Sum assured is one of the most important terms to understand when it comes to life insurance plans. Knowing what is sum assured in life insurance can help you select the coverage and ensure sufficient financial protection for your loved ones.
What is Sum Assured?
The sum assured is the fixed amount of money the insurer agrees to pay to the beneficiary upon the policyholder's death or upon the occurrence of any other specified event, based on the terms of the life insurance plan.
It acts as a financial safety net for the policyholder's dependents. It provides, them with the necessary funds to manage their expenses in the policyholder's absence.
The sum assured is predetermined at the time of policy purchase and remains unchanged throughout the policy term. It is the amount the nominee can initiate a claim for if the defined event were to occur.
The sum assured is one of the factors influencing your premium. Understanding what is sum assured and its importance can help in selecting a suitable life insurance plan.
How to Calculate Sum Assured
To ensure your life insurance plan serves its purpose, it is crucial to choose the right sum assured.
Step 1. Understand Your Family’s Financial Requirements
Calculating the sum assured begins with identifying regular household expenses, future goals, and outstanding debts. This helps form a baseline for coverage.
Step 2. Apply the Income Multiplier Rule
Many experts suggest choosing a sum assured amount 10–15 times your annual income. This can ensure long-term financial stability for your family. You can also use the Human Life Value method, or the Underwriter’s Rule method to calculate your sum assured.
Step 3. Factor in Inflation and Liabilities
Consider inflation, loans, dependents, and upcoming commitments. This ensures that the chosen sum assured in your insurance coverage remains adequate in the long run.
Step 4. Use a Life Insurance Calculator
Once you have a figure in mind, consider using a life insurance calculator to get an estimate of the cost for the same. This will allow you to check whether the sum assured is affordable for you in the long run.
Key Factors to Consider Before Choosing a Sum Assured
Choosing the right sum assured involves consideration of the following factors:
Income and Lifestyle Obligations
Your income level and monthly living costs determine the minimum safety net that your family may need.
Existing Loans and Dependents
Outstanding liabilities and the number of dependents also play a role in determining the amount for the sum assured.
Future Milestones
Plan for expenses such as education, marriage, and retirement, to ensure complete financial protection.
How Is Sum Assured Different From Sum Insured?
The meaning of sum assured refers to a fixed benefit paid under life insurance or term life insurance, usually in case of death. It remains constant and is not linked to actual loss.
The meaning of sum insured applies to general and health insurance, where the insurer reimburses actual expenses such as medical bills or damages.
In simple terms, sum assured covers life risks, whereas sum insured covers financial losses. It is important to understand this distinction as it will help you choose the right insurance coverage for your needs.
Determining the Right Sum Assured
Once you know what sum assured is, it becomes crucial to ensure that you choose the right amount for your needs. It should be sufficient to cover your family’s needs without being excessively burdensome on your budget. Usually, an amount that is 10 times your annual income, along with any possible debts and other liabilities, may be considered a good total value for a life insurance sum assured.
By using a life insurance calculator, you can determine the premium you may pay for the desired sum assured amount.
Understanding what is sum assured in life insurance is fundamental to selecting the right policy and ensuring adequate protection for your loved ones. By considering your financial obligations and future goals, you can determine the appropriate sum assured for your needs. This knowledge will empower you to make informed decisions and secure the financial future of your dependents effectively.
Frequently Asked Questions
What is the importance of the sum assured in a life insurance policy?
It provides financial stability to your family in your absence. The sum assured in life insurance ensures long-term security by covering daily expenses, future goals, and outstanding loans.
Can you increase the sum assured after the policy is purchased?
Some insurers may allow an increase in the sum assured through riders or milestones such as marriage or childbirth. However, medical tests or additional documentation may be required.
What factors affect the sum assured amount?
Your income, age, health, lifestyle habits, dependents, and existing liabilities determine how much coverage is necessary to protect your family.
Are the sum assured value and the maturity amount the same?
No. The sum assured is the fixed death benefit, while the maturity amount applies to savings-based plans. In term life insurance, only the sum assured is paid.
Does the sum assured amount impact your premium cost?
Yes. A higher sum assured in insurance leads to higher premiums. Insurers look at health, age, and other risk factors to calculate the cost of covering an individual.
Disclaimers:
IndiaFirst Life Insurance Company Limited, IRDAI Regn No.:143, CIN: U66010MH2008PLC183679, Address: 12th & 13th floor, North [C] Wing, Tower 4, Nesco IT Park, Nesco Center, Western Express Highway, Goregaon (East), Mumbai – 400 063. Toll-free No – 18002098700. Email Id:customer.first@indiafirstlife.com, Website: www.indiafirstlife.com, Fax No. +91226570600. For more details on risk factors and terms and conditions, please read the sales brochure carefully before concluding the sale. Trade logo displayed above belongs to our promoter M/s Bank of Baroda and is used by IndiaFirst Life Insurance Co. Ltd. under license.
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