Minimum Sum Assured In Term Insurance Plan

 

Determining the sum assured

 

A sum assured in a term plan is the amount of money the nominee receives if the life assured dies an untimely death within the policy term. This is a payout that is designed to take care of the family’s financial future, which has suffered not only a personal loss but an income loss as well. The minimum sum assured in a term plan is the minimum amount the nominee of the policy will require, to take care of the expenses/liabilities in the absence of the life assured. It is the amount the nominee will receive in case of an unfortunate incident covered under the plan. So, why is it important to choose the minimum sum assured of a term assurance correctly?

Let us start with an example. Mr. X, a 30-year-old, buys a term plan with a policy term of 20 years and a sum assured of Rs 10 lakh. He has a wife who’s a homemaker and a 2-year-old child. 5 years later, Mr. X succumbs to a stroke. Now, while his widow has no regular earnings, the child is now 7 years old, and needs a solid financial backup for the future. But when the family calculates the amount of money required to support the daily expenditures and the child’s educational needs, the minimum sum assured in the term insurance falls drastically short.

 

Calculating the right amount

 

According to financial experts[1], one should first calculate their annual income, annual expenses, and present value of long- and mid-term life goals. In addition, current liabilities (if any) are to be deducted from a proposed term plan’s minimum sum assured. If the outcome is equal to the sum of annual expenses and the present value of life goals, the minimum sum assured in the term insurance is good to go. This can be a suitable amount to help the family manage their expenses if anything untoward happens to the life assured.

 

Factors to consider

 

While determining the minimum sum assured in term insurance, there are certain factors that need to be taken into account. These help in gauging the amount of money needed to sustain the existing lifestyle and support the life goals of the dependents if the life assured is no more. The amount can vary from case to case depending on the number of family members, the source of incomes, and the respective life goals of the family members. Here’s a glance at the important factors that need to be taken into account.

 

1. Annual income along with probable inflation¹

 

The policyholder’s income is the first thing to consider. Financial experts opine that 8–10 times the policy owner’s current annual income can be a good marker as the minimum sum assured in a term plan. Particularly helpful in the case of single-earning members, this amount can compensate for the loss of income as well as cover the possible inflation that can arise in the future.

 

2. Household expenditure¹

 

Calculating the annual household expenses is crucial in determining the term insurance minimum sum assured. Financial experts suggest the coverage of the policy should ideally be 15-20 times the annual expenditure of the family. This is a thumb rule based on the policy term, working years remaining of the policyholder, and the number of dependents.

 

3. Debts and liabilities

 

There can be debts and liabilities like loan EMIs, other investments, or mortgages. One needs to consider those amounts while calculating the minimum sum assured in the term plan. This could save the family from financial struggles in an unforeseen event.

 

4. Life goals

 

One should keep in mind the life goals like the child’s education, marriage, and the spouse’s retirement income. The amount needed to fund these goals needs to be taken care of by the minimum sum assured in a term plan.

 

5. Additional riders

 

Nobody knows when a crisis might arise. It can be a terminal or critical disease or an accidental death. Some plans come with optional riders that pay an additional benefit amount towards death due to accidental or critical/terminal illness along with the minimum sum assured in term insurance. Though it involves a higher premium payment, this can be a crucial decision too.

 

Conclusion

 

The loss of a family member is irreplaceable. But it can in turn bring financial stress too. A right choice of term insurance with a minimum sum assured that is sufficient to meet the family’s needs and inflation can help cope with the struggles and bring peace of mind.

 

Frequently Asked Questions

 

 

1.       Why is the minimum sum assured important in a term plan?

 

The minimum sum assured in a term plan is important as it is designed to financially secure the life assured’s family in the event of the unforeseen event. This amount should suffice to support the family in carrying on with the regular expenses as well as in funding their life goals.

 

2.       Is the premium affected by the minimum sum assured?

 

Yes, usually the term insurance  premium is affected by the minimum sum assured. Higher the term insurance sum assured; the premium tends to be higher, depending on the tenure of the policy.

 

3.       Can the minimum sum assured change during the policy term?

 

No, usually the minimum sum assured in a term plan cannot be changed during the policy term^[2]. This makes it crucial to choose the amount wisely.

 

4.       Does the minimum sum assured vary between insurance companies?

 

Yes, the minimum permitted sum assured can vary^[3] between insurance companies depending on the nature of the policy and company guidelines.

References:

[1]https://www.livemint.com/money/personal-finance/life-insurance-rule-minimum-sum-assured-an-investor-need-explained-11663994204745.html

[2]https://www.livemint.com/Money/UnFYNcPwYoZGPuQdWJioBL/Usually-the-sum-assured-in-a-term-plan-cannot-be-changed-af.html

[3]https://www.livemint.com/Money/Pio57s15nRYI8tb0Yb9HaM/There-is-a-minimum-sum-assured-in-life-insurance-policies.html

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