When you buy a life insurance policy, the most important aspect is choosing the sum assured. Sum assured is the amount that your beneficiary will get if you die during the policy term. Therefore, choosing a sum assured is very important because through insurance you create a financial cushion for your family. According to one thumb rule, quoted by many financial planners, this sum assured should be at least 12-15 times your annual expenses or 8-10 times your annual income. If you have a debt, such as a home loan, factor in that too when calculating your cover.
While it is easy and cheapest to choose a sum assured when buying a term plan—the cover is several multiples of the premium paid—other insurance products that also double up as investment products give you fixed sum assured or a range within which you can choose.
Insurance Regulatory and Development Authority (Irda) has mandated a minimum level of insurance in these products so that they don’t end up being pure investment products. The minimum cover depends upon your policy term and age.
POLICY TERM OF 10 YEARS+
The minimum sum assured or the death benefit on a life insurance policy shall not be less than 10 times the annual premium for individuals below 45 years of age. And for individuals above 45 years of age, minimum sum assured is 7 times the annual premium. But rules mandate that death benefit given to the beneficiary at any time during the policy term should not be less than 105% of the premiums paid. This means if a policyholder was paying a premium of Rs.10,000 for a sum assured of Rs.1 lakh, and dies, say, in the 15th policy year (policy term being 20 years), the insurer will pay Rs.1.58 lakh and not Rs.1 lakh (105% of Rs.1.5 lakh paid as premiums so far).
POLICY TERM OF LESS THAN 10 YEARS
For policies with a term of less than 10 years, the minimum sum assured is five times the annual premium for all individuals. Again, the sum assured or the death benefit at any given point in time would not be less than 105% of all the premiums paid. This means if a policyholder pays a premiums ofRs.10,000 for a sum assured of Rs.50,000, and dies, say, in the sixth policy year, the insurer will pay Rs.63,000 (105% of Rs.60,000 paid as premiums so far).
Irda relaxed the limit for regular insurance policies with a shorter tenor because insurers expressed difficulty in designing policies with shorter tenors with a minimum sum assured limit of 10 times the annual premium since it meant more costs and affected returns.
If you bring home a sum assured of less than 10 times the annual premium, you will not be entitled to tax benefits. Tax deduction benefits have increased to Rs.1.5 lakh under section 80C. Under section 10(10D), maturity proceeds would be tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium.