It is often observed that for most policy seekers in India, a sum assured of ₹1 crore seems substantial, and enough to take care of all expenses. They deem the amount sufficient to sustain their family’s requirements in case something untoward happens to the policyholder.

This is where they fail to understand the essential logic and do the basic math. No doubt the eight-digit figure sum assured seems impressive — after all, ₹1 crore deposited in a bank account gives a ₹58,333 monthly income at 7 per cent rate of interest. However, there is a flip side to the story.

While the calculation may seem perfect on paper, when it comes to implementation, things change drastically. People often forget to take into account the outstanding loans in the name of the policyholder, the significant inflation and, most importantly, one-time expenses such as children’s higher education and marriage and, of course, the retirement needs of the partner.

How to arrive at the figure

Generally, the value of sum assured must be based entirely on the life stage of the policy seeker. A salaried individual up to the age of 40 must have a cover of approximately 20 times the annual income. Individuals above the age of 40 must buy a cover 10-20 times the annual income while those in their 50s must opt for a cover of 5-10 times their annual income.

Apart from the annual income, your family’s annual expenses are also a great way to calculate the right sum assured. A one-size-fits-all approach cannot be followed while taking a policy; a thorough analysis of individual expenses, liabilities, investments and requirements is recommended.

When looking for a comprehensive life insurance plan, do make sure to choose a plan that adequately covers your spouse’s future. It must be well equipped to protect your partner’s old age requirements so that she/he can live a life of dignity and comfort in your absence. Make sure you consider his/her living, medical and health-related expenses. While a ₹1-crore cover is sufficient if the only dependent is the spouse, those with two or more dependant children will require a larger cover.

Zooming needs

Never forget inflation when calculating your family’s future costs and expenses. The needs and requirements of your family will keep rising with time. If your family’s total expenses today are ₹50,000 a month, they are sure to rise to ₹70,000 in five years at an annual inflation rate of 7 per cent.

It is advisable to review the insurance cover every five years and during critical milestones such as marriage, buying a new home and birth of a child. To help policyholders, most insurers have in-built features such as increasing the total sum assured or life stage-linked enhancement. Under these plans, you can easily enhance your policies and the sum assured as required.

Customers can also choose term plans with the option of increasing the sum assured. Under such plans, the sum assured increases every year by a specific amount. While for the first five years the death benefit remains the same, after that period the sum assured increases by 5-10 per cent for the next 15 years, or the end of the policy term, whichever is earlier. All such plans let you increase your term cover by using the increasing sum assured option with the same insurer, thus taking care of the increasing expenses of your family.

The writer is Chief Business Officer, Life Insurance, Policybazaar.com

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