How to Calculate the Sum Assured

"Sum assured" is a term most often used in the insurance industry.

The "sum assured" refers to the amount of money that an individual or entity is guaranteed to receive based on their contract for policy. For instance, if someone has a life insurance policy that has a sum assured value of $500,000, it means that the minimum he will receive is $500,000 when the payment is executed. People add up their assets and liabilities to determine the "sum assured" amount they need in order to cover expenses.

Instructions

1. Determine the number of monetary liabilities in your financial picture. This will include items such as the mortgage payment, car payment, tax payments, credit card bills, student loans, personal loans and any other debts which you or your family have accrued or are responsible for at the moment.

2. Calculate the financial worth of the assets the family would be willing to sell at the time of death. For instance, if upon the death of the insured, the remaining spouse was willing to sell the home to cure the mortgage, then the insurance would not need to cover that balance due. Other common assets include boats, automobiles, stocks, pension payouts, retirement account liquidations and other valuable collectibles such as high-end jewelry.

3. Subtract the liabilities from the amount of assets that the family would be willing to sell. For instance, say a family had $1 million in liabilities between the mortgage, car payments and student loan payments for their children. However, the value of assets in stocks, bonds, retirement accounts for the insured was $750,000, the calculation would be:

   $1,000,000 - $750,000 = $250,000

4. Determine how much extra coverage you would like in order to obtain the proper "sum assured." In the above example it shows that the policy should be at least $250,000 in order to make up the difference between assets and liabilities. However, many people wish to have additional monies to cover the gap period until the assets can be sold and additionally as a buffer in case they do not receive the price they feel the items were valued at when they are sold. Based on the desire of the client, they will ask for additional coverage, which will raise the sum assured. Using the example, the insured party may wish to add $100,000 of coverage as a buffer.

Tips & Warnings

• Many financial planners suggest that you obtain an insurance policy that has a sum assured of 5 to 10 times your family salary.

References

• Finance Glossary: Sum Assured
• Itrust: Sum Assured, Do You Understand How Much You Need?