What is Sum Assured & How is it Different from Sum Insured?

Source: paytminsurance.co.in

A crucial aspect of a life insurance policy involves paying the sum assured to the beneficiary. However, the sum assured amount is offered only upon the untimely demise of the insured before the expiration of the policy. 

Read on to know more about what is sum assured in life insurance.

Sum assured is a predetermined amount that an insurance provider guarantees to pay the beneficiary in case of the policyholder's untimely demise within the policy tenure. The insurer will pay this sum to the nominee/heir/beneficiary, given that the premiums of the policy were paid in full. 

Generally, this is how pure life insurance plans work. However, multiple insurance companies have also come up with personalized insurance plans that can be modified as per the policyholder’s preferences. 

Some insurance providers also offer life insurance policies inclusive of health insurance benefits. In such cases, the policyholder will be able to avail the benefits of the sum assured amount in case he/she faces a financial emergency due to disability or critical illness. Additionally, one can also add riders or top-ups to an insurance plan to enhance the benefits offered by a life insurance policy, like critical illness rider, term rider, etc.

Most people face a dilemma when deciding the sum assured of their life insurance policy. The minimum sum assured should be enough to cover the present-day financial needs of your family as well as any potential additions to that list in the future. 

You can estimate the ideal sum assured amount for you by using the Human Life Value (HLV) formula. Many insurance providers offer this online calculator on their websites. 

The HLV calculator lets you calculate your capitalised value while keeping inflation in mind. To use this calculator, all you have to do is put in some details like your present and future expense estimate, your age, income, etc. The calculator will provide you with an estimate of the sum assured. 

You can also calculate Human Life Value manually by following the steps mentioned below:

Step 1: Calculate your current annual income. 

Step 2: Subtract your expenses, insurance premiums, loan repayments and other liabilities. 

Step 3: Determine the number of working years left before your retirement, the expected rate of return on your investments and rate of inflation.

Step 4: Calculate the present value of your future income and assets by adjusting inflation. This will offer you an estimate of your HLV. 

There are some factors you should consider while estimating the ideal sum assured amount for your insurance plan. It is crucial to decide an amount that will provide adequate financial coverage to your dependents in your absence. 

Some of the general factors that you should consider while determining the minimum sum assured are:

• Your age, 

• Current health situation of you and your family members, 

• Current income and future income potential

• Existing debts and liabilities, 

• Regular lifestyle expenses, 

• Planned & unplanned future expenses

• Current family income and inflation, 

• Accidents, illnesses and emergency funds. 

Additionally, the premium payable towards your policy plays a major role when it comes to determining the sum assured. If you are young and starting early, you may start by paying low premium amounts, which can then be increased as your income increases with age. 

Moreover, medical expenses and healthcare costs are increasing every day. If you are paying a certain amount for a specific treatment today, it will definitely be higher the next time you pay a visit to the hospital. Owing to the effects of inflation, financial planning should ideally be for the long term; hence, the sum assured should be able to fulfil the financial requirements of the future.

Consider calculating the ideal sum assured amount for you before purchasing any life insurance policy. Hope this article has given you a comprehensive brief about what is sum assured and how it differs from the sum insured.