Life insurance is a vast world with multiple branches and many jargons that are hard to understand. And most of the jargon comes with an explanation along with numbers. Well, this blog is all for those souls who find it hard to understand and differentiate between two highly ambiguous terms.
- Sum Assured
- Sum Insured
Buying life insurance has become mandatory; therefore, it has become vital to understand the term rather than relying on another person. And, sum assured and sum insured are two of the essential terms in the insurance world. Even though these terminologies sound the same, they have very different meanings.
We are here to dissolve and pull you out of the complex sphere of insurance. This blog, we will answer the following queries,
- Definition of sum assured in life insurance
- What is the sum insured in general insurance or non life insurance?
- How to calculate the sum assured?
- Factors to consider in sum assured
- How to calculate the sum insured?
- What is the difference between sum assured and sum insured?
Are you ready to get your dilemmas solved? If yes, then continue to read this knowledge pool.
What is Sum Assured?
“Terminal Illness Benefit: In case you are diagnosed with a Terminal Illness during the Policy Term, up to an age of 80 years, provided the policy is in force, 50% of the applicable Sum Assured on Death, subject to a maximum of Rs. 2 crores, will be paid immediately as a lump sum and future due to premiums shall be waived off.” – This is a clause from the ABSLI DigiShield Plan (term insurance).
Are you aware of what sum assured here means? If yes, then it is good for you; and if not, we have your back.
Sum assured refers to the predetermined money that the insurance company/insurer promises to pay either to the life insured once they reach the maturity benefit (or any other benefit that guarantees sum assured) or the nominee/beneficiary if the life insured meets with an untimely death while the insurance plan is active.
The sum assured is established while the life insured is set to purchase the plan. And the amount stays constant throughout the policy term.
The policyholder is expected to pay premiums to the insurance company determined against assured value. And, once the insurance company settles the sum assured to the life insured or beneficiary, the plan is called off.
Choosing the right sum assured is crucial because it decides the possible amount that you (as the life insured) or your family shall receive. It becomes a financial blanket for your loved ones. Moreover, one can supplement their guaranteed insurance policy with add-on riders (additional benefits at an affordable rate).
How to calculate the Sum Assured?
We know it becomes difficult to answer your yearly cost of running a family and spending on other activities. But, while purchasing life insurance, you must be clear with the assured sum because that value proves to be an asset when you need it for your family.
We know it becomes difficult to answer your yearly cost of running a family and spending on other activities. But, while purchasing life insurance, you must be clear with the sum assured because that value proves to be an asset at the time of need for your family.
It isn’t rocket science; all you require are –
- Age
- Have a fair idea (number) about your current and future spending
- Annual Pay
- Understand the life cover that you are about to purchase
Note: The human life value calculator is an efficient online mechanism. It considers the future inflation and then provides you with an estimate of the ideal sum assured that you should need in your insurance.
Factors to Consider in Sum Assured
Before deciding upon the sum assured, one must consider the following points, and they are as follows:
Age: This element matters because it assists the user in calculating how much coverage you need. For instance, if you are in your mid or late 30’s, you would prefer to buy insurance with a more considerable sum assured as you are arriving at the age where health ailments begin. It is why financial advisors advise that you should opt for insurance at a young age because the premiums will be low.
Way of Living: None would want to compromise with their lifestyle because that is where their comfort level lies. For instance, if you are the sole bread-winner of the family and meet with an untimely demise, your family would suffer and compromise with their lifestyle. Therefore, while calculating your sum, you should keep all the relevant details in mind for a better tomorrow.
Medical History: If you have a medical history of critical ailments such as cancer. Then having critical illness insurance with an extensive sum assured is necessary because once you are diagnosed with cancer, it will exhaust your financial reserve faster.
Income: While buying insurance, you should always consider your annual income because you need to pay the premiums to the insurance company. Therefore, you should be aware of the sum assured you are liable to pay the premiums because a lapse in premium payment could pose a buffer at a later stage of the insurance proceeds.
What is Sum Insured?
Though the terms are synonymous, they are different functionalities from the same body. Here, the sum insured symbolizes the amount paid for any unforeseen incident, such as a medical emergency or other crisis.
Sum insured can be considered more of a monetary benefit than maturity benefit in sum assured. Sum insured is paid to the policyholder under the indemnity (reimbursement paid by the insurance company for any loss, accident, or injury) concept.
One is life insurance, and the other is a non-life insurance plan that includes subjects such as – car insurance, health insurance, etc. They give protection in the form of the sum insured.
For instance you have a health insurance where the sum insured is – 2 lakhs. Now due to a medical emergency such as an accident, the medical cost revolving around it costs 3.5 lakhs. Your insurance company shall reimburse 2 lakhs out of the 3.5 and the rest 1.5 lakh has to be paid from your pocket. It is why having the right sum insured is important in general and non-life insurance policies.
How to Calculate Sum Insured?
It’s hard to anticipate any negative happenings in life, but we buy insurance to have our back at the time of need. And while ensuring your asset, you should keep the following things in mind,
To begin with, examine the asset’s value to ensure that the damage is appropriately reimbursed.
When life is at stake and hospital bills are expensive, you should always choose a more significant sum to manage your medical bills if any emergency arises.
Inflation doesn’t come with an invitation, which is why one must always keep inflation in mind. Therefore, one shall always determine their sum insured considering the long-term impact of inflation.
What is the Difference Between Sum Assured and Sum Insured?
After understanding both the topics and their features, it is time to understand the difference between both, and they are as follows:
| Sum Assured | Sum Insured |
| Sum Assured is generally estimated by taking into account by calculating the economic value in your life. It could be influenced by factors such as – income, lifestyle, and many more. | Whereas under sum insured the amount for assets, generally depreciates. |
| The death or maturity benefit received by the life insured or nominee is termed as the sum assured. | However, there are no maturity or death benefits associated with the sum insured. |
| Sum assured is a predetermined sum paid by the insurance company to the life insured or beneficiary (if the policyholder meets with death when the term plan is active). | On the other hand, the sum insured is the reimbursement or compensation if it falls under the indemnity concept against damage/loss. |
Conclusion
Learning and understanding the right terms in the insurance world has become necessary because once you reach your twenties, it is one of the vital assets that one must own to safeguard their and family’s life. And sum assured and sum insured fall under one common yet crucial category.
Therefore, if the basics are straightforward, the journey becomes more logical.