The amount of Life Insurance coverage you need will depend on many factors ...
When the premium for a life insurance policy is not paid on time and it lapses, then the Policy acquires a Paid Up Value and it is considered a Paid Up Policy, such that the Sum Assured of the policy is reduced in proportionate with the number of premiums paid and total number of premiums of the policy. A Paid Up Policy acquires a Paid Up Value. If a policy needs to be surrendered or a loan needs to be availed, it is taken as a percentage of the Paid Up Value.
Let us understand this with an example:
If the Policy Term is 25 years and the Sum Assured is Rs 20, 00,000 and the person has paid premiums for 5 years, then the Paid Up Value of this policy will be reduced to the Sum Assured of Rs 4,00,000.
Paid-Up Value = [ (No. of paid premium X Sum Assured) / Total No. of premium ]
Hence, Paid Up Value = [ (5X2000000)/25) = Rs 4,00,000
This insurance cover will continue till the end of the term or death of the policyholder, whichever is earlier. The insurance cover will be Paid-Upto the reduced sum assured or the Paid-Up Value. The Paid-Up policy is also eligible to receive the proportionate bonus.
Paid-Up Policies can further be surrendered if the policyholder wishes to take the money out. In that case, a certain surrender charge is deducted, depending on the tenure left for the policy to mature and the remaining amount can be paid out to the policyholder as Surrender Value. Even loans can be availed on Paid-Up Policies. If the loan amount is not paid back, then the Paid-Up Policy can be surrendered by the insurer to recover the loan amount.