Understanding Sum Assured: An Important Term Life Insurance Concept in 2024

What's the big deal about "sum assured" regarding term life insurance? Though it may sound complex, this single concept influences everything, including your premiums. Before purchasing any policy in 2024, it's essential to grasp precisely how sum assured works and ensures your coverage aligns with your specific financial situation.

The Importance of Understanding Sum Assured in Term Life Insurance

Term life insurance has become integral to financial planning for many individuals and families. It provides financial security to dependents in case of the insured's unexpected death during the policy term. While premiums, death benefits, riders, and other technical specifications are essential, the cornerstone of any term life insurance policy is the sum assured.

What is Sum Assured?

The sum assured is the guaranteed amount the nominee/beneficiary receives in the unfortunate event of the policyholder's demise during the policy term. It is the coverage amount that the insurance company agrees to pay out if the death benefit is triggered.

For example, if Sanjay buys a ₹1 crore term plan, this ₹1 crore is his sum assured. Unfortunately, If he passes away during the policy term, the insurer will pay his nominee the ₹1 crore sum assured.

Why is Sum Assured Important?

The sum assured is the cornerstone for calculating other policy values and benefits. It decides the policy's premium amount, death benefit, and income tax benefits if suitable. Selecting an adequate sum is vital to ensure your family is financially secure in your absence.

If the sum assured is higher, your dependents may be able to maintain their lifestyle using the claim amount. If you set it unrealistically high, you will have to pay higher premiums that could strain your finances.

Factors Influencing Sum Assured

Once you’re aware of the sum assured meaning, it becomes quite easy to understand the key factors that influence sum assured:

● Age and Health: Younger people in good health qualify for higher cover, as the perceived risk is lower for insurance companies. Older individuals and those with medical issues may get less assured approvals.

● Financial Obligations: Account for expenses like recurring household costs, outstanding debts and loans, children's education, retirement corpus, etc., that your family would incur. Your sum assured must adequately cover these aspects.

● Number of Dependents: The more dependents you have, the higher insurance coverage you need to protect their future. Account for each dependent's expenses and financial needs.

● Income Replacement: The idea is to replace your earning capacity so that dependents can maintain their lifestyle. Thus, your income level largely influences the sum assured.

● Existing Life Covers: Before deciding this policy's sum assured, consider all existing policies you or your spouse have. Evaluate whether your overall coverage adequately protects your family.

Benefits of Opting for Adequate Sum Assured

1. Financial Security for Family: The right sum assured amount means your family has enough funds to cover their goals without compromising their lifestyle.

2. Meeting Important Milestones: The sum assured payout can fund major life expenses like higher education, marriages, etc.

3. Tax Benefits: Premiums paid towards term insurance are eligible for tax rebates under Section 80C and Section 10(10D).

The Bottom Line

Determining the appropriate sum assured involves balancing premium affordability and adequate protection for your family. Before deciding on this vital aspect of term life insurance, consider your lifestyle, goals, income, and policies. Once purchased, periodically reviewing the sum assured ensures the continued relevance of the life cover.