How to Calculate Life Insurance Premium and Sum Assured

Two of the most important things to understand about any insurance policy are the premium and the sum assured (Uang Pertanggungan, or UP in Indonesia), which is the amount paid out under the policy. Choosing the right premium helps prospective policyholders manage their finances properly. It is just as important to know how much the policyholder will actually receive as the sum assured. Some people complain that the payout is smaller than they expected, but the sum assured follows a formula. To avoid miscalculating, here is how to calculate life insurance premiums and the sum assured correctly:

Read also: The Big Loss of Not Having Life Insurance

Calculating the Premium

Calculating a life insurance premium is fairly simple: multiply the applicable premium rate by the number of people covered. Individual life insurance has a lower premium rate than group life insurance, because under a group policy the rate is multiplied by the number of people covered in a single policy.

Calculating the Sum Assured

Three methods can be used to calculate the sum assured. Here are the formulas for working out the right amount:

Human Life Value

One method for calculating the sum assured is Human Life Value. It is used to work out the sum assured a life insurance policy should provide. The calculation takes into account factors such as annual expenses, time to retirement and the estimated funds needed.

For example, A is 30 years old and earns about Rp 120 million per year. The family spends Rp 5 million per month, which totals Rp 60 million per year. A will retire in 25 years. The formula multiplies 25 by the annual income of Rp 120 million, which gives Rp 3 billion. The sum assured needed is half of that, or Rp 1.5 billion.

Income Based Value

The first method does not account for possible increases in costs or needs. This method factors in the likely rise in inflation each year. For example, B is 40 years old, earns Rp 5 million per month and faces inflation of about 7% per year. B will retire at 60, which is 20 years away, so B could receive a sum assured of about Rp 1 billion.

Financial Needs Based Value

This method calculates more specific financial needs, such as a child's education or healthcare costs. For example, C is 45 years old and earns Rp 8 million per month. In 7 years, C's child will start college at a cost of Rp 150 million, with inflation estimated at 4%. The sum assured C needs is therefore Rp 197 million.

Read also: Types of Life Insurance You Should Know

The sum assured and the premium are two sides of the same coin and cannot be separated. That is why it pays to know not only how to calculate a life insurance premium, but also how to calculate the sum assured you will receive.