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Life insurance is an important instrument that ensures financial assistance to the Dependants of an Insured person in the event of his/her untimely demise. It is purchased so that another source of income is already there in case the insured person dies and dependants do not get into the financial constraints when there is need.
Under every life insurance documentation a particular sum Assured is declared by the insured which is paid at the Maturity or in the event of death of the insured to the beneficiary. Sum Assured can also be called as life cover or Death Benefit protection.
In order to decide the sum assured that your Beneficiary will get by raising insurance claims you need to understand what would be the expected cost of living for your family when you will not be around and consider various factors pertaining to your financial affordability.
The first thing you should do is to compute family’s one time expenses. These expenses can be in the form of outstanding debts, mortgages, personal loans, education loans, home loans, credit card payments which can be paid in lump sum.
The next thing you should calculate is total value of your assets. Add only those assets which your family is willing to offset with the lump sum amount of liabilities. These assets can be listed as stocks, mutual funds, fixed deposits, provident funds, automobile, property like land, house etc, gold and silver bars, high-end valued jewelry and so on.
When you deduct liabilities from assets, you get net assets available for family to fix up unexpected financial constraints such as funeral cost, accumulated rent charges for something or any other unexpected requirement.
In case liabilities are more than assets, you need to consider at least this much amount of difference as your minimum sum assured so that there are no financial obligations left for your family to pay after you.
Now you need to add up annual family expenses. Add the grocery bills, school/college fees, electricity bills and other utility bills on monthly basis. Now derive annual expenses by multiplying this amount to 12.
When you buy the life insurance policy, you need to take the number of years into account for which you want to provide financial protection to your family. You can decide this by looking at the number of years left for your children to start earning after your demise. Though you cannot decide the year when this unfortunate event will happen, but you can do it on assumption basis.
Say, you want to provide financial cover to your family for 15 years. Now multiply your family’s annual expenses to 15 to derive the cash required by your family in all these years. And, add this amount to net liabilities to get approximate sum assured.
Your Premium amount will depend upon the number of years you have acquired your life insurance policy for as well as the total sum assured. If your affordability allows you to pay significantly higher premium than the premium amount for the above calculated sum assured, you can raise your sum assured to make the lifestyle of your family even more comfortable at later years. If not, you can go for premium amount which you are comfortable in paying and decide the sum assured as per your family’s basic requirements.