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Life insurance rule: Minimum sum assured an investor need — explained
- Life insurance rule of thumb: As a matter of standard practice, the sum assured should be at least 12-15 times of one’s annual expenses, say experts
Life insurance rule: After the outbreak of Covid-19 pandemic, investors have realised the importance of life insurance in one's financial planning. According to investment and financial planners, a good number of people are buying life insurance who failed to buy life insurance in early phase of one's career. However, they said that while buying a life insurance people look at the minimum sum assured but there is need to understand whether this would be enough for their family or not. They said that one would buy a life insurance keeping one's annual expense in mind. One should opt for a life insurance policy that offers minimum sum assured to the tune of 12 to 15 times of one's annual expenses.
Speaking on the life insurance rule that one should implement while buying a life insurance policy, Vinit Khandare, CEO & Founder at MyFundBazaar said, "As a matter of standard practice, the sum assured should be at least 12-15 times of one’s annual expenses or 8-10 times their annual income when it comes to purchasing a life insurance policy. While the minimum sum assured on a life insurance policy won’t be less than 10 times the annual premium for individuals below 45 years of age, for individuals above 45 years, the minimum sum assured is 7 times the annual premium."
MyFundBazaar expert went on to add that while opting for life insurance, knowing one's needs is essential. While the renewable term insurance is known to be sufficient for most people, the individual needs to analyse their scenario - calculating their childrens’ education, retirement fund etc. As with investing, perpetually educating oneself is imperative to making a well-informed choice, one should be sure to do a thorough analysis to ensure that they opt for the best life insurance possible.
How to calculate minimum sum assured one needs
Explaining life insurance rule in regard to minimum sum assured calculation, Rahul Agarwal, a certified financial planner said, "To know how much minimum sum assured one require from a life insurance policy, one needs to first calculate one's annual income and present value of one's long-term and medium term goals. Apart from this, one needs to deduct one's current liabilities from the minimum sum assured by the life insurance policy one is looking at. If the addition of present value of one long and medium term goals and present annual expense is equal to the final outcome of sum assured offered by the life insurance policy and current liabilities of the investor, then only the investor is advised to opt the insurance policy."
Disclaimer: The views and recommendations made above are those of individual experts or personal finance companies, and not of Mint.
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First Published:24 Sep 2022, 10:18 AM IST
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