Maximum and Minimum Sum Assured in Term Life 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 minimum and maximum 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 refers to the fixed amount of money the insurance company agrees to pay to the policyholder’s beneficiaries in case of the insured’s death during the policy term. It’s essentially the financial protection the policy provides.

For example, if you have a term insurance policy with a sum assured of ₹1 crore, your beneficiaries will receive ₹1 crore if you pass away during the policy term.

It’s crucial to have an adequate minimum sum assured to ensure your family doesn't face financial hardships in your absence. Here’s why it’s important:

1. The sum should be large enough to cover everyday living expenses.

2. It should help pay off any outstanding loans or debts so your family isn’t burdened with financial liabilities.

3. It should cover future expenses like your children’s education or marriage.

4. Provides funds for unexpected medical costs.

5. Ensures your spouse has financial support during retirement.

Now, let’s understand how to evaluate the minimum sum assured using a simple example.

Understanding Minimum Sum Assured in Term Insurance with Illustration

Raj, a 35-year-old engineer, is the sole earner in his family. He lives with his wife, Priya, and a child. Raj earns ₹8 lakh annually, has a home loan of ₹30 lakh, and wants to secure his children’s future education. 

Raj decides to purchase term insurance but wonders how much coverage he needs. After evaluating his family’s needs, Raj considers the following:

• Income replacement: His family would need to replace his ₹8 lakh annual income for at least 10 years, totalling ₹80 lakh.
• Loan repayment: He wants to ensure that the ₹30 lakh home loan doesn’t burden his family.
• Children’s education: Raj estimates ₹10 lakh for his children’s future education.

Raj opts for a minimum sum assured of ₹1.2 crore, which comes at the premium of approx ₹5,000 per annum. This amount would cover his family’s everyday expenses, pay off the home loan, and ensure his children’s education if something happened to him.

If Raj had chosen only ₹50 lakh in coverage, his family would have struggled with expenses and loan repayment. By selecting the right minimum sum assured, Raj ensures his family is financially secure in his absence.

It’s crucial to have a maximum sum assured to ensure your family doesn't face financial hardships in your absence. Here’s why it’s important:

• Consider ongoing expenses (rent, utilities, groceries), future needs (education, healthcare), and liabilities (loans, debts).
• Calculate the sum assured based on replacing your income for a specific number of years.
• It should cover significant debts, such as home loans, so your family isn’t burdened after your passing.
• Factor in future family plans, such as children's education, weddings, or spousal retirement.
• Ensure the sum assured accounts for future inflation to maintain your family’s living standards.

Now, let’s understand how to evaluate the minimum sum assured using a simple example.

Understanding Maximum Sum Assured in Term Insurance with Illustration

Rajesh, a 35-year-old software engineer, is the sole breadwinner for his wife, Soniya and their three children. Rajesh’s home loan stands at ₹30 lakhs, and his family relies on his ₹1 lakh monthly income for all their needs, including future expenses like his children's education.

Rajesh decides to purchase term insurance but wonders how much coverage he needs. After evaluating his family’s needs, Rajesh considers the following:

• Income replacement: His family would need to replace his ₹1 lakh monthly income for at least 15 years, totalling ₹1.8 crore (₹1 lakh x 12 x 15 years).
• Loan repayment: He wants to ensure that the ₹30 lakh home loan doesn’t burden his family.
• Children’s education: Rajesh estimates ₹40 lakh for his children’s future education.
• Provide for future goals and inflation adjustments.

Summing this up, Rajesh opts for a sum assured of ₹2.5 crore, which comes at the premium of approx ₹10,000 per annum. This amount ensures that, even if Rajesh passes away, Soniya can clear the debt, maintain the family’s standard of living, and fund the children's education. If Rajesh had opted for only ₹1 Crore, his family could have struggled to meet expenses and long-term goals.

Several factors influence the minimum and maximum sum assured in Term Insurance, such as:

• It’s generally recommended to choose a sum assured that is at least 10-15 times your annual income.
• Younger individuals typically qualify for higher sums assured because they have a longer earning period ahead.
• Consider your family’s daily living expenses to ensure they can maintain their lifestyle in your absence.
• Include any outstanding loans or debts that need to be paid off.
• Consider future financial needs like children’s education, weddings, or house buying.
• Account for inflation to ensure the sum assured retains its value over time.
• Your current health and any medical history can influence the sum assured.
• The more dependents you have, the higher the sum assured should be.
• Ensure there are enough funds to support your spouse’s retirement if you’re not around.
• Risky behaviours like smoking can reduce the sum assured.

You can also consider the following formula to get a basic understanding of 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.

Underestimating Needs

Ignoring Outstanding Debts

Overestimating Needs

Not Reviewing Regularly

Ignoring Inflation

Choosing Based on Premiums Alone