26/11/20144 Comments (http://apnafinguide.weebly.com/articles/what-should-be-the-sum-assured-amount-fo-life-insurance#comments)

WhatshouldbethesumassuredamountforLifeInsurance?(http://apnafinguide.weebly.com/articles/whatshouldbethesumassuredamountfolifeinsurance)

In first topic it was discussed about the difference between endowment policy and term policy"Term Insurance Plan vs. Life Insurance Plan (http://apnafinguide.weebly.com/articles/term-insurance-plan-vs-endowment-plan) " whereas, the key parameters to select a life insurance wasdiscussed in second topic " (http://apnafinguide.weebly.com/articles/november-21st-2014)KeyParameters to select A Life Insurance (http://apnafinguide.weebly.com/articles/november-21st-2014)". Today the discussion is on, what should be the sum assured(SA) to select while taking a lifeinsurance. The topic will be discussed in a very brief manner.

Its better to select a SA which is greater than or equal to 10-15 times of your annual salary. That

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means if ones annual gross income is Rs.6L in that case he/she should take a policy of Rs.60L-90L.

Also there is a lower threshold and upper threshold for the SA. As the topic will be discussed thereader will understand.

Now lets do some simple calculation to verify the above statement.

Ones annual gross salary is Rs.7.2L, then his monthly in hand salary is approximately Rs.60,000/-.Lets consider his/her monthly expenditure and investments are as follows

Expenditure = Rs.30,000/-

Safe Investments= Rs.15,000/- @ 8.5% RI (Like Bank FD, RD, PPF, Postoffice TD, NSC,MIS)

Equity Investments= Rs.15,000/-

Considering only the safe investment part as the savings,

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So now lets see whether the SA will actually be beneficial or not, when the policyholder dies or the regularsource of income is stopped(due to permanent disability). Now it is assumed that, once the policy holder

will die the nominee will deposit the death benefit amount in the safest place(like bank FD, NSC etc.) fromwhere he/she can generate a regular source of income.

So considering the 10th year case,

Rs.85,00,000/-(85L) would be the total amount, from where the nominee can generate anually Rs.7L(RI@ 8.5%) per annum without touching the principle amount. The tax amount is not calculted here. Soconsidering the savings amount the policy holder should take a SA of (85-28)=57L.

Considering the 20th year case,

Rs.1,50,00,000/-(1.5Crore) would be the total amount, from where the nominee can generate anuallyRs.13L(RI @ 8.5%) per annum without touching the principle amount. The tax amount is not calculted here.So considering the savings amount the policy holder should take a SA of (1.5-0.94)=56L.

Considering the 30th year case,

Rs.3,00,00,000/-(3Crore) would be the amount, from where the nominee can generate anuallyRs.27L(RI @ 8.5%) per annum without touching the principle amount. The tax amount is not calculted here.So considering the savings amount the policy holder should take a SA of (3.0-2.46)=54L.

But in three cases, the interest amount(Bank FD) is fixed per annum, though the inflation will alwaysincrease. So actually after some years if there is no source of income(i.e. nominee is not able to generateincome) nominee has to break the FD to fetch out a part of principle amount every year(so horrible). So itsbetter to go for higher SA like 75L or 1Crore(than the calculated one).

So, considering the current scenario, the lower threshold of SA= Rs.50L where as upper threshold

of SA=1Crore. If you are taking a insurance less than the lower threshold SA it is worthless, premiumpayment is less compared to what is required one and if you are going higher than the upper threshold itis waste, premium payment is more than whatever is required.

So here it is seen that, the recommended SA will help to survive ones family, with out a active sourceof income(in the absence of policy holder). However still its better to go for higher (>10 times of annualsalary) SA, as the average inflation may be higher than 7% or bank RI may decrease at any time.

For SA= 1Crore, Term= 30Y and AGE=25Y, the premium will be

LIC eterm = Rs.11,685/- per annum

ICICI Pru IProtect= Rs.8,800/- per annum

Here a basic idea has been given to illustarte what should be the amount of SA. The expenditure andsavings are assumptions. Also a lump sum amount is required due to daughters marriage or childrenshigher education or buying real estate etc. that situations are not considered here. Its better to take allinto consideration when one is going to take a policy.

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