No, sum assured usually means the minimum guaranteed amount that is paid to the beneficiary in the unfortunate event of the insured’s demise. On the other hand, death benefit is the minimum sum assured plus bonus that is paid to the nominee if the policyholder dies within the policy’s tenure.
What is Sum Assured & How is it Different from Sum Insured?
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 a 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:
|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.
|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:
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 Related To Sum Assured
Maturity amount is the sum paid to the policyholder by the insurer after the term of a certain policy ends. On the other hand, sum assured is the guaranteed amount paid to the nominee of an insurance plan without including any bonus amount.
No, usually the maturity amount is higher than the sum assured as it also includes the bonuses payable upon the maturity of the policy. In contrast, sum assured is only the minimum guaranteed amount.
Adding a rider will only enhance your insurance benefits. If you have any critical illness or a probability of having some hereditary disease, you may want to add a critical illness rider, but this will also result in paying higher premiums.
It is advisable to do in-depth research about the top insurers in the country and choose the one best suited for you. Checking their reviews and ratings of insurance companies and their claim settlement ratio will give you a fair idea about the insurer.
When the tenure of a life insurance policy ends, the policy simply expires. The policyholder doesn’t have to pay any more premium amounts because the policy becomes inactive and there is no longer a death benefit.
Any sum assured amount received at the time of maturity of an insurance policy is exempted from taxation as per Section 10(10D) of the Income Tax Act.
Important Guides related to Life Insurance
- 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.