Term Insurance Cover- Have you got your number right?

Have you ever wondered why Sachin Tendulkar bats at number 4 and Virender Sehwag as opener in tests? They feel protected at that number. The protection gives them immense confidence to perform better. Similarly, you will feel protected if you get your number right. This number in insurance is often called the sum assured. Getting this number right is crucial. Here is what you should know about it.

What is Sum Assured?

At the time of buying a life insurance policy, the insurance company and policyholder would mutually agree upon a certain amount of money that will be payable upon the death of insured. This amount is the sum assured which shall be paid to beneficiaries as documented in the policy.

How the sum assured amount is arrived at?

Sum Assured mainly depends on factors such as your net assets, families current and potential fixed annual income and expenses, your age and the age of your dependents, any loans or liabilities or guarantees due and any dedicated charity. Numerically, this number should be sufficient for your dependents to meet their expenses until they become financially independent. Most financial advisors insist that the sum assured should lie in the range of 5-10 times of Insured’s annual income.

For more accurate calculations, various programmed calculators based on HLV (Human Life Value) are readily available should be used. Aggregate of all the obligations that you have towards your dependants is your human life value.

Is the sum assured related to premium?

Yes, the sum assured is related to premium. This relationship of sum assured with the premium is directly proportional for term plans. Higher the sum assured higher the premium payable.

In a pure protection or term policy, one has to typically pay as low as about Rs. 150 per Rs.1 lakh of coverage (of course depending on age, medical conditions, and smoker status). So, if an insured wants Rs. 1 core as cover, they need to pay Rs. 15,000 per annum (100 x Rs. 150). Most companies will give a rebate on premium as the sum assured increases. For instance if the sum assured is increased to Rs. 5 crores the premium payable may get reduced, for e.g. by 10% i.e. premium for each lakh would be Rs. 135, total premium payable would be Rs. 67,500 (500 x Rs. 135)

Does the sum assured depend on age?

Yes, most companies restrict the maximum sum assured that an individual can take (of course depending on underwriting). For example, “Termsurance Seniors Insurance Plan” offered by IDBI fedral for people above 50 till age of 85 allows maximum sum assured of Rs. 5 lacs only.

How often should the sum assured (right number) be tested?

Ideally, the sum assured number should be reviewed annually. However, as most of us do not go for regular health or dental check up expecting a regular review would be farfetched. However, any changes in personal circumstances should warrant a review of sum assured. Some of these circumstances could be:

• Change in marital status - whether you get married or divorced.
• Addition to family by childbirth or adoption.
• Deletion in family due to death in the family.
• When you take a loan that is not insured.
• Increase your loan.
• A rise in your salary.
• Inheritance of some assets.