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Meaning of Sum Assured

Sum Assured is a fixed amount that is paid to the nominee of the plan in the unfortunate event of the policyholder’s demise. The insurance company pays this money as per the sum chosen by you at the time of purchasing the policy.

Calculation of Sum Assured in Life Insurance

There are many different ways to calculate the sum assured for your life insurance policy. One of the most popular methods is Human Life Value (HLV). This method calculates the sum assured based on your current and future expenses, present and future earnings, and age.

It helps you calculate your capitalized value based on current inflation. You can now find Human life Value calculators online to know your HLV and select the right sum assured.

Consider Some Factors while selecting Sum assured

  • Add Up One Time Expenses- You must compute the family’s one-time expenses. These expenses can be outstanding debts, mortages, personal loans, home loans, education loans credit card payments that can be paid in lump sum.
  • Additional of all Assets- Next step is to calculate that total value if you assets. Remember you assets that your family is willing to offset with lump sum liability amount. These can be stocks, mutual funds, fixed diposits, provident funds, automobile. Also property like house, land, gold/silver bars, high-valued jewelry, etc.
  • Deduct Liabilities from Assets- Deduct the liabilities from the assets and you will get the net assets available for your family require to face financial crunch if any to pay for funeral charges, accumulated rent charges, etc.
  • Deduct Assets from Liabilities- If the liabilities as more than the assets available then you must consider that much amount of difference as the minimum sum assured so that there are no financial obligations on your family to tackle after you.
  • Calculate Annual Family Expenses- This is Very Crucial. To make sure that all the financial needs of you family are met after you, it is important to calculate the annual expenses of your family while calculating sum assured. This includes grocery bills, electricity bills, school and college fees other utility bills that need to be paid monthly and multiply all by 12 to get the net annual expense.
  • Decide Number of Years You Need To Provide Protection For- While deciding sum assured for a life insurance policy, you must consider the number of years for which you aim to provide your family with protection. Multiply your family’s annual expenses by that number and then add that to the net liabilities to get the approximate sum assured.

If you feel that the decided sum assured won’t be sufficient then you can raise the sum assured. Though for that you must be ready pay the higher premium.