Difference Between Sum Insured vs. Sum Assured

Although many people use terms like sum insured and sum assured interchangeably, these two terms are fundamentally different. Whereas the sum insured is used in mostly non-life insurance policies, such as health, motor, travel and home insurance, the sum assured is a term exclusively used in life insurance policies.

Understanding the difference between sum assured and sum insured is crucial, as it would help policy seekers to have clarity and make an informed decision when it comes to securing their financial future against uncertainties.

Read on to understand how these two terms differ, their applications and why the distinction matters for your pocket.

What is Sum Insured?

The term sum insured primarily applies to non-life insurance policies, such as medical, home, travel or motor insurance. It operates based on the principle of indemnity.

Meaning, the insurance provider compensates the policyholder for the losses or damages up to a predetermined limit. The objective of the sum insured is not to offer profits, but rather to secure a similar financial position the policyholder had before an unfortunate event occurred.

For example, a policyholder has purchased travel insurance for Australia from Bajaj General Insurance with a sum insured amount of ₹5 lakh. During the trip, if the policyholder experiences trip cancellation due to certain unavoidable reasons, the insurer will cover up to a specified amount to compensate for this unexpected financial loss.

The compensation amount for trip cancellation is determined at the time of policy purchase. Once it is complete, the remaining amount is available for any other unforeseen occurrences.

Also Read: Understanding the Importance of Blood Typing

What is Sum Assured?

The term sum assured is particularly applicable for life insurance policies. It refers to the pre-defined, fixed amount an insurer offers to pay to the nominee in the event of the policyholder's unfortunate death.

Unlike the sum insured amount, the sum assured is not indemnity-based. In this context, in exchange for a premium, the insurer agrees to pay a lump sum regardless of the actual financial loss.

For example, a 30-year-old school teacher purchases a term life insurance of ₹1 Crore coverage with a tenure of 30 years. If the policyholder dies within the policy tenure at the age of 50, their family or nominee will receive the sum assured amount as part of the death benefit. This type of payout does not involve any reimbursement calculation.

What are the Key Differences Between Sum Insured vs. Sum Assured?

Here is a breakdown of the sum assured vs sum insured comparison across various parameters.

Also Read: Epstein-Barr Virus: Symptoms, Diagnosis and Care

How to Calculate Sum Insured Amount?

Whether you are looking for medical, travel or home insurance, the sum insured is the maximum amount an insurer pays to cover a loss or a claim. 

For example, a policyholder purchases comprehensive medical insurance from Bajaj General Insurance with a sum insured of ₹10 lakh. He wants to create a financial shield against the consistently rising healthcare costs. Upon making a claim during an emergency,  say for ₹5 Lakh, the insurer will verify the claim and settle it.

If he makes another claim worth ₹6 lakh, the insurer will only cover ₹5 lakh. Otherwise, the sum insured will be exhausted. The policyholder needs to cover the remaining ₹1 lakh on their own.

The best way to calculate the sum insured amount is to consider:

1. Age and health condition: Specifically applicable for medical insurance, younger policyholders get a higher sum insured amount at a lower premium because insurers believe that they have lower mortality risks. In contrast, older policyholders pay a higher premium to get a higher sum insured amount.

2. Plan type: Choosing an individual plan will only cover your own medical conditions. Whereas a family health insurance plan allows you to cover your whole family under a single plan. 

3. City of Residence: If you live in a metropolitan city, it is ideal for you to choose a higher sum insured amount since these regions are expensive compared to rural areas.

Health complications arise at any time, causing a financial strain, so why take chances? Choose comprehensive health insurance from Bajaj General Insurance to get a higher sum insured at an affordable premium today!

Also Read: What Is Domiciliary Hospitalisation and How Does It Work?

When to Choose a Sum Insured Product?

The sum insured of an insurance policy protects your savings from an unprecedented event. A robust general insurance plan ensures that your finances remain untouched when any kind of emergencies strike.

How to Calculate Sum Assured in Life Insurance?

Although many people struggle with determining the ideal sum assured amount for their life insurance plan, using the human life value calculator (HLV) makes it easy.

You need to simply enter details such as age, current expenses, pre-existing health conditions and the HLV calculator will factor in inflation to provide you with an estimation of the ideal sum assured amount.

Factors Influencing Sum Assured Are:

1. Age and Health: Younger individuals can secure a higher sum assured at lower premiums since insurers believe they have a lower mortality risk.

2. Inflation: When choosing a sum assured, you must account for the rising cost of living at least 10 years from now. Inflation rate usually varies between 5% and 8% annually.

3. Lifestyle: Based on the policyholders’ lifestyle or pre-existing health conditions, the insurer determines the sum assured amount. 

In life insurance, the sum assured acts as a financial replacement for the policyholder's income. It ensures that dependents or nominees can maintain their lifestyle, pay off debts, and fund future goals, such as education, even when the policyholder is not around.

When to Choose the Sum Assured Product?

Policyholders need a sum assured when they want to create a legacy and provide financial security for their family. It offers peace of mind that ensures their family’s requirements are not unmet in their absence.

A general rule of thumb is to have a sum assured that is at least 10 to 15 times your annual income. For example, if you earn ₹10 lakhs annually, your life cover is ideally ₹1.5 crores.

Also Read: Can I Get Health Insurance Without Medical Tests?

Final Words

Understanding the difference between sum assured and sum insured enables you to decode the fine print of your policy documents with confidence. Whereas the sum insured is about compensating financially for a loss, the sum assured delivers a guaranteed payout in case of the death of the policyholder.

If you are struggling to choose the right sum insured amount for your comprehensive medical insurance cover, talk to the experts at Bajaj General Insurance. Our 24/7 customer care service is always ready to resolve your queries anytime.

Frequently Asked Questions (FAQs)

What is the significance of sum insured, commonly used in insurance?

The sum insured refers to the pre-determined financial limit specified in general insurance policies, such as health, motor, travel, and property insurance. It is the upper limit an insurer agrees to pay in exchange for a premium in the event of a covered loss or claim.

What is the sum insured vs sum assured?

A sum insured is the maximum limit an insurer pays to the policyholder to cover unforeseen occurrences in a general insurance plan. This includes medical, travel, home, or motor insurance. In contrast, a sum assured is the fixed amount dependents receive from an insurer as life cover in case of the death of the policyholder. 

Is the sum assured in life insurance taxable?

Generally, the death benefit or the sum assured a nominee receives is tax-free under Section 10(10D) of the Income Tax Act (1961). However, it is important to ensure that the premium conditions are met.

What happens if my hospital bill exceeds the sum insured?

When the medical bill exceeds the sum insured in comprehensive health insurance, the policyholder pays the remaining amount on their own. That is why choosing an adequate limit is essential.

Can I change my sum assured in life insurance after buying a policy?

In most traditional plans, the sum assured amount is fixed except for increasing term plans. These plans allow policyholders to increase coverage at specific life stages, such as marriage or the birth of a child.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.

Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.