Simplifying Life Insurance in India
What is Sum Assured & How is it Different from Sum Insured?
Source: paytminsurance.co.in
A crucial aspect of a life insurance policy involves paying the sum assured to the beneficiary. However, the sum assured amount is offered only upon the untimely demise of the insured before the expiration of the policy.
Read on to know more about what is sum assured in life insurance.
What is the Meaning of Sum Assured?
Sum assured is a predetermined amount that an insurance provider guarantees to pay the beneficiary in case of the policyholder's untimely demise within the policy tenure. The insurer will pay this sum to the nominee/heir/beneficiary, given that the premiums of the policy were paid in full.
Generally, this is how pure life insurance plans work. However, multiple insurance companies have also come up with personalized insurance plans that can be modified as per the policyholder’s preferences.
Some insurance providers also offer life insurance policies inclusive of health insurance benefits. In such cases, the policyholder will be able to avail the benefits of the sum assured amount in case he/she faces a financial emergency due to disability or critical illness. Additionally, one can also add riders or top-ups to an insurance plan to enhance the benefits offered by a life insurance policy, like critical illness rider, term rider, etc.
How to Calculate the Ideal Sum Assured for You?
Most people face a dilemma when deciding the sum assured of their life insurance policy. The minimum sum assured should be enough to cover the present-day financial needs of your family as well as any potential additions to that list in the future.
You can estimate the ideal sum assured amount for you by using the Human Life Value (HLV) formula. Many insurance providers offer this online calculator on their websites.
The HLV calculator lets you calculate your capitalised value while keeping inflation in mind. To use this calculator, all you have to do is put in some details like your present and future expense estimate, your age, income, etc. The calculator will provide you with an estimate of the sum assured.
You can also calculate Human Life Value manually by following the steps mentioned below:
Step 1: Calculate your current annual income.
Step 2: Subtract your expenses, insurance premiums, loan repayments and other liabilities.
Step 3: Determine the number of working years left before your retirement, the expected rate of return on your investments and rate of inflation.
Step 4: Calculate the present value of your future income and assets by adjusting inflation. This will offer you an estimate of your HLV.
How is Sum Assured Different from the Sum Insured?
If you have been planning to purchase an insurance policy, you must have heard about another term - "sum insured". Unlike sum assured that is paid to the beneficiary upon the untimely demise of the insured, sum insured is the maximum amount that a policyholder can claim once a year for any insured event.
For example, the sum insured for health insurance is the maximum amount the insurer will pay for your medical expenses that are covered by the policy.
It is pretty common to get confused between sum assured and sum insured. However, these two are significantly different from each other and have entirely different purposes.
The differences between sum assured and sum insured have been discussed below:
| Parameters | Sum Assured | Sum Insured |
| Applicability | Sum assured is only applicable for life insurance policies. | Sum insured is applicable for other types of insurance plans such as health insurance, car insurance, etc. |
| Definition | It is a guaranteed sum that the policy provider must pay to the beneficiary in case of the untimely demise of the insured. | The policyholder receives this sum as reimbursement or compensation depending on the expenses incurred as per the policy agreement. |
| Relation with Maturity Benefit | One can avail life insurance plans with maturity benefits (sum assured + bonuses) if the policyholder survives the policy tenure. | There is no such thing as a maturity benefit with sum insured. |
| Mode of Calculation | Sum assured can be calculated through the HLV method. | Sum insured depends on the value of the asset. For example, if you have vehicle insurance, the insured amount will depend on the damage incurred or by your vehicle, depending upon your insurance plan. |
Factors to Consider while Calculating the Ideal Sum Assured Amount for You
There are some factors you should consider while estimating the ideal sum assured amount for your insurance plan. It is crucial to decide an amount that will provide adequate financial coverage to your dependents in your absence.
Some of the general factors that you should consider while determining the minimum sum assured are:
Your age,
Current health situation of you and your family members,
Current income and future income potential
Existing debts and liabilities,
Regular lifestyle expenses,
Planned & unplanned future expenses
Current family income and inflation,
Accidents, illnesses and emergency funds.
Additionally, the premium payable towards your policy plays a major role when it comes to determining the sum assured. If you are young and starting early, you may start by paying low premium amounts, which can then be increased as your income increases with age.
Moreover, medical expenses and healthcare costs are increasing every day. If you are paying a certain amount for a specific treatment today, it will definitely be higher the next time you pay a visit to the hospital. Owing to the effects of inflation, financial planning should ideally be for the long term; hence, the sum assured should be able to fulfil the financial requirements of the future.
Consider calculating the ideal sum assured amount for you before purchasing any life insurance policy. Hope this article has given you a comprehensive brief about what is sum assured and how it differs from the sum insured.
FAQs about Sum Asssured
Is sum assured the same as death benefit?
What is the difference between maturity and sum assured?
Can the maturity amount be less than sum assured?
Do I need to pay tax on the sum assured?
What is the meaning of Sum Assured in Insurance?
How is the sum assured calculated?
Can sum assured be less than total premium?
What is the difference between sum assured and sum insured?
What is the difference between life insurance or life assurance?
Is the sum assured paid on maturity?
What happens if my policy's Sum Assured is too low?
What is the maximum limit of sum assured?
Is sum assured guaranteed?
In life insurance, the sum assured is typically guaranteed, but there are some exceptions and conditions to consider:
- Guaranteed sum assured: Here, the insurer promises to pay the specified amount in the event of death.
- Conditional guarantees: Some policies may have conditions or riders that affect the sum assured, such as suicide clauses or exclusions.
- Non-guaranteed components: Like bonuses or interest, which are not part of the guaranteed sum assured.
- Insurer’s solvency: The sum assured is only as good as the insurer’s ability to pay.
Can a sum assured be reduced?
What is the sum at risk?
How much sum assured is enough?
How is sum assured calculated?
Is sum assured taxable in term insurance?
What is the difference between sum assured and premium?
Who is assured in insurance?
Can I increase the sum assured in a term plan?
Important Guides related to Life Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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