Maximum and Minimum Sum Assured in Term Insurance

A term insurance plan lets individuals secure their family’s financial condition in case of their untimely demise. Their nominees get the sum assured from the insurance company as per the policy terms.

Nevertheless, while signing such contracts, you should ideally compare the maximum and minimum sum assured in term insurance policies provided by different insurers. Simultaneously, you also need to determine how much sum assured will suffice your family’s future financial requirements.

The sum assured in a term insurance policy refers to the amount a nominee gets in case of the unfortunate demise of a policyholder. Generally, the maximum sum assured offered by insurance providers is 10 times the annual income of the policy holders.

An insurance provider generally offers their plans at different costs (premiums). With higher premiums, the sum assured increases. The maximum sum assured in a term insurance plan refers to the highest amount that you can secure as the death cover.

The minimum sum assured refers to the least coverage amount that an insurer will provide against a certain premium. When you choose a term plan with a minimum sum insured, you will have to pay the lowest premium to purchase and renew your plan.

Ideally, the minimum sum assured of the term insurance policy should be around at least 12-15 times of an individual’s yearly expenses, including loans. This way, he/she can ensure that his/her family remains financially well off even after his/her unfortunate demise.

In the case of unfortunate demise of the insured individuals within the policy period, their nominees will get a fixed sum of money. Here are four major aspects that you need to check while deciding your sum assured amount:

• Financial Requirements of Family: You will have to decide how much your family would require to sustain their life and livelihood comfortably in your absence. This is why while choosing the minimum sum assured in a term insurance policy, you should ideally factor in your family's present and probable future annual expenses.
• Upcoming Bigger Expenses: Your family may encounter difficulties in paying for large one-time expenses like those of higher education, marriage, etc. If you have such upcoming expenditures, you need to ensure that the sum assured amount will help them to bear those costs.
• Professional Career Remaining: While deciding the minimum sum assured in a term plan, you must consider how much of your professional career remains. This is because the term insurance policy acts as a means of substituting your income and savings in case of unfortunate situations. Estimating your career’s remaining duration will help you understand how much your loved ones should ideally get to fulfil their financial needs.
• Liabilities: You also need to take care that your family members do not encounter financial challenges owing to your outstanding liabilities. This is why while choosing a sum assured, you must take into account your pending loans that will take longer to repay.

You can also consider the following formula to get a basic understanding about the sum assured amount of your term insurance plan:

Sum Assured in a Term Insurance Plan = (10 x Annual Income) + Financial Liabilities

For example, if your annual income is ₹20 lakh and your pending loan amount is ₹ 50 lakh, you should opt for a sum assured of ₹ 2.5 crore.

To ensure that your family does not face any financial difficulty in sustaining their livelihood in case of your unfortunate demise, you must get a life cover that provides a sufficient sum assured. You can consider the above-mentioned aspect and formula to get an idea about the minimum sum assured in a term insurance policy.