Sum Insured vs. Sum Assured: What’s the Difference?

The various terminologies used in insurance can be quite difficult to understand.

Many times, the phrases appear to be the same but their meanings are completely different. 

Today, we are going to decode the two phrases “sum insured” and “sum assured” that frequently perplex  policyholders.

Grasping the concepts behind these terms is essential because they dictate the coverage, benefits, and claims processes in your insurance scheme. In this article, we will explain the difference between insurance and assurance policies to aid you in policy selection.

What is Sum Assured and its Purpose?

Sum assured indicates the amount that the insurer promises to pay to the policyholder or his nominee upon the occurrence of specified events, such as death or policy maturity. It is mostly used in life insurance, such as term insurance policies, endowment policies, and ULIPs (Unit-Linked Insurance Policies).

For example, if you happen to have a term life policy and the insurance company guarantees a sum assured of rupees fifty lakhs and you die during the policy's term, your family will be paid this amount. The sum assured is equivalent to financial protection and provision for your dependents.

Calculation of Sum Assured (CASA)

The sum assured is determined by:

• Income and Dependents: Ideally, one’s annual income combined with the number of dependents directly impacts the sum assured, as higher policyholders will want more coverage on their policies.
• Outstanding Liabilities: Loans, mortgages, or any other financial obligations must be carefully monitored to avoid overborrowing, which may strain the family budget due to repayment costs.
• Lifestyle and Future Aspirations: There is a need to ensure that the assurance policy being purchased caters to not only the present but also future expenditures, such as education for children and retirement savings plans.
• Age and Medical Status: Younger, healthier persons may purchase policies with higher sums insured for more modest premiums over the longer term if it gives them more comfort.

These amounts underlying insured factors must be aligned so that the family need not worry about anything else.

What is the Sum Insured? 

The sum insured is the cap on the claim amount payable to the policyholder by an insurer to indemnify a loss sustained within insurance covers such as health, motor, and property, as well as travel policies. This is the prevalence of this phrase within these policies.

Let’s discuss the case of ‘A’, who purchased a health insurance policy with an annual sum insured of Rs 5 lakhs. His insurer will reimburse him for the hospitalisation expenses incurred up to this threshold.

For example, if the medical expenses are billed at Rs 3 lakhs, the insurance company will settle the bill on his behalf, and the two remaining lakhs will be left open as claims during the policy duration.

Calculation of Sum Insured

Factors affecting the sum insured

• Value of Assets: The sum insured for automobile and property insurance policies is either current market value or replacement cost.
• Medical Expenses: The sum insured for health insurance obtained needs to cover expected future health costs such as hospitalisation, surgeries, and medication.
• Risk Profile: The sum insured amount is dependent on multiple factors like age, medical history, and lifestyle habits of the client that insurance companies usually analyse.
• Location: The amount of coverage needed may differ as healthcare or property repair costs vary according to different regions.

These are the simple factors that, when understood make sure you are properly insured and not paying for something you do not need.

What is the Difference Between the Sum Insured and the Sum Assured?

The  explanation outlined above, taken collectively, makes it easier for you to settle for certain policies without compromising your financial goals and protection requirements.

Significance of Understanding These Terminologies

Financial Planning Implications

It is crucial to understand  the difference between sum insured and sum assured to ensure effective financial planning. Here are some specifics:

• Prevent Under-insurance: Insufficient coverage may render you or your family economically exposed at times of disaster.
• Prevent Over-insurance: When policies are rendered beyond reasonable indemnities, the premium expenses lead to unneeded costs.

Choose the Necessary Coverage 

Choosing an appropriate insurance policy is a matter of personal consideration:

• Life Insurance: Choose the sum assured parts of the financial needs, liabilities, and goals of you and your family.
• General insurance: It conducts risk evaluation as well as asset valuation to calculate the appropriate sum insured.

When you balance these two factors, you will be able to purchase an insurance policy that will protect your finances without breaking the bank.

Conclusion

The terms sum assured and sum insured relate and further impact planning for insurance in different ways. With the life policies, the sum assured offers a guaranteed amount to be paid at the eventuality of the insured person’s death, whereas the sum insured is only a provision made in general policies to pay for actual losses in the case of a claim. With the proper application of these terms and metrics, you and your family can rest easy knowing that any financial goals set will be well managed.