Sum assured is a critical component of life insurance policies. Learn what it is and how to choose the right amount.
Home / Life Insurance / Sum Assured
Insurance is like a superhero for your finances! It's there to protect you and your hard-earned assets if anything unexpected happens. When you buy an insurance policy, you pay a premium to an insurance company. In return, they'll cover you financially if something goes wrong. It's really important to figure out the right sum assured for your needs. That way, you can make sure your loved ones are financially protected and you have peace of mind. Determining the right sum assured is easy once you know the factors that can impact it. In the next sections, we'll walk you through how sum assured works in a life insurance policy.
Sum assured is the upper limit of the compensation that the policyholder can receive from the insurance company. It can vary depending on the type of insurance policy, the level of coverage, and the insured party's specific requirements. The sum assured varies from policy to policy and can be adjusted based on the needs and requirements of the policyholder.
Although sum insured and sum assured are often used interchangeably, they have distinct meanings. Sum assured is a term frequently used in Life Insurance policies, referring to the guaranteed amount that the insurer commits to pay to the nominee in case of the policyholder's death. The sum assured is fixed at the time of purchasing the policy and remains unchanged throughout the policy term. On the other hand, Sum insured is a term used in non-life policies. It is the maximum amount that the insurer will pay to the policyholder in case of a claim. The sum insured can be adjusted at the time of policy renewal or by endorsement during the policy term. Here are more differences between the two terms.
The amount of money promised by the insurer to the policyholder or nominee in the event of a covered loss.
The maximum amount of money that the insurance company will pay out to cover claims during the policy period.
Life Insurance Policies
Health Insurance Policies
Basis for calculation
Based on the policyholder's income, age, and other factors.
Based on the incurred losses and other factors.
The policyholder or nominee upon the policyholder's death or as a maturity benefit depending upon the policy type.
The service provider or policyholder (in case of reimbursement) in case of loss.
To provide financial security to the policyholder's dependents after the policyholder's death.
To cover the policyholder's expenses and provide financial security in the event of an emergency.
Selecting the right sum assured in life insurance is crucial to ensure adequate coverage against financial liabilities. Inadequate coverage can result in financial strain on the family in case of the policyholder’s death. On the other hand, over-insurance can lead to a higher premium amount, which can be a financial burden for the policyholder in the long run. Therefore, it is important to select the right sum assured based on various factors such as age, current health state, and lifestyle.
Here are some things to consider while selecting the sum insured of your life insurance plan
There are a variety of life insurance plans to choose from in the market, such as Term, ULIPs, Endowment policy, Critical Illness Life Insurance, etc. The type of plan you select will determine the sum assured for your policy.
When selecting a plan, it is essential to consider the number of members covered. The sum assured should be based on the number of people the plan covers to provide sufficient coverage. A lower sum assured may not be sufficient and can lead to increased expenses.
The insured's health history and age also play a role in determining the sum assured. Individuals with recurring health conditions or senior citizens may require more medical attention, requiring a higher sum assured. Annual income and the number of dependents should also be considered, as the higher the dependents, the greater the sum assured required.
In most cases, the sum assured cannot be changed after the policy is issued. However, some policies may allow you to increase or decrease it by submitting a request to the insurer.
If the sum assured is insufficient, the policyholder's family may not receive adequate financial support after death. Therefore, choosing the appropriate sum assured for your family's needs and financial goals is important.
Yes, some life insurance policies allow the Sum Assured to be paid out in instalments instead of a lump sum. This can provide a regular source of income for your family in case of your death.
No, the sum assured is generally not taxable. However, any interest earned on the sum assured may be subject to tax.
Sum assured is calculated based on the policyholder's age, health, lifestyle, and other factors that could affect their mortality risk.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.