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How much Sum Insured (SI) do you need for NRI Life Insurance

TeamAckoNov 29, 2024

Life Insurance is an important tool you can use to provide financial protection to your loved ones. As an NRI, it is essential to carefully consider the Sum Assured when purchasing a Life Insurance Policy. The amount of Sum Assured you choose will determine the financial protection your beneficiaries will receive in the event of your passing. This article will explore determining the appropriate Sum Assured or NRI life insurance policies.

Life

Contents

Sum Assured in Life Insurance
What are the Different NRI Life Insurance Policies?
How Do You Choose the Sum Assured for NRI Life Insurance?
5 Popular Methods for Calculating the Required Sum Assured for NRI Life Insurance
4 Key Benefits of NRI Life Insurance Policies
How Can NRIs Pay the Premium for their Life Insurance Policies?
Does the Country of Residence Affect the NRI Insurance Premium Amount?
Rules Regarding Maturity and Death Proceeds for NRI Life Insurance Plans
Conclusion
Frequently Asked Questions (FAQs)

Sum Assured in Life Insurance

In life insurance, the Sum Assured refers to the maximum amount that the insurance policy will pay out in the event of a claim, which could be in the event of the insured's death or other covered events (like permanent disability). The Sum Assured is a critical component of a life insurance policy as it defines the coverage the policyholder has in the event of death or other specified risks, depending on the type of life insurance.

For example, if you take a life insurance policy with a Sum Assured of ₹10,00,000 (10 lakh), this is the amount your beneficiaries will receive upon your death after fulfilling all the necessary policy conditions, provided there is no fraud or non-disclosure involved.

Types of Life Insurance and Sum Assured

Term Insurance:

The Sum Assured in term insurance is the amount your beneficiaries will receive if you pass away during the policy term. It’s generally pure life cover with no savings component.

Endowment Policies:

The Sum sured in an endowment policy is the amount paid out either on your death or when the policy matures, whichever happens first. Some policies also accumulate bonuses, increasing the final payout.

Whole Life Policies:

Here, the Sum Assured is the guaranteed amount payable upon death, no matter when it occurs, as the policy remains active for life.

Importance of Choosing the Right Life Insurance Sum Assured

Choosing an appropriate Sum Assured is crucial for ensuring adequate financial protection for your loved ones.

Underinsurance: A Sum Assured that is too low may leave you underinsured, meaning your dependents may not receive enough to cover their needs, leaving them to bear part of the financial burden.
Overinsurance: A Sum Assured that is too high may result in unnecessarily high premiums, making the policy less affordable.

The Sum Assured should reflect the financial support your dependents would need if something were to happen to you. A common guideline is to choose a Sum Assured that is 10-15 times your annual income, ensuring that your family has enough coverage to maintain their lifestyle, pay off debts, and cover any future expenses, such as children’s education or retirement needs.

What are the Different NRI Life Insurance Policies?

NRI Life Insurance Policies come in various forms, such as Term Life Insurance, Whole Life Insurance and Unit-Linked Insurance Plans (ULIPs). Each policy provides different levels of coverage and protection for the insured individual and their family.

Term Life Insurance

One type of NRI Life Insurance policy is Term Life Insurance. This type of policy provides coverage for a certain period, usually 10 to 30 years.

Whole Life Insurance

Whole Life Insurance is a type of NRI Life Insurance policy that provides coverage for the insured's entire life.

Unit-Linked Insurance Plans (ULIPs)

Unit-Linked Insurance Plans (ULIPs) offer insurance coverage and investment opportunities. With ULIPs, a portion of your premium payments are invested in various funds, giving you the potential for growth.

Factors that Influence Life Insurance Sum Assured

Several factors impact the amount of Sum Assured you choose when buying life insurance:

Age of the Policyholder
Income Level
No. of Dependents
Existing Liabilities/Debts
Lifestyle and Health Factors
Financial Goals
Policy Type
Inflation
Insurance Company Policies
Premium Budget

How Do You Choose the Sum Assured for NRI Life Insurance?

When choosing a Sum Assured for an NRI Life Insurance Policy, consider the following things:

Financial Goals

Your monetary objectives help you decide the kind of coverage you desire. With the various life insurance policy options available to NRIs, you can select the appropriate plan based on your financial objectives. For example, you could opt for ULIPs for wealth accumulation goals.

The size of your family

If you have a larger family with dependents, opt for a higher Sum Assured so that your family can maintain their current lifestyle and meet expenses in case of your death. If you have a smaller family with no major financial obligations, you may select a lower Sum Assured that covers only essential expenses. Before deciding on a sum assured, assessing your family's financial needs and expenses, such as medical bills, household expenses, education costs, and other liabilities, is crucial.

Debts and financial obligations

If you were to pass away, your debts would still exist, and your loved ones could be left with a significant financial burden. Therefore, it's essential to consider these obligations and make an informed decision about the appropriate Sum Assured for your NRI Life Insurance policy.

5 Popular Methods for Calculating the Required Sum Assured for NRI Life Insurance

When buying NRI Life Insurance, selecting an appropriate Sum Assured(SI) can be challenging, as it requires balancing your family's financial needs with your budget. There are several methods for calculating the required Sum Assured for NRI Life Insurance.

Human Life Value Approach

The Human Life Value approach is popular for calculating the required Sum Assured for NRI Life Insurance. This approach considers factors such as age, size of the insured's family, lifestyle, income and future expenses to determine the value of an individual's life. By using this approach, you can ensure that your loved ones are financially protected in the event of your untimely death and that they have enough money to cover their future expenses and maintain their quality of life.

Example of Human Life Value Approach:

NRI C, aged 35, is the sole breadwinner of a family of three and has a net annual income of ₹30 lakhs. Assuming NRI C works until they are 65, their Human Life Value is estimated at ₹9 crores (30 lakhs x 30 years x 10 multiplier). Therefore, the recommended Sum Assured for their Life Insurance policy would be at least ₹9 crores.

Income Replacement Approach

The Income Replacement approach is commonly used to calculate the required Sum Assured for NRI Life Insurance policies. This approach considers the policyholder's annual income and multiplies it by a factor of anywhere between 10 and 20, depending on the insurance provider and the policy terms. The resulting amount is the Sum Assured that the policy should provide upon the policyholder's death to help their family maintain the same standard of living and meet their financial needs.

Example of Income Replacement Approach:

NRI A, aged 40, has a family of four and a net annual income of ₹50 lakhs. Assuming a ratio of 10:1 of the Sum Assured to yearly income, NRI A's recommended Sum Assured could be ₹5 crores.

Needs-based Approach

The Needs-Based approach is another method used to calculate the required Sum Assured for NRI Life Insurance policies. This approach considers the policyholder's financial obligations and future needs, such as paying off any outstanding debts or mortgages, providing for children's education and covering other foreseeable expenses. Insurance providers may also factor in inflation and other variables into the calculation.

Example of a Needs-based Approach:

NRI B, aged 50, has a mortgage of ₹2 crores, children's education expenses of ₹50 lakhs, outstanding loans of ₹10 lakhs, and a retirement fund shortfall of ₹1 crore. Based on the needs-based approach, the total Sum Assured required for NRI B could be at least ₹3.6 crores.

Expense Analysis Approach

This approach calculates the total expenses that the policyholder's family may incur in the event of the policyholder's passing away, such as funeral costs, outstanding debts and future expenses. The required Sum Assured is the amount that will cover these expenses, ensuring that the policyholder's family is not financially burdened.

Standard Value Approach

The Standard value approach considers the insured's income, inflation, and expected income growth over time to arrive at the sum the insured needs. This method can vary depending on the insurance provider and policy.

4 Key Benefits of NRI Life Insurance Policies

If you need concrete reasons to invest in NRI insurance policies, here are some to convince you:

Secure Your Family's Future

Investing in NRI life insurance can provide a safety net for your loved ones in your absence. If the primary breadwinner passes away, these policies can offer a payout to cover the family's financial needs. This money can be used for rent, school fees, and other expenses.

Enjoy Maturity Benefits

NRI life insurance plans offer survival and maturity benefits to help you plan for retirement, meet financial objectives, and guard against inflation. Some policies also provide a return of premium options that refund premiums upon maturity.

Settle Outstanding Debts

Many people acquire different debts, such as mortgages or educational loans. These borrowings may burden their loved ones in the event of their untimely demise. Payouts from NRI insurance policies can shield your family from the hardship of trying to clear the remaining debts and obligations.

Capital Accumulation

NRI life insurance schemes enable policyholders to accumulate capital using the plan's cash value element. You can utilise this sum to secure your post-retirement life, combat inflation, or achieve other financial objectives.

4. Tax Advantages

NRI life insurance schemes in India provide the opportunity to enjoy tax advantages by the current regulations under sections 80C and 10(10D) of the Income Tax Act.

How Can NRIs Pay the Premium for their Life Insurance Policies?

Life insurance premiums for Non-Resident Indians (NRIs) in India can be paid using various methods:

Settlement payment in a foreign currency
NRO bank account
FCNR/ NRE bank account.

Insurance companies can issue policies in the currency of the NRI's resident country or Indian rupees. Therefore, verifying the currency in which the policy is issued is important. In case of foreign currency issuance, NRIs must pay premiums from an FCNR/NRE account in India. On the other hand, premiums in Indian currency can be paid through NRO accounts. Nonetheless, few insurance providers offer policies that accept payments in foreign currency.

Does the Country of Residence Affect the NRI Insurance Premium Amount?

Typically, the costs are equal for Indians and NRIs for identical insurance plans. However, the costs may increase if the non-resident resides in a nation with a greater likelihood of danger to life.

A nation that is susceptible to civil or military conflicts, has an unsteady administration and experiences frequent assaults can be identified as a high-risk nation. Conversely, low-risk nations are recognised for their tranquillity, stable leadership, and favourable law enforcement conditions.

A non-resident living in a high-risk nation might face elevated charges for their insurance plan.

Rules Regarding Maturity and Death Proceeds for NRI Life Insurance Plans

Indian insurance companies offer NRI policies that provide coverage for death worldwide. The policy may specify the return of premiums in either rupees or foreign currency. In case of an insured person's death, the nominee must submit the required documents outlined in the policy to file a claim.

The payout value in case of death or maturity benefits can only be sent to the home country, provided the sum matches the premium paid in foreign currency. As a result, any premiums paid in Indian rupees cannot be sent abroad.

The funds will not be eligible for transfer if the policyholder pays the total premium in Indian currency using an NRO account. Suppose the policy was acquired before becoming a non-resident Indian. In that case, the amount transferable will be equivalent to the foreign currency payment from the total premium paid by the policyholder.

However, the specifics can vary depending on the insurance company and the terms mentioned in the policy contract.

Conclusion

You should check the protection advantages of the plan before choosing NRI life insurance policies. In addition to covering early death, explore the extra features of the policy, such as rewards, guaranteed additions, additional riders, income options, and more. Select a policy that provides appropriate coverage benefits to ensure you have a comprehensive range of security.

Frequently Asked Questions (FAQs)

Here are the answers to the most asked common questions regarding how much sum insured (SI) do you need for NRI Life Insurance

Can an NRI purchase Life Insurance from any insurance provider, or are there specific providers who cater to NRIs?

Yes, Non-Resident Indians (NRIs) can purchase Life Insurance policies from any insurance provider in India that offers coverage to NRIs. However, specific insurance providers may cater to NRIs and offer more tailored policies or features, such as online applications or premium payments in foreign currency.

2. Are premiums for NRI Life Insurance policies higher compared to policies for residents of India?

The premiums for NRI Life Insurance policies typically match those of residents. If an NRI lives in a country with higher risks, such as natural disasters or political instability, the premiums may increase to reflect the level of risk. When determining the Sum Assuredfor your NRI Life Insurance policy, it is essential to consider these factors.

3. Are there any additional documentation requirements for NRIs when applying for Life Insurance policies?

The documentation requirements for NRIs when applying for Life Insurance policies are like those for Indian citizens. However, insurance providers may require additional documents such as proof of NRI status, proof of residence and employment abroad, and copies of relevant visa and passport pages.