Decoding the terms : Sum Assured Vs. Sum Insured

Updated: 13-10-2022 05:58:49 AM

Insurance, which protects you from financial losses related to various risks in life, can be divided into 2 categories – life insurance and general insurance. Health insurance is another important type that comes under general insurance. The financial protection or the coverage amount that you get is called sum assured for life insurance, and sum insured for general insurance.

What is Sum Assured?

In a life insurance policy, sum assured is the guaranteed amount that the insurance company pays to the family members of the policyholder in case of his/her sudden demise. It is the fixed amount decided at the time of purchasing the policy. The insurance company assures the nominee to pay that fixed specified amount, when needed. For instance, if a customer decides that the sum assured or the coverage amount for his life insurance plan would be Rs. 50 lakh, the minimum amount that the nominee/beneficiary would receive on the death of the policyholder would be Rs. 50 lakh.

Sum assured is an important factor affecting the premium or the cost of life insurance. The type of life insurance plan to be purchased and the amount of coverage to be opted should be chosen after considering factors like present and future financial position.

What is Sum Insured?

Non-life insurance or general insurance like motor, health, home insurance, etc. which work on the principle of indemnity (where compensation is paid by the insurer for any loss, damage or injury) offers sum insured. The policies that offer sum insured provide coverage for the losses that may have resulted from any damage to the insured asset. The compensation paid should not lead to a monetary benefit to the policyholder. Thus, the policyholder is not given anything more than the loss he/she suffered. For a health insurance policy offering sum insured of Rs. 2 lakh, if the insured gets hospitalised and has to pay Rs. 1 lakh, the entire amount is paid by the insurer. However, if the bill exceeds Rs. 2 lakh, the insurer pays only Rs. 2 lakh and the remaining amount is paid by the insured.

Factors to Consider for Deciding Sum Assured

Insurance companies consider factors like policy term, smoking habit, age, additional benefits/riders, sum assured, etc. in finalising the premium of a life plan. Given below are some important points that should be considered while deciding the coverage amount or sum assured.

1. Financial Situation: An individual’s current financial situation and future requirements play a big role in deciding the sum assured. The current income and expenditure determine the amount of premium you can pay and on the basis of this you decide the sum assured. Higher coverage amount means higher premium.
2. Loan Liabilities: In case an individual has loan liabilities, the coverage amount should be adequate to repay these liabilities in case of the policyholder’s sudden demise.
3. Stage of life: Your stage of life affects the coverage amount that you would require. The coverage amount for a married person would be different from the amount required by a married individual with children. The requirement may change when the children grow up or when the person retires.
4. Family’s Lifestyle: The coverage amount should be enough to sustain the family’s current standard of living in case of the policyholder’s sudden demise.

Customers must be conscientious while deciding the coverage amount (sum assured) as it affects the amount of premium to be paid as well as the coverage that they get.

Factors to Consider for Deciding Sum Insured

Sum insured is an important factor affecting the premium or the cost of non-life insurance policies. Given below are some important factors to be considered while deciding the coverage amount or sum insured:

1. Medical History: A person’s own medical history like a pre-existing disease or condition and his/her family history (in case diseases like diabetes, etc. run in the family) must be considered while deciding the amount of coverage required for health plans.
2. Number of Family Members Insured: The number of people insured under the health plan affects the amount of coverage required. A single person would require a relatively smaller cover compared to a plan where three or four people are insured.
3. Age: Age also affects the amount of coverage required. An older person is more prone to health-related risks than a young one and therefore would require greater coverage.
4. Financial Situation: A person must evaluate his/her financial situation-current and future income and expenditure, before deciding the insured amount. Higher sum insured means higher premiums.
5. Geographical Location: A person’s geographical location also affects the amount of coverage required. People residing in metropolitan cities are considered to be more prone to health issues. Also, medical facilities are usually expensive in these areas. Therefore, they require a greater cover than their rural counterparts.
6. Future Inflation: It is not sufficient to simply purchase a health insurance policy that comes at a lower premium. Future inflation should be kept in mind while deciding the sum insured or the amount of coverage required.

How Sum Assured Affects Premium Amount

The amount of premium to be paid on life insurance policies depends on factors like policy term, applicant’s gender, age, sum assured, smoking habit, etc. Let us look at how sum assured affects the premium.

• Higher the sum assured, higher the premium amount
• Lower the sum assured, lower the premium amount

Let us understand how different coverage amount changes the premium of an insurance plan.

Plan Name: SBI Life eShield Plan

Policyholder’s Age: 30 years

Particulars	Sum Assured	Policy Term	Annual Premium (excluding taxes)
Scenario 1	Rs. 50 lakh	30 years	Rs. 5,400
Scenario 2	Rs. 1 crore	30 years	Rs. 9,400
Scenario 3	Rs. 50 lakh	40 years	Rs. 10,640
Scenario 4	Rs. 1 crore	40 years	Rs. 19,070

Plan Name: HDFC Click 2 Protect 3D Plus Term Plan

Policyholder’s Age: 30 years

Particulars	Sum Assured	Policy Term	Annual Premium (excluding taxes)
Scenario 1	Rs. 50 lakh	30 years	Rs. 4,904
Scenario 2	Rs. 1 crore	30 years	Rs. 8,588
Scenario 3	Rs. 50 lakh	40 years	Rs. 10,890
Scenario 4	Rs. 1 crore	40 years	Rs. 18,611

How Sum Insured Affects Premium Amount

The amount of premium to be paid on non-life insurance policies depends on factors like the applicant’s gender, age, policy term, sum insured, smoking habit, etc. Let us look at how sum insured affects the premium amount.

• Higher the sum insured, higher the premium amount
• Lower the sum insured, lower the premium amount

Let us understand how different coverage amount changes the premium of an insurance plan.

Plan Name: Apollo Munich Optima Restore

Policyholder’s Age: 30 years

Particulars	Sum Insured	Policy Term	Annual Premium (including taxes)
Scenario 1	Rs. 5 lakh	1 year	Rs. 13,469.7
Scenario 2	Rs. 10 lakh	1 year	Rs. 17,526.54
Scenario 3	Rs. 5 lakh	2 year	Rs. 24,919.24
Scenario 4	Rs. 10 lakh	2 year	Rs. 32,425.22

Plan Name: Max Bupa Health Companion Individual

Policyholder’s Age: 30 years

Particulars	Sum Insured	Policy Term	Annual Premium (excluding taxes)
Scenario 1	Rs. 5 lakh	1 year	Rs. 6,542
Scenario 2	Rs. 10 lakh	1 year	Rs. 8,219
Scenario 3	Rs. 5 lakh	2 year	Rs. 12,392
Scenario 4	Rs. 10 lakh	2 year	Rs. 15,597

FAQs

Q1. Can I change my coverage amount?

Yes, many insurance providers offer the option to increase or decrease the coverage amount as per the requirement.

Q2. Do life insurance policies cover death outside India?

Yes. For a policy purchased in India, if the policyholder passes away in some other country, the nominee is entitled to get the sum assured.

Q3. How much does a term insurance plan pay in case of accidental death?

In case death occurs due to an accident, only the basic sum assured is paid under a term insurance policy. However, if you have added a personal accidental rider to your plan, you get double the sum assured under the accidental rider.

Q4. Does the premium increase with an increase in the coverage amount?

Yes, the premium usually increases with an increase in the coverage amount or the sum assured.

Q5. What is the maximum number of term insurance plans that I can buy for myself?

You can purchase any number of term insurance plans as you want depending on your financial situation. However, ideally you should purchase only one insurance plan because in case the claim arises your family would have to run after multiple insurance providers.

Q6. Is there a rebate on opting for a greater amount of coverage?

Many companies offer rebate on higher sum assured (higher than a certain amount). The reason behind this is that the cost of servicing the same type of policies is almost the same and a higher sum assured translates into lower cost of servicing per unit of sum assured. This means higher profit per unit of sum assured or per unit of premium paid to the company.