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

It is a well-known fact that term insurance is a must-have in your financial portfolio. And there is a reason for financial advisors to advocate it: as term insurance essentially provides your family financial protection in your absence.

The sum assured in term insurance what the nominee will get in case the life assured dies during the policy tenure. So, choosing the right term plan with an adequate cover is quite crucial. It must be done with the utmost precision, for it is the term plan’s sum assured amount that your family will be supported financially in case of your untimely demise.

If you choose too low a sum assured, it may be insufficient for your family even to meet monthly household expenses or to pay loans/debts, if any. Consequently, such a term plan with a low sum assured loses its value for which it is meant. On the other hand, if you choose too high a sum assured, you will end up paying a high premium. Thus, choose the term plan cover meticulously that should be good enough for your family to carry on life without any financial burden even in your absence.

If choosing a term plan sum assured is overwhelming for you or you have questions in your mind such as: Should you buy a term plan with INR 50 lakh cover or INR 1 crore term plan? Then this article aims to answer those queries. Also, to help you in making the correct decision in buying a term plan with the right sum assured with confidence.

Factors to consider while choosing the sum assured under a term plan

Let’s go through these factors one-by-one.

Your Annual Income
Your annual income plays an important role in determining the term insurance sum assured for 2 reasons.

Reason 1: As term insurance is purely a death benefit plan, it is based on the human-life value. It is difficult to measure the impact of emotional loss the loved ones go through due to the death of a family member, but financial loss can still be controlled. Thus, to compensate for the financial loss, insurers take one’s annual income into account.

Reason 2: It is your annual income that is running your family financially, so it helps in deciding the sum assured as your family needs a percentage of your current earning to keep on going.

So, financial experts advise you to opt for 15-20 times of your annual income. If your annual income is INR 6 lakhs, you can opt for a term plan with a cover of up to INR 1 crore or INR 1.2 crore. This amount should be sufficient to cover household expenses, education fees, to pay debts, if any, and other expenses.

Your Monthly Household Expenditure and Family’s Lifestyle

You want to make sure your family gets back on their feet financially and continue living as you have planned for them. And, for that, you need to figure out how they are going to manage their monthly household expenses, rent (if any), groceries, medical expenses, education fees, and other day-to-day lifestyle expenses. Figure out your monthly household expenses as it should be incorporated when you are finalizing your term plan sum assured.

Your spouse, parents, and kids should be worry-free when it comes to arranging money for things to carry out their life in your absence. Basically, the sum assured should be more than sufficient to carry on their life even in your absence.

Number of Financially Dependent Family Members

You need to assess how many family members are financially dependent on you. Also, how much money they require for day-to-day life and other lifestyle related expenses.

If the number of family members dependent on you is large, you may have to consider a large cover. However, if you are living in a small and nuclear family, you might just opt for a relatively small cover and that would suffice.

In case you have children, you need to ensure to opt for a large enough cover for completion of their education in case of your untimely demise, so that their education doesn’t stop due to insufficient funds.

However, in case you are buying at a later stage of life, when your children are financially independent and well settled, you may opt for a cover just enough to leave that as a legacy or corpus for your family.

Loan(s) / Debt(s) Amount

One of the most crucial factors to keep in mind when calculating your term life insurance sum assured is the amount of debt/loan on yourself . If you have taken any loan such as a car loan, business loan, home loan or have mortgaged a property, you need to have a term life cover that is sufficient enough to cover such loans and debts. Because you don’t want your family to be burdened with the repayment of heavy loans without financial support in case you pass away before you could repay all your loans. Make sure your family isn’t burdened for clearing the dues without sufficient funds or income source.

It is a known-fact that every year inflation impacts our life in many ways. Considering an annual inflation rate will be of good help in deciding the term insurance sum assured. As yesterday’s monthly expenses aren't the same as today’s, and so it won’t be the same for tomorrow.

The smart way would be to include an annual inflation rate of 7% while deciding the sum assured. Only then the sum assured would be good enough to beat the inflation over the years too to meet the lifestyle needs and carry on life stress-free.

Future financial milestones

You should also keep certain future financial goals in mind. For instance, if you have little children, you may have considered education and further studies, but you can also consider their marriage funds. If you don’t have any debts or house loan, but if you are planning to buy a house in the future, you should think about it too before finalizing the term insurance sum assured. Likewise, you may also consider your spouse’s retirement funds, medical expenses, and so on. Increasing Sum Assured / Another Term Insurance Plan

Even though you may want a high sum assured, you need to check your eligibility for the same. There are several factors that are taken into account for your term plan sum assured. For instance, your annual income, age, lifestyle: smoker or non-smoker, and so on.

In case you think the current sum assured amount might not be sufficient for your family, and you wish to increase your sum assured, you may be able to do it when your income increases. Usually, over a period of time one’s income increases. So, as your income increases, you may ask the insurer to increase the cover with the increased annual income.

Deciding on the right sum assured for your term insurance policy requires a careful assessment of your current financial situation and future needs. Here are some questions to ask yourself that can guide you in this process:

• What is my current income? This can serve as a base for calculating the sum assured using the Income Replacement Method. A common guideline is to have coverage of 10 to 15 times your annual income.


• What are my current debts and liabilities? Consider loans like a home loan, car loan, or personal loans that your family would need to repay in your absence.


• What is the cost of living for my dependents? Think about the regular household expenses your family incurs. This should include everything from groceries and utility bills to transportation and healthcare costs.


• What are the future financial goals of my family? Consider the cost of higher education for your children, their marriage expenses, and your spouse's retirement needs. Be sure to account for inflation when estimating these future costs.


• Do I have any other savings or investments? If you have other substantial savings or investments, you might not need as large a sum assured.


• What is the impact of inflation? The value of money decreases over time due to inflation. So, a sum that seems substantial today may not be sufficient a few years down the line.


• Do I have any dependents with special needs? If you have a dependent with special needs, you may need a larger sum assured to provide for their long-term care.


• What are the existing insurance policies I have? If you already have certain insurance policies, consider their coverage before deciding the sum assured.

Remember, the main aim of a term insurance policy is to provide financial security to your dependents in case of your untimely demise. Hence, the sum assured should be large enough to help them maintain their current lifestyle and meet future financial obligations. It's always a good idea to consult with a financial advisor to help make these important decisions.

When you are deciding on the sum assured for your term insurance plan, you should aim for an amount that will allow your family to maintain their standard of living and meet their future financial goals, even in your absence. Here are some methods to help you calculate the suitable sum assured:

• Income Replacement Method: This is the simplest method to calculate the sum assured. Typically, it is recommended to have a sum assured of about 10 to 15 times your annual income. So, if you are earning INR 10 lakh per annum, you should consider a sum assured of INR 1 crore to INR 1.5 crore.


• Need-Based Analysis: This method takes into account the specific financial needs of your family. First, calculate immediate liabilities that will need to be paid off, like a home loan or car loan. Then, consider ongoing expenses like daily household expenses, education costs for your children, and the future marriage expenses of your children. Don’t forget to factor in inflation. The sum of these amounts is the cover you should ideally aim for.


• Human Life Value (HLV) Method: This method takes into account not just your current income but also your potential future income. The HLV is calculated as: Income Replacement + Outstanding Loans - Current Investments.

For income replacement, calculate your yearly income until the age you plan to retire, accounting for factors like inflation and salary hikes.

While these methods can guide you in determining a suitable sum assured, remember that everyone's situation is unique. You should consider your individual circumstances, including your current income, age, family's lifestyle, liabilities, and financial goals.

Also, note that it is important to review your insurance needs periodically, especially after major life events like marriage, the birth of a child, purchase of a new house, etc., as these events can significantly impact your family's financial needs. Always make sure that your sum assured is sufficient to cover your family's financial needs.

As always, it may be beneficial to consult with a financial advisor to help determine the best amount of coverage for your individual circumstances.

You have to ensure that you do not buy a term plan and still stay underinsured or not end up buying a wrong plan cover. Thus, choosing the right plan with an adequate cover is crucial. With the above-mentioned pointers to incorporate while deciding the sum assured, you will be confident in making the informed decision without any worries if the chosen cover is good enough for family or not.

There’s nothing better than knowing that your family will be financially secure even in your absence. Choose now to provide your family a financial shield at an affordable premium and live worry-free.

In case you have any queries or find it difficult to figure out the right sum assured, you can connect with us and we will be more than happy to help you in making a smart decision. For more details on risk factors, terms and conditions please read the sales brochure carefully before concluding the sale.