How to Calculate Life Insurance Sum Insured

Life insurance is an insurance service that is used to protect against the impact of financial losses or loss of income of a person or family, due to the death of a family member (the insured) who was previously the backbone of the family.

Regarding the Covid-19 pandemic, according to previous research, it was noted that the recovery of gross premium income for life insurance in June 2020 had exceeded the value of income in June 2019.

So that it can be seen that the awareness of the Indonesian people is increasing to have life insurance and protect their families from financial risks by preparing insurance money for their families if they have to be left behind or the insured can no longer be productive.

For that, let's look at the important things that need to be known in calculating the right life insurance.

What is Sum Insured

In life insurance there is one thing that really needs to be considered, namely UP or Sum Insured. UP is the amount of money that must be paid by the insurance company if the policyholder makes a claim for the risks covered by the insurance program.

The sum insured for each insurance varies, usually the larger the premium paid, the greater the sum insured that can be received.

Generally, insurance companies in Indonesia provide sum insured between tens of millions to billions of rupiah.

The size of the sum insured is influenced by the size of the premium, age, and other factors related to health risks. Of course, the longer the tenor you choose, the greater the sum insured you can have.

However, many policyholders are stuck with this coverage figure. Because they calculate the insurance value for the current life.

Whereas in the next 20 or 30 years the value, 200 or 500 million rupiah may feel very small because the need increases, but the income is zero.

Calculation of Sum Insured
Therefore, it is very important for you to know how much sum insured will be needed later by dependents, in this case your family.

There are two methods that can be used to calculate the amount of the sum insured.

1. Human Live Value (HLV)
As the name implies, this method sees you as a human being who has "economic value", because you can work and generate a certain amount of value (money).

HLV can be calculated by the following formula:

UP = EX(((1+R)^N)-1)/R

E = Monthly Expenditures / Income X 12
R = Annual Inflation
N = Time of Insurance (Years)
UP = Sum Insured

2. Income Based Value (IBV)
This method is done by calculating the amount of the sum insured by taking into account the amount of interest or return if the sum assured to be received is stored in investment products. IBV can be calculated by the following formula:

IBV = Income/Expenditure: Deposit interest rate per month

Example calculation:

Mrs. Nerissa has an income of Rp 10 million rupiah per month, assuming the deposit interest rate is 6% per year or 0.5% per month and annual inflation is 3%. How much is Mrs. Nerissa's UP if calculated using the Human Live Value (HLV) and Income Based Value (IBV) methods.

Using the Human Live Value method,
UP = EX (((1+R)^ N)-1)/R
UP= IDR 10 million X 12 months (((1+ 3%)^20)-1) /3%
UP = IDR 3.2 billion

The number 20 years listed in this calculation formula is the estimated time related to the adequacy of UP to meet the daily needs of Mrs. Nerissa's family after her death. It should be noted that the HLV calculation does not include the assumed value of deposits or the growth of investment funds.

With the Income Based Value method,

ILV= IDR 10 million : 0.5% = IDR 2 billion