When it comes to insurance, understanding the jargon can sometimes feel like deciphering a secret code. One term you will encounter in your insurance journey is ‘Sum Assured.’ But fear not, we are here to make it crystal clear without any complicated insurance-speak.
In this blog post, we will explain the meaning of sum assured, how it differs from other terms like sum insured and death benefit, and how to choose the right sum assured for your life insurance policy.
What Is Sum Assured?
Sum assured is the fixed amount the insurance company promises to pay to your nominee or legal heir in case of your death during the policy term. It is also known as the coverage amount or the face value of the policy. For example, if you buy a life insurance policy with a sum assured of Rs. 50 lakh, your nominee will receive Rs. 50 lakhs from the insurer in case of your untimely demise within the policy term.
Sum assured is one of the most important parameters to consider when investing in an insurance policy, as it determines the financial protection you provide to your family in your absence. It also affects the premium that you have to pay for the policy. Generally, the higher the sum assured, the higher the premium, and vice versa.
How Is Sum Assured Different From Sum Insured And Death Benefit?
Sum assured is often confused with other terms like sum insured and death benefit, but they are not the same. Here are the differences between them:
The sum insured is the value the insurance provider pays you in case of an unforeseen event, such as an illness or an accident. Non-life insurance policies, such as health or car insurance, usually offer it.
The sum insured is not a fixed amount but depends on the asset’s actual value or the expenses incurred by you. For example, if you own a health insurance scheme with a sum insured of Rs. 5 lakhs, and you incur a hospital bill of Rs. 3 lakhs due to an illness, the insurer will reimburse you Rs. 3 lakhs, not Rs. 5 lakhs.
The death benefit is the amount that the insurance company pays to your nominee or legal heir in case of your death during the policy term. It may or may not be equal to the sum assured, based on the type of life insurance policy that you have chosen. For example, if you have a term insurance policy with a sum assured of Rs. 50 lakh, your nominee will receive Rs. 50 lakh as the death benefit if you die within the policy term. However, if you have an endowment policy or a unit-linked insurance plan (ULIP) with a sum assured of Rs. 50 lakh, your nominee may receive more or less than Rs. 50 lakh as the death benefit, depending on the maturity benefit or the fund value of the policy.
How To Choose The Right Sum Assured For Your Life Insurance Policy?
Picking the appropriate sum assured of your term policy can be a complex decision. It relies on several factors, including your income, expenses, debts, objectives, and those who rely on you. Nevertheless, here are some broad recommendations that may assist:
- The sum assured should be at least ten times your yearly income. This will establish that your loved ones can maintain their present standard of living and meet their regular expenses for at least ten years after your death.
- The sum assured should also cover your outstanding debts, such as home, car, and personal loans, so your family does not have to bear any financial burden in your absence.
- The sum assured should also consider your future goals and aspirations for your family, such as education, marriage, retirement, etc., and provide enough funds to fulfil them.
- The sum assured should also factor in inflation and rising living costs over time and increase accordingly. You may use a term plan calculator for this.
- The sum assured should be reviewed and revised periodically to match your changing needs and circumstances.
Sum assured is a crucial aspect of any life insurance policy that determines how much money your family will receive in case of your death during the policy term. It differs from the sum insured and death benefit, which are related to non-life insurance policies and specific types of life insurance policies, respectively. To choose the right sum assured for your life insurance policy, you need to consider various factors like your income, expenses, liabilities, goals, and dependents and use online tools like the term plan calculator to get an estimate. Doing so can ensure that you provide adequate financial protection to your loved ones in your absence.