Insurance terminologies can get quite complicated. But it is important to understand different insurance terms because they have a big impact on your policy. For example, two of the most important insurance terminologies are sum insured and sum assured in the insurance policy. Though both the terms sound the same, in principle, the two have different meanings altogether.

 

Sum assured relates to the benefit of your guaranteed return insurance plan, and sum insured defines the reimbursement of an insured loss.

 

Read below to understand the difference between sum insured and sum assured:

 

What is a sum insured?

 

Sum insured in an insurance policy is defined by the principle of indemnity that provides cover or compensation for damage, loss, or injury. This concept is usually applicable for non-life insurance policies such as motor insurance, home insurance, health insurance, etc. These policies only reimburse the losses on the insured asset's damage.

 

For instance, assuming you have a health insurance policy with a basic sum insured of ₹1 Lakh. If you get hospitalised and have to pay ₹50,000 in medical bills, the insurance company will reimburse the entire amount. However, if your medical bill is ₹2 Lakh (typically above ₹1 Lakh), the insurance company will only pay ₹1 Lakh, and you will have to pay the balance from your pocket.

 

The objective of the basic sum insured in insurance is to rightly compensate for the loss and not to provide any monetary benefit.

 

How to calculate the sum insured?

 

 

When choosing the basic sum insured for your policy, you should consider the following factors:

 

• If you are insuring an asset, you should consider the asset's value so that your damage or loss is fully compensated. 
•  In case you are insuring your health, you should opt for a sum that is sufficient to cover medical expenses in an emergency.
•  If you are buying a family floater plan, you should take a sum insured that is sufficient to cover all dependents.
• If you are insuring your life, you should consider your current income, expenses, outstanding financial liabilities, and upcoming major financial requirements.
• Consider the impact of inflation in the long run when deciding your sum insured value.
• Choose an affordable sum insured that fits your budget.

 

What is a sum assured?

 

Sum assured in insurance is another important term you should know. Sum assured is a pre-defined sum that the insurance company agrees to pay you or your nominee if the insured event happens or at the end of the insurance term. The sum assured in insurance is determined at the time of policy purchase. It remains unchanged throughout the policy period. The premiums you pay for the policy are decided against the sum assured value. When the insurer pays the sum assured to you or your nominee, the policy stands terminated.

 

This concept applies to life insurance policies and guaranteed return insurance policies. These plans give you secure life insurance coverage and savings to help you meet your life goals. A guaranteed return insurance plan offers you assured returns in the mode of your choice. You can opt to take returns from your plan as a lump sum, regular income or a whole-life income benefit. The plan also offers guaranteed1 insurance cover to protect those you love the most in the world – your family. 

 

With the right sum assured for your insurance cover, you can secure your family's financial future in case of your absence. You also have an option to enhance your guaranteed1 insurance policy through add-on riders. Further, this guaranteed1 return insurance plan gives you the freedom to pay all premiums in a lump sum, regularly or for a limited period.

 

You can also pay the amount of your premium per your preferred frequency – annually, semi-annually, quarterly or monthly. You can also get a loan against your guaranteed1 life insurance plan. Additionally, guaranteed1 insurance plans in India are exempt from taxes.

 

The premiums you pay for these plans are exempt under Section 80C of the Income Tax Act, 1961. The death benefit and maturity proceeds are exempt from taxes under Section 10(10D).

 

For instance, you buy a guaranteed1 return insurance plan with a sum assured of ₹15 Lakh in case of demise during the policy tenure. It means that in case of your unfortunate death during the insurance policy period, your nominee will get ₹15 Lakh as a guaranteed insurance sum.

 

How to calculate the sum assured?

 

Choosing the right sum assured is extremely crucial for your life insurance policies. You can consider the following factors to know the optimal sum assured amount:

 

• Your sum assured should be sufficient to cover all your financial responsibilities such as sponsoring your child’s education or marriage,  sustaining your family's living expenses, etc.
• Your sum assured should be enough to financially secure all your dependents such as your spouse, kids, parents, etc.
•  The sum assured in insurance should be adequate for your family to pay off the financial liabilities in your absence.
•  Your age determines your sum assured. If you are young, opt for a high sum assured because you have a long life ahead of you.
•  The sum assured in insurance should be affordable and not pinch your pockets.

 

Difference between the sum insured and sum assured

 

The table below highlights the difference between basic sum insured and sum assured:

 

Basis	Sum Insured	Sum Assured
Applicability for policy	Applicable for non-life insurance plans such as home insurance, motor insurance, health insurance, etc.	Applicable for life insurance and guaranteed1 return insurance policies
Nature of policy	Based on the indemnity principle, reimburses only the amount of loss or damage	Fixed amount, pre-determined by the insurer, is paid in case of death during the tenure or maturity of the policy
Benefit	No monetary benefit, only reimbursement of loss/damage amount	The monetary benefit is paid to the insured or nominee

 

Conclusion

 

It is important to understand the differences between these two insurance terminologies so that you can choose the right insurance amount as per your policy and needs. Choose the optimal sum insured and sum assured as per your insurance policy for a secure future.

 

Tata AIA Life online offers a  guaranteed1 return insurance plan that offers life cover, assured returns, tax benefits, unique riders, loan against policy and much more! To know more, get in touch with our insurance experts.

 

L&C/Advt/2021/May/0638