Life Insurance Policy – Investments or Life Cover??
Sum Insured:
Sum insured is the most important thing that all individuals need to take care of because this is the amount which would be given to the heirs in case of the death of the insured person. It has been universally accepted that the sum insured should be at least 10 to 15 times your annual expenses and 8 to 10 times your annual expenses. There may be two options for the insured person to buy from:
1. Policy > 10 years :
The minimum sum insured for the person having age of 45 years of age or less should have 10 times the annual premium and the persons having age of 45 years or more should have at least 7 times the premium amount as sum insured. But the government of India has mandated some fixed amount which needs to be provided in case of death. This amount is that any person who dies under the policy than heirs should get at least 105% of the premiums paid so far (Total of premiums paid for years).
2. Policy < 10 Years
If the policy is chosen for less than 10 years than the sum insured should be at least 5 times the annual premium irrespective of the age factor. The government has mandated the same provisions as discussed above for the policy for less than 10 years (105% of the premiums paid)
3. Tax benefits:
Under Section 10(10D) of the Income Tax Act, 1961, the deduction of the premiums paid would be restricted to 10% of the sum insured. For example – If Mr. X has a policy with sum insured of Rs. 2, 00,000. He pays a premium of Rs. 30,000. Than Mr. X would get benefit for tax under this section of Rs. 20,000 (2, 00,000 * 10%) only and not of Rs. 30,000. So it is advisable to take such policy where sum insured is at least 10 times the premium amount.
4. What is Sum Insured and Guaranteed amount??
The meaning of the term sum insured and guaranteed amount will be cleared with the help of one example. If there is a policy for 10 years with life coverage of 10 lakhs and the maturity on the 10th year would be 2 lakhs, than the 10 lakhs shall be referred as sum insured and 2 lakhs as guaranteed return. The sum insured is the fixed amount which the insurance company needs to provide to the insured person during the death of the person. The guaranteed amount is such an amount which insurance company needs to provide as per there terms and conditions which may change from time to time. Now a days insurance companies are providing both the benefits simultaneously and so the insured person is not bored about choosing one of them.
