A term plan is among the simplest and most efficient life insurance options available. It provides financial security to your loved ones in the event of your untimely demise by ensuring they are financially protected. However, selecting the right sum assured is crucial to ensure your family’s future expenses and goals are adequately covered.
Here, we will guide you on how to calculate the right sum assured for your term plan and answer some frequently asked questions to make the process easier for you.
What Is Sum Assured in a Term Plan?
The sum assured is the amount your nominee will receive if you pass away during the policy term. It acts as a financial cushion for your family, covering daily expenses, loans, and long-term goals like education or retirement planning.
Factors to Consider When Calculating the Right Sum Assured
1. Annual Income
A common rule of thumb is to opt for a sum assured that is at least 10–15 times your annual income. This ensures your family can maintain their current lifestyle even in your absence.
2. Outstanding Liabilities
Include all your financial liabilities, such as home loans, car loans, or any personal loans, in your calculations. The sum assured should be sufficient to clear these debts, so your family isn’t burdened with repayments.
3. Future Financial Goals
Consider significant financial milestones like your children’s education, marriage, or retirement plans for your spouse. Make sure the sum assured is sufficient to cover these expenses.
4. Inflation
Over time, inflation leads to a rise in the cost of living. When calculating your sum assured, factor in the future value of money to ensure your family’s needs are covered in the long run.
5. Existing Savings and Investments
Assess your existing savings and investments. Subtract these from your total financial needs to arrive at a realistic sum assured amount.
6. Dependents and Lifestyle
The number of dependents you have and your family’s lifestyle will play a significant role in determining the required coverage. A family with more dependents or a higher standard of living will require a higher sum assured.
Steps to Calculate the Right Sum Assured
1. Assess Your Annual Income
Calculate the basic coverage amount by multiplying your annual income by 10–15.
2. Add Your Liabilities
Include all outstanding debts like loans or mortgages in your sum assured.
3. Factor in Future Goals
Add the estimated costs of your children’s education, marriage, and any other financial goals.
4. Account for Inflation
Adjust the amount to account for inflation rates, ensuring your family’s expenses are adequately covered in the future.
5. Subtract Existing Assets
Deduct the value of your savings, investments, and any existing life insurance coverage from the total.
6. Review Periodically
Reassess your sum assured regularly, especially after major life events like marriage, childbirth, or taking a loan.
Benefits of Choosing the Right Sum Assured in a Term Plan
- Ensures financial stability for your family.
- Covers all outstanding debts and liabilities.
- Secures future financial goals like education and marriage.
- Offers reassurance that your loved ones are financially secure.
Conclusion
Selecting the appropriate sum assured for your term plan is essential to safeguarding your family’s financial future. By carefully evaluating your income, liabilities, and goals, you can arrive at an amount that ensures comprehensive coverage.
Frequently Asked Questions (FAQs)
- How do I know if I’ve chosen the right sum assured for my term plan?
To choose the right sum assured, consider factors like your annual income, liabilities, future financial goals, and dependents. - Can I increase the sum assured in my term plan later?
Some term plans offer the option to increase the sum assured during major life events like marriage or childbirth. Consult your insurer to explore these flexible options. - Does the premium increase with a higher sum assured?
Yes, a higher sum assured typically means a higher premium. However, term plans are generally affordable and offer substantial coverage at competitive rates. - Can I use an online calculator to determine the right sum assured?
Yes, many insurers provide online calculators to estimate the right sum assured for your term plan based on your income, expenses, and goals.
