Decoding Insurance

Assessing the right sum assured: An important factor when buying term insurance

One of the most important things you can do to plan your future is to ensure that you and your family are financially secure throughout your life. Especially, if you are the family's sole breadwinner, it may be difficult for your loved ones to sustain and cover such expenses when you’re not available anymore. This is where a term plan will come to the rescue. A term  plan will act like a blanket of protection for you and your family. Under this, you can get a large amount of life cover by paying a relatively low premium. However, before investing in a term plan one needs to consider certain factors. The most important being, making sure that you are choosing the right sum assured.

Sum assured refers to the pre-decided amount that the insurance company pays to the beneficiary in the event of your unfortunate demise during the policy period. This factor plays a very important role in financial planning as it determines the lifestyle of your family in your absence. Thus, one needs to calculate the right value before investing in a plan. The most efficient way you can do this is by  keeping in mind certain aspects like preparing for expenses that you will have to incur in the future, like your child’s education, marriage, retirement planning of your spouse etc. Further, considering the increasing lifestyle related ailments, it becomes essential to invest in a term plan at an early stage of life. Additionally, one would get a term plan at lower premiums if bought in his/her say, early 30s. 

To help calculate the right sum assured, insurers have a human life value calculator, which basically takes into consideration various future expenses, like mentioned above and tells you how much life cover one should opt for. It is suggested that the sum assured of your term life insurance plan should be calculated as per your current age. HLV has a shortcut formula which insurance companies use which broadly gives you similar value as to how much life cover you should need. Under this, your annual income is multiplied by a factor which is dependent on your age. For instance if you are below 35yrs old, you should have a life cover of 25 times of your annual income. This formula ensures that even in your absence your family is able to have a similar lifestyle as they had earlier. 

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