayment tenure may go on for a long time, then that should be taken into consideration as well. So, if anything tragic were to happen to you, the sum assured should be enough for your family to continue paying the EMIs for these loans while providing for their daily expenses and other goals as well.
The age at which you are buying the term plan
Generally, it is advised to buy term insurance plans at a younger age to get a lower premium quote. However, one should also remember that buying term insurance at a younger age, for instance, in one’s early 30s, means you have to consider higher rates of inflation. Since you are ideally planning for a very distant future, the rates of inflation may have increased by a large percentage by then. On the other hand, buying term insurance at a later age in life, say at the age of 50 years, means one has to consider a shorter duration and thus, plan with a reduced rate of inflation.
The financial goals that your loved ones have
Whether your daughter wants to pursue her higher education abroad or your son wishes to begin his own enterprise after graduation, the sum assured you choose should help them in pursuing these goals effectively. Your spouse’s plans for their future should also be considered one of the important factors affecting term insurance premium and sum assured amounts.
Techniques for computing the right sum assured
Using a term insurance plan calculator
Similar to the term insurance premium calculator, this online tool helps you compute the sum assured after asking you questions regarding your current income, expected salary hike, how many years you will be working, and so on.
Using the underwriter’s rule
This rule essentially states that one should have a sum assured that is ten times your current annual income. So, if your present income is Rs 8 lakhs, you should choose Rs 80 lakhs as the sum assured. This is, as mentioned above, relative to age.
Utilising the human life value calculator
This tool asks you to provide your income and expenses, the debts you may have in the future, and financial goals, to give you an idea of the economic value you hold in your family. Getting this figure can help you choose a more suitable sum assured.
Choosing the right sum assured amount with term insurance plans is incredibly important. We hope the information provided here helps you in the process.