Minimum sum assured rule
Also written IRDAI minimum sum assured · Minimum sum assured multiple · Ten times annual premium rule
The IRDAI requirement that a life policy provide a minimum sum assured of 10 times the annual premium below age 45, 7 times above 45, and 5 times where the term is under 10 years.
In plain language
A life policy can be sold with a small cover and a large premium. That turns an insurance product into a savings product wearing an insurance label.
IRDAI blocks the worst of it with a floor. The sum assured must be at least a set multiple of the annual premium.
The multiple depends on two things. How long the policy runs, and how old the buyer is.
For a policy with a term of more than 10 years, the floor is 10 times the annual premium for a buyer below 45. For a buyer above 45, it is 7 times.
If the term is less than 10 years, the floor is 5 times the annual premium for all buyers.
So the rule sets the least cover a given premium must buy. It does not cap the cover.
How it works
The three tiers, as the workbook states them.
| Policy term | Age of the individual | Minimum sum assured |
|---|---|---|
| More than 10 years | Below 45 years | 10 times the annual premium |
| More than 10 years | Above 45 years | 7 times the annual premium |
| Less than 10 years | All individuals | 5 times the annual premium |
What the rule bites on. It is a product-design requirement on the insurer, applied at the point the policy is issued. It fixes the relationship between the annual premium and the cover, so a buyer paying a large premium cannot be issued a token amount of life cover.
Where the same figure turns up again, in a different rule. The workbook also uses the phrase ten times the annual premium in its tax chapters, as the condition for exemption of maturity proceeds. Chapter 12 states that maturity proceeds of an endowment policy taken after 1 April 2012 are exempt under section 10(10D) if the premium payable for any year does not exceed 10% of the sum assured. Chapter 19's mutual fund versus ULIP table states the same test the other way round: withdrawals and maturity are tax free if the sum assured is at least 10 times the annual premium.
These are two separate rules that share a number. One is IRDAI's minimum on how a policy may be designed. The other is a condition in the Income-tax Act for a payout to be exempt. The workbook states both, in different chapters, and a candidate needs to know which one a question is about.
Where the sum assured may change. The contract may specify situations in which the sum assured changes. The workbook's example is a reducing term policy taken to cover outstanding mortgage payments, where the sum assured falls as the loan is paid down.
One gap in the wording. The workbook writes below 45 and above 45, and more than 10 years and less than 10 years. It does not say what happens at exactly age 45 or at a term of exactly 10 years.
A worked example
Mr Rathore is 38 and wants to pay Rs 3,00,000 a year into a life policy with a term of 20 years.
Because the term is more than 10 years and he is below 45, the minimum sum assured is 10 times the annual premium:
| Item | Amount |
|---|---|
| Annual premium | Rs 3,00,000 |
| Multiple (term over 10 years, age below 45) | 10 times |
| Minimum sum assured the policy must carry | Rs 30,00,000 |
An insurer cannot issue him this policy with a sum assured of, say, Rs 12,00,000.
Change his age to 52, keeping everything else the same. The multiple drops to 7 times, so the floor becomes Rs 21,00,000. The same Rs 3,00,000 premium now has to buy Rs 9,00,000 less cover than it did at 38, because an older life costs more to insure.
Change the term instead, to 8 years, and leave him at 38. The term is now less than 10 years, so the floor is 5 times for all individuals: Rs 15,00,000.
| Case | Term | Age | Multiple | Minimum sum assured |
|---|---|---|---|---|
| A | 20 years | 38 | 10 times | Rs 30,00,000 |
| B | 20 years | 52 | 7 times | Rs 21,00,000 |
| C | 8 years | 38 | 5 times | Rs 15,00,000 |
Same premium, three different floors.
Why NISM asks about it
Chapter 2 (Features of Life Insurance Products), section 2.1, states the rule inside the definition of sum assured, one of the elements of a life insurance contract, and follows it with the reducing-term example. Expect a direct recall question on the three multiples, or a small computation of the sort above. Chapter 12, section 12.8 and Chapter 19, section 19.2.3 bring the ten-times figure back in its tax sense, so a question may be testing the section 10(10D) exemption condition rather than the IRDAI product rule.
Common exam traps
- Three multiples, not one. 10 times below 45, 7 times above 45, both for terms over 10 years; 5 times for all individuals where the term is under 10 years.
- The trigger for the 5 times tier is the TERM, not the age. A 30-year-old on a 7-year policy gets the 5 times floor.
- It is a minimum, not a maximum. Nothing stops a buyer taking far more cover for the same premium.
- The multiple applies to the ANNUAL premium, not to the total premiums paid over the term.
- Two rules share the number 10. IRDAI's minimum sum assured is a product-design rule. Section 10(10D)'s exemption test asks whether the premium for any year exceeds 10% of the sum assured, which is the same arithmetic but a tax condition with its own separate conditions, including the Rs 5,00,000 aggregate premium limit for policies taken on or after 1 April 2023. Do not answer a tax question with the IRDAI rule.
- Exactly 45, and exactly 10 years, are not covered by the workbook's wording. It says below and above, more than and less than. If a question puts a candidate on the boundary, the workbook gives no answer for it.
- Sum assured is not always fixed. A reducing term policy covering a home loan has a sum assured that falls with the outstanding balance.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Death coverThe life insurance benefit paid only if the insured dies within the policy's specified period — nothing is paid if the insured survives it, the defining feature of a pure term plan.
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- High value ULIPA ULIP issued on or after 1 February 2021 whose aggregate annual premium exceeds Rs 2,50,000, loses the Section 10(10D) exemption and is instead taxed as a capital asset, at 12.5% long-term or 20% short-term.
- Level premiumA term insurance premium that stays the same every year for the whole of the policy term, as distinct from one that increases as the insured gets older.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Sum assuredThe amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
- Telescopic premiumsLife insurance premiums that do not rise in the same proportion as the sum assured - a larger cover costs a lower rate of premium per thousand of sum assured, up to a limit set by each insurer.
- ULIP Type IIThe ULIP structure in which death before maturity pays the sum assured plus the fund value, while maturity pays the fund value alone — the most generous of the death-benefit wordings the workbook lists.