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.
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.
Let us understand the difference between the two with some examples
Mr. A buys a health insurance policy with a cover/Sum Insured of Rs. 5 Lakh with a Policy Term of 10 years.
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.
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.
In case one is not hospitalised during the policy period, they will not receive any amount.
This is Sum Insured.
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)
When the policy matures at the end of 10 years, Mr. A will receive the assured amount of Rs. 5 lakh.
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.
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.
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.
AN Sep 69/22