Sum Assured Meaning

Sum Assured Meaning

Knowing your sum assured is key. It determines your loved ones' financial safety, covering expenses, debts, and even future goals.

Written by : Daina Mathew

Reviewed by : Lalit Lata

Lalit Lata

2023-01-17

520 Views

7 minutes read

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Life insurance provides a financial safety net to help you take care of your loved ones in case of your unfortunate demise. If you are the primary breadwinner, your family depends on you financially for a living standard and a safe future.

When you buy a life insurance, the sum assured becomes that banking rock that will keep your family afloat and secure their future in your absence. This makes it crucial to understand the meaning of sum assured and how it works.

Table of Content

What is the Meaning of Sum Assured?

Wondering what is sum assured? Well, sum assured meaning, defined in the easiest way, is the minimum guaranteed benefit amount the insurer will pay to your nominee in the unfortunate event of your demise during the policy tenure. You can choose your life insurance sum assured amount at the time of buying the policy. Choosing a correct sum assured in insurance is important in life insurance policies like term insurance.

Along with the sum assured, you can also select the way that amount is paid to your nominee or nominees. At the time of buying the policy, you can select the payout frequency as a lump sum pay in regular monthly income or a combination of both.

The sum assured of your policy has the most significant impact on your policy premium. It should keep up with your income and lifestyle. Plans like the iSelect Smart360 Term Plan give you the option to block your premium and increase the sum assured within five years of buying the policy.

Ideally, you need to maintain a life insurance sum assured equal to 10 times your annual income. Otherwise, you can also buy a new term policy to increase the total life coverage sum assured and keep up with your income.

Did you know?

Life insurance death benefits are not taxable to the beneficiary!

Source: Investopedia

Claim Settlement Ratio

How to Calculate your Sum Assured?

You can calculate the sum assured amount that you need by using Human Life Value (HLV). It helps you determine the ideal amount required for your family’s financial needs. There are two methods to calculate the sum assured using HLV.

Income Replacement BasedIn this method, whatever income your family needs for support is covered by a sum assured.

Sum Assured = Annual Income * Years left until Retirement
Need-BasedIn this method, the sum assured is calculated based on the family's monthly expenses till the life expectancy of the spouse or any other dependent member in the family.

Factors to be Considered while Calculating the Sum Assured

Sum assured is not a fixed number, and it will always vary from person to person depending on their future financial needs, current earnings, and outgoings. While calculating the sum assured, consider the following factors:

  1. Age: Your age will help you determine the coverage you need.

  2. Income: Your income helps assess your living standard, and hence it is an essential factor in determining the sum assured.

  3. Dependents: The sum assured depends on the total number of dependents. The higher the number of dependents, the higher the sum assured you need. 

  4. Life and Lifestyle: Lifestyle habits such as drinking and smoking will push your premium up and affect your sum assured.

What is the Difference between Sum Assured and Sum Insured?
 

 Sum InsuredSum Assured
ApplicabilityIt is applicable for non-life insurance plans such as home insurance, health insurance, motor insurance, etc.It is applicable for life insurance plans.
Policy natureThe reimbursement is only for the amount of loss or damage.A fixed, pre-decided amount is given to the nominee in case of a policyholder's death during the policy tenure.
CalculationIt is calculated as per the damages incurred by the policyholder.It is calculated based on the HLV.
BenefitsNo monetary benefits. The policyholder receives only the amount toward losses.The nominee is paid the monetary benefit.

How To Increase the Sum Assured As Per Your Financial Needs?

 Here is a look at how to increase your sum assured:

  • Consider an Increasing Term Plan: This type of policy automatically increases your death benefit each year, counteracting inflation and ensuring your loved ones receive a sufficient payout regardless of when a claim occurs.
  • Review Your Coverage Regularly: Life milestones like marriage, children, or a mortgage increase your financial obligations. Schedule check-ins with your insurance provider to assess if your current sum assured remains adequate.
  • Explore Riders: Certain riders can be added to existing policies, boosting your coverage for specific needs. For example, a child rider can provide an additional payout in case of your death before your child reaches adulthood.

Remember, a sufficient sum assured provides peace of mind, knowing your loved ones will be financially protected. By using the strategies above, you can ensure your life insurance continues to meet your evolving needs.

How does the Sum Assured Work in a Health Insurance Policy?

There are two kinds of health risks in life: temporary and life-threatening. While temporary health hazards only require temporary medical attention, the life-threatening types require extensive care. Generally, the sum assured in a health insurance plan is paid as medical expenses to the policyholder.

There are two types of health insurance policies, they are:

  1. Mediclaim Health Insurance: Mediclaim is a sum-insured-based health insurance policy. Assume the policyholder is diagnosed with malaria and admitted to the hospital. The treatment cost is Rs 80,000. They have a health insurance plan with a sum insured of Rs 5 lakh. As a result, most of the treatment costs will be borne by the insurance company.

  2. Critical Health Insurance: Critical health insurance is a health plan with a sum assured. This means the policyholder will receive a lump sum benefit from the plan if a covered health event occurs. For example, if the policyholder buys a health insurance plan with coverage for critical illnesses like cancer, and the sum assured is Rs 20 lakh, if they are diagnosed with cancer or any other critical illness covered in the plan, they will receive a sum assured of Rs 20 lakh.

The world we live in is full of risks and uncertainties. There are various risks, such as loss of life, assets, health, etc. You cannot possibly prevent unwanted events from occurring, but you can safeguard your financial health from them.

Essential Insurance plans like term life and health insurance plans to safeguard you against common hazards in life. At the same time, you can also invest in ULIP plans to build wealth and meet long-term goals.

Before We Part!

Choosing the right sum assured is a crucial step in securing your loved one's financial well-being in your absence. By understanding the factors that influence your sum assured needs and utilising the above strategies, you can ensure your life insurance policy provides adequate protection as your life evolves.

Remember, a sufficient sum assured acts as a financial safety net, offering peace of mind and the knowledge that your family can manage financially even during challenging times. Don't hesitate to consult a financial advisor for personalised guidance on determining the ideal sum assured for your specific circumstances.

Glossary

  • Beneficiary: The person designated to receive the payout (sum assured) from a life insurance policy in the event of the policyholder's death.
  • Dependants: Individuals who rely on your income for financial support, such as spouses, children, or ageing parents.
  • Human Life Value (HLV): A method used to estimate the financial value of a person's life based on their future income potential.
  • Nominee: Similar to a beneficiary, the person designated to receive the policy payout. However, the nominee may need to submit a claim to receive the funds.
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FAQs on What is Sum Assured

There's no one-size-fits-all answer. Consider your income, dependents, debts, lifestyle, and future goals. A good rule of thumb is 10-12 times your annual income, but financial advisors can help you calculate a more precise amount.

No! While affordability is important, prioritise adequate coverage for your dependents. Strike a balance between sufficient protection and a comfortable premium.

Research reputation, financial strength, claim settlement ratio, and policy features. Compare quotes from multiple insurers to find the best fit for your needs.

Not necessarily. Riders provide additional coverage for specific situations (e.g., child education). Choose riders that complement your overall financial plan.

Yes, buying life insurance online can be secure. Use reputable insurance companies with robust online security measures. However, consider the benefits of consulting a financial advisor for personalised guidance.