What is Sum Assured
Insurance terms can be quite complicated to understand. However, it is important for us to know these terms before we purchase a policy or make any other decisions like this.
The term Sum Assured comes to play when one buys an insurance policy which has a pre-determined amount payable on the happening of the insured event. This is usually in the case of life insurance policies and other policies which have a guaranteed return, like unit linked insurance plans.
Sum Assured Meaning
The Sum Assured refers to the pre-determined amount which is paid at the end of the policy period or when the policy matures, either to the policy holder or to their nominee in case of life insured’s death. This sum is guaranteed. The premium on the insurance policy that a policy holder buys is directly dependent on the sum assured. Higher the sum assured, higher the premium.
One may often find themselves getting confused between the terms sum assured and sum insured. These terms are generally used interchangeably; however, they have very different meanings.
The sum insured is the cover that is available when a person buys a policy with no guaranteed return. These are usually general insurance policies such as health insurance, motor insurance, rental insurance etc. Under these policies, one pays a certain premium amount at regular intervals (usually annually), and they are covered up to a certain amount when the incident against which the policy is bought occurs.
Sum Assured vs. Sum Insured: Key Differences
SUM INSURED-
Mr. A buys a health insurance policy with a cover/Sum Insured of Rs. 5 Lakh with a Policy Term of 10 years.
Scenario 1-
Now say an unfortunate hospitalization occurs during the policy term, where his bill comes up to Rs. 6 lakh. Here, since Rs. 5 lakh is the sum insured which will be paid to him in lieu of the policy claim.
Scenario 2-
Now, for the same policy above, if the insured person gets a bill of 3 lakh, they will only be able to avail that amount, and not the entire Rs. 5 Lakh. Basically, this works like a form of reimbursements- the maximum claim amount being the Sum Insured.
Scenario 3-
In case one is not hospitalised during the policy period, they will not receive any amount.
Also Read: Different Types of Life Insurance Policies
SUM ASSURED-
Mr. A buys a Life Insurance Policy with a cover/ Sum Assured of Rs. 10 lakhs for a Policy Term of 10 years. In this he has also opted for an additional Critical Illness rider (Health insurance cover from insurer) with sum assured Rs. 5 lakh. This means his total Sum assured is 10L for Life Insurance + 5L For Health)
Scenario 1-
When the policy matures at the end of 10 years, Mr. A will receive the assured amount of Rs. 5 lakh.
Scenario 2-
In case of the unfortunate and untimely death of Mr. A before the end of the policy term of 10 years, their nominees will receive the assured amount of Rs. 5 lakhs.
Scenario 3-
If Mr. A is diagnosed with an illness during the policy term, he will receive the entire amount of Rs. 5 lakh, irrespective of what is his amount is. This is an ASSURED sum that will be paid to him if he falls ill/needs hospitalization. And while he will get this, his Life Insurance cover of Rs. 10Lakh will still continue without impact.
When selecting a sum assured in insurance, it's important to evaluate several key factors to ensure comprehensive coverage for your family. Here are the primary considerations:
- Financial requirements of your family
- The sum assured life insurance should cover your family's living expenses, children's education, and other significant financial needs. Consider how much your loved ones would require in case of your absence.
- Current and Future Liabilities
- Take into account any outstanding debts, such as home loans, car loans, or personal loans. A higher sum may be needed to clear these liabilities, ensuring your family isn't financially burdened.
- Income replacement
- A core function of life insurance is to replace lost income. Ensure the sum is enough to sustain your family's lifestyle without compromising on essential needs or goals.
- Inflation impact
- Inflation erodes purchasing power over time. Therefore, the sum assured in insurance should factor in future cost increases, ensuring the payout remains effective even years later.
- Policy types and benefits
- Different insurance policies, like term plans or endowment policies, offer varying sums assured. Understand your policy's features, including bonuses or add-ons, to select a sum that aligns with your goals.
By evaluating these factors, you can ensure that the sum assured you choose offers optimal protection for your family's future.
Now that’s a double benefit, isn’t it? That’s what SUM ASSURED
The sum assured is usually dependent on multiple factors. One must carefully consider this before buying a policy. Age is a crucial determinant of the sum assured. It helps determine the coverage that one may require. Those who are young can begin with a lower sum assured and gradually increase it over the years. The next biggest factor is the income or earning capability of a person which determines the premium paying capacity. One’s income is an indicator of the standard of living that one has. Lifestyle and habits also affect the sum assured. Smoking, alcohol consumption, and unhealthy lifestyle options will result in one’s premium being higher as one will then require a greater sum assured.
Understanding what the sum assured is will help you choose the right plan. It helps get a suitable coverage and does not lead to overspending on premiums.
Also Read: One stop guide to Life Insurance
Sum assured is the amount guaranteed by the insurer to be paid to the beneficiary in case of death or policy maturity. For example, if you opt for a sum assured of Rs 20 lakhs, your family will receive this amount in case of your untimely demise.
Yes, the sum assured is guaranteed, meaning the insurer will pay the agreed-upon amount to the nominee in case of death or policy maturity, subject to terms and conditions.
The primary benefit of sum assured is providing financial security to your loved ones by ensuring they receive a fixed amount, like Rs 10 lakhs, in case of your untimely death or policy maturity.
The sum assured should be based on your family’s financial needs, outstanding debts, income replacement, and future goals. A general rule is 10-15 times your annual income.
Sum assured refers to the fixed amount paid by the insurer in life insurance, while sum insured pertains to general insurance (e.g., health or vehicle), indicating the maximum coverage amount for a claim.
Adding riders can enhance your coverage and provide additional benefits like
Yes, in some policies, you can modify the sum insured amount by contacting the insurer, though terms and conditions may apply, such as paying higher premiums.
AN Sep 70/22
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