What is Sum Assured in Term Insurance?
When you buy a term insurance plan, one of the important things to understand is the sum assured. It is the fixed amount the nominee will get if the life assured dies during the policy period.
The minimum sum assured in term insurance refers to the lowest amount of life cover you can choose while buying a policy. The amount you choose should be sufficient for your family to manage basic financial needs like household expenses, debts, and future goals in the unfortunate case of your death during the policy term. Picking the right sum assured is a crucial step in your financial planning.
What is the Minimum Allowable Sum Assured in Term Insurance?
The minimum allowable sum assured in term insurance is the lowest coverage amount that the insurance company allows. The insurer has a minimum sum assured applicable to everyone.
Choosing only the minimum may not always meet your family’s future financial needs. So, it’s important to calculate the right sum assured instead of just picking the minimum.
Determining the Sum Assured
Choosing the correct sum assured in term insurance is not a guesswork exercise. It requires a practical understanding of your family’s needs.
There are several methods to help you calculate an appropriate sum assured:
- Income Replacement Method: Think about how many years your family may need financial support. Multiply your yearly income by that number.
- Human Life Value (HLV) Method: Calculates your economic worth based on income, expenses, liabilities, and remaining working years.
- Expense-Oriented Method: Focuses on estimating your family’s future financial needs and covering those costs adequately.
The right method depends on your personal circumstances. For example, if you are the sole earner in your family, you may want a higher cover than someone who has other earning family members.
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.
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.
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.
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.
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.
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.
Retirement Funds
While calculating your term insurance minimum sum assured, don’t forget to include retirement support for the spouse of the life assured. In case of the untimely demise of life assured, the spouse or family will need enough savings or regular income for their golden years.
What are the Common Mistakes to Avoid When Choosing the Right Sum Assured in Term Insurance?
Underestimating needs
Choosing a low cover just to save money can lead to trouble later. Your family may not have enough money to manage everyday expenses.
Not factoring in loans
Forgetting to consider EMIs or debts while choosing sum assured can create pressure on your family later.
Not accounting for inflation
Prices go up over time. The same amount will not be enough later.
Ignoring future goals
Education, marriage, or home buying—these expenses can be big, and ignoring them can lead to gaps in coverage.
Choosing based on lowest premium only
While affordable premiums are good, don’t let them be the only factor. Low premiums often come with low coverage.
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
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.
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.
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.
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.
Does the sum assured in term insurance come with any tax benefit?
Yes, premiums paid for term insurance are eligible for tax benefits under Section 80C of the Income Tax Act, 1961, up to ₹1.5 lakh per year (applicable under old tax regime). Additionally, the death benefit received by nominees is usually tax-free under Section 10(10D), subject to certain terms and conditions.
What are the documents that nominees need to provide to get the sum assured in term insurance?
Nominees generally need to submit:
- Original insurance paper
- Death certificate
- ID and address proof
- A photo of the claimant
- PAN card or Form 60
- Cancelled cheque or passbook copy
Other documents may be asked as per insurer requirements.
What happens if I choose a sum assured that is too low?
Choosing the right sum assured is crucial as if its too low it can lead to gaps in financial protection. . Ideally your sum assured should be 10 times of your annual income. Hence, choose the sum assured which fits your needs.
Can I decrease the sum assured during the policy term if my financial situation changes?
Usually, the sum assured cannot be reduced during the term of the policy unless you opt for a decreasing term plan. Always check with the insurer before purchasing.
What is the minimum and maximum sum assured for critical illness?
This is completely dependent on the insurance company. Check the policy brochure for proper information.
An ISO 9001:2015 
