There are two types of payouts available in insurance - the sum assured and sum insured. Sum assured is paid out when there is a life insurance claim and the sum insured is paid out when there is a non-life insurance claim such as a health insurance claim, a motor insurance claim, a travel insurance claim, etc. People often get confused between the two, but if the basic concepts are clear, there doesn't remain any room for any more confusion.
Understanding the Concept of Sum Assured
Let us begin by understanding what a sum assured is. When you buy a life insurance plan, you do so to ensure that your family receives a death benefit after your demise. You pay the premium on time, and if anything happens to you within the policy period, your family receives the proceeds from the life plan, which is nothing but the sum assured. The sum assured is an assurance that tells you your family will remain safe even after you are gone and it forms the backbone of a life insurance policy.
How to Calculate the Ideal Sum Assured?
Now that you know more about the sum assured, you should ensure you have the most suitable sum assured amount for your family. Here are some ways in which you can arrive at the amount:
- Monetary Duties - The first thing to consider is your financial responsibilities towards your family. If you have important financial milestones such as your child’s higher studies, you need to have a sum assured that is large enough to cover those.
- Dependent Family Members - Next, you need to calculate how many dependent family members you have. If you have many people such as your spouse and kids, your parents and your siblings depending on you financially, you will need a high sum assured, as compared to a sum assured you'll have when you just have a dependent spouse.
- Debt - Your unpaid loan amount should be calculated before finalising the life insurance coverage amount. Make sure the sum assured is enough to clear your debts after your demise.
- Affordability - The affordability factor is important as you need to buy a life insurance plan within your budget. If you have a small budget, you should not get a sum assured that is too high as the premium rates will also be very high in that case.
Once you take these factors into consideration, you will be easily able to calculate your ideal sum assured. Thereafter, you should buy a life insurance plan that has a similar life cover at a rate that suits your budget perfectly.
Understanding the Concept of Sum Insured
Now, let us understand the concept of the sum insured. When you buy a general insurance plan, such as a motor insurance policy or a health insurance policy, you are promised of getting your expenses reimbursed when there is a requirement relating to the cover you buy. When your car needs repairs following an accident, the motor insurance plan pays for it. When you are sick, your health insurance plan pays for medical expenses. An amount such as this, that is available on a general insurance cover, is known as the sum insured.
How to Calculate the Ideal Sum Insured?
If you are looking for ways in which you can have the ideal sum insured on your general insurance plan, here are some factors that can help you to arrive at the amount:
- Price of the Asset Covered - If you have an expensive car, the sum insured you choose on the motor insurance plan should be high. So the price or value of the asset you look to insure plays a role here.
- Expected Expense - If you are looking to buy a health insurance plan, you need to see how much health cover you need for yourself and your family members. You should take into account the number of people you want to be covered under the plan. Similarly, if you are buying a travel insurance plan, you need to estimate the duration of your stay. These factors will help you to make an assumption of the expected expenses you may incur for which you need to make the insurance claim.
- Inflation - Next, you need to factor in inflation and choose the sum insured accordingly. For instance, if you are buying a health insurance plan for three years, you need to see how much the healthcare costs will go up in that time and choose the coverage amount accordingly.
- Budget - And finally you need to choose a pocket-friendly insurance plan that has a suitable premium which you can afford.
If you make correct assumptions for each of these factors, you will quite easily be able to arrive at the correct sum insured for your general insurance plan.
Key Differences Between Sum Assured and Sum Insured
Let us now look at the basic differences between the two:
- Applied In - The term ‘sum assured is used exclusively in life insurance. The term ‘sum insured’ is used in all general insurance plans including motor insurance, health insurance, home insurance, travel insurance, etc.
- Characteristic - The amount in a sum assured is fixed and stays the same throughout the policy period. The amount is pre-decided and agreed upon by the life insurance company and the policyholder. The sum insured in a general insurance plan however is never fixed. It is paid out on-demand, as per the extent of the loss suffered by the policyholder. So while the beneficiaries of the life insurance policyholder will receive the entire claim of INR 5 lacs upon his demise, the policyholder of a health insurance plan will only get INR 50,000 if his hospital bill is of that value, even though he has a mediclaim cover of INR 5 lakhs.
- Significance - The sum assured is fixed because you cannot put a tag on the value of human life. Also, this value remains fixed and doesn't increase or decrease at different stages of his life. This is why the sum assured in a life insurance policy is fixed. In a general insurance plan though, the extent of the financial loss incurred due to an injury or asset loss can be calculated and so the sum insured varies from claim to claim.
The Bottom Line
As you can see, there is a very clear difference between a sum assured and a sum insured. Once you know the difference between the two, you will never mix the two up again! So keep all the points mentioned above in mind and understand the coverage you are entitled to before you buy an insurance plan.