When you buy an insurance policy for life or for a term, you expect that it should provide the most adequate cover to ensure complete financial security for your family in the event of your untimely death. However, it is a little tricky to determine this accurately. Generally speaking, it should be sufficient to sustain the same income level and lifestyle for the insured’s loved ones and ensure that they are able to fulfil their goals in future. Let’s take a look at some ways and factors to consider when calculating the sum assured for both life and term insurance policies.
An easy way to calculate the sum assured for your choice of the best term insurance plan is to determine the income that would be replaced in the event of your untimely death. This replacement of income is one of the benefits of life insurance. Once you have arrived at this figure, you can calculate the sum of the term insurance cover needed to replace the lost income adequately for your loved ones. A simple formula that insurance experts advocate is thus:
Current Monthly Income x 120 = Sum Assured
(here, 120 = months in 10 years)
The Golden Rule of a term insurance plan is that it should replace your monthly salary for a minimum of 10-15 years. |
To arrive at a suitable sum assured for your term insurance meaning insurance that covers you for a specific term, you can also calculate the Human Life Value to begin with. It is a comprehensive indicator of your gains, expenses, debts, and savings. To calculate your Human Life Value, you need to make an estimate of your current income as well as ongoing and expected debts and expenses. What also needs to be added into the same is an estimate of the number of years for which you will probably work. External factors such as economic inflation or yearly reforms too should be considered when calculating your Human Life Value. This formula can also be applicable for other life insurance types.
Just as you can calculate the income that the term insurance policy should replace, you can also make an estimate of all expenses that can occur both on an immediate and a long-term basis. This includes your daily living costs as well as the expenses that can be incurred in future for certain goals, like children’s education, as well as for financial stability in old age. Adding up these expenses will give an approximate idea of how much your family would need.
To arrive at a suitable estimate of the insurance sum assured, you need to subtract the present value of all your assets, specifically investments and other insurance policies. You don’t need to consider the value of your house or your car, however, as these will pass on to your loved ones by default.
You can decide how big the sum assured for both life and term insurance should be by calculating how much you can spend in paying your premiums. You can also compare the rates of all options, when picking the best term insurance plan. If you are in a position to pay premiums for a fairly long period of time, you will be able to avail all the benefits of life insurance as well as term insurance for your loved ones.
Confused about how term insurance works? You can read up everything that needs to be known and whether term insurance is worth it or not.
Need some help from us in calculating the sum assured for your insurance policy? We can lend you a helping hand.
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