Why Does It Make Perfect Sense to Choose the Higher Sum Assured Amount?

Purchasing a life insurance policy has become relatively simple in recent years, and many people choose to do so online owing to the convenience it comes within the first place. However, several common mistakes must be avoided while purchasing term insurance plan and one such common mistake people make is not choosing the right sum assured amount. Should you buy the 1 crore term insurance or 50 lakh? There is no particular right or wrong answer here. After reading this article, one will get clarity on why it makes sense to choose the higher sum assured. 

Why Does the Sum Assured in a Term Insurance Plan Matter?

Firstly, what is the sum assured under a life insurance policy? It is a sum of money that the insured or their family receives when the policyholder, unfortunately, passes away during the policy tenure. 

A lot of individuals choose for a sum assured less than Rs 50 lakhs. There could be one key explanation for this: they believe their premium amount will be too high. It is reasonable to assume that the bigger the sum assured, the higher the premium will be. However, while you may believe you have chosen the appropriate sum assured, the following are a few reasons why you should choose a bigger sum assured in your insurance policy:

Reason 1: Inflation: Prices have increased dramatically. Not only have the prices of luxury goods increased dramatically over the last five years, but so have the costs of basics such as food and transport. Consider the inflation rate after ten or twenty years. While you may believe that an amount assured of 40 or 50 lakhs will be sufficient for your family, this is not certain. If it does not, your family members will have to make sacrifices in terms of living standards. This is the reason why most of the population is choosing 1 crore term insurance. 

Reason 2: Cover the loan amount: You might have assessed your family’s daily expenditure, as well as the cost of your child’s schooling. But what about loan repayment or EMI? If you have a personal loan or a home loan, it is recommended that you choose a sum assured that is sufficient to cover the outstanding balance. So that your family members are financially secure if an unfortunate event happens to you, and the loans are still outstanding. 

Reason 3: Discounts are given for higher sum assured: Many people believe that choosing a higher sum assured will result in a higher premium amount. However, when you get a term insurance plan, you can get up to a Rs 1 crore term insurance plan at a reasonable premium. 

Reason 4: Protection: Choosing a lower sum assured will leave your family short on finances fairly quickly. Your sum assured should be sufficient to cover significant events such as your child’s higher education or marriage, your spouse’s retirement, your parents’ healthcare, and so on. Furthermore, if you have any overdue loans, you will need to ensure their repayment so that the burden does not fall on your loved ones during your absence. Obtaining a 1 crore term insurance will ensure that your family receives a lump sum amount through periodic payouts in your absence.

How Much Sum Assured Is Sufficient?

While the general rule of thumb suggests that a sum assured of 15 to 25 times your yearly income is excellent, it is best to estimate the amount based on your current financial status, earnings, needs and liabilities. To do, follow the below-mentioned steps:

• Add up your monthly expenses and multiply them by 15, 20, or 25.
• Calculate the expected cost of future financial goals such as a child’s education, marriage, a family trip, a retirement fund, a car, and so on.
• Add up the current value of any loans you may have.
• Once you’ve included these three, add any current and potential sources of income other than your income, such as investments, real estate rent, and bank accounts.
• Then deduct it from the value you get after adding steps 1, 2, and 3.

That way, you’ll have an idea of how much sum assured you need.

Questions to ask yourself while deciding on a term insurance sum assured amount

• Choosing the right sum assured for your term insurance plan necessitates a thorough examination of your present financial condition and future requirements. Here are some questions to ask yourself that will help you during this process:
• What is my current income? This can be used as a foundation for computing the sum assured using the Income Replacement Method. A standard suggestion is to have coverage equal to 10 to 15 times your annual income.
• What are my current debt and liabilities? Consider loans such as a home, car, or personal loan that your family would be responsible for repaying after your absence.
• What is the cost of living for my dependents? Consider the regular household expenses your family incurs. This should cover everything from grocery and electricity costs to transportation and healthcare expenses.
• What are my family’s future financial goals? Consider the cost of your children’s further education, their wedding expenses, and your spouse’s retirement requirements. When predicting future costs, make sure to account for inflation.
• Do I have any further savings or investments? If you have other significant funds or assets, you may not require as high a sum assured as 1 crore term insurance. 
• What is the impact of inflation? Money’s value falls over time owing to inflation. As a result, an amount that appears large now may prove insufficient a few years later.
• Do I have any dependents with special needs? If you have a dependent with specific requirements, you may need a higher sum assured to cover their long-term care.

There’s nothing better than knowing your family will be financially secure even when you’re not present. You must guarantee that you do not get a term plan and then remain underinsured, or that you do not end up buying the wrong plan cover. Thus, selecting the appropriate plan with proper coverage is critical. With the above-mentioned tips to consider when deciding on the sum assured, you will be able to make an informed decision without worrying about whether the chosen policy is suitable for your family.