In India, the insurance sector is categorized into two main segments: General Insurance and life insurance. The term "sum assured" is specific to the life insurance segment, whereas "sum insured" pertains to general insurance.
Below, we will delve into the significant distinctions between these two terms.
What is Sum Assured?
Sum assured is a predetermined amount the insurance company agrees to pay at the end of the policy term or to the nominee upon the death of the policyholder. Premiums paid by policyholders to insurers are dependent on the total sum assured. A higher life cover (sum assured) means a higher insurance premium.
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 guaranteed 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.
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What is Sum Insured?
The term "sum insured" applies to general insurances such as health, motor, and home insurance. These policies operate on the principle of indemnity, offering compensation for damages, loss, or injury to the insured asset.
The Sum Insured concept ensures policyholders receive only compensation for their losses, preventing any monetary gains. It represents the total cover provided for non-life insurance policies.
For sole breadwinners, purchasing life insurance with an adequate sum assured is crucial to cover current and future family expenses. Increasing inflation and lifestyle costs may influence the required life cover amount.
Difference between Sum Insured and Sum Assured
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Sum Assured |
Sum Insured |
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The term sum assured refers to the pre-decided amount a nominee will receive upon the demise of the policyholder. |
The term insured refers to the maximum reimbursement amount one receives at the time of insured loss. |
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The sum assured is determined based on the various factors like budget, inflation, income, lifestyle, and overall working period |
The sum-insured value is decided based on the insured asset. In the situation of medical insurance, based on the past medical issues or pre-existing diseases, sum insured value is determined. |
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There is no monetary benefit in the sum insured. The amount of damage or loss is the only amount to be reimbursed. |
Nominees or insured individuals receive financial benefits, such as guaranteed return insurance policies that provide life cover alongside investment benefits. |
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Sum Assured relates to Life Insurance Policies |
Sum Insured related to Non-Life Insurance Policies like Motor, Travel, Property, credit , accident, insurance, etc. |
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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:
- Ensure that your sum assured adequately covers all your financial obligations, including sponsoring your child's education or marriage and sustaining your family's living expenses.
- Your sum assured should provide sufficient financial security for all your dependents, including your spouse, children, and parents.
- Consider your age when determining your sum assured. If you are young, opt for a higher sum assured as you have a longer life expectancy.
- Your insurance sum assured should be affordable and not strain your finances.
Bottom Line
In essence, while both Sum Insured and Sum Assured play pivotal roles in the domain of insurance, they operate in distinct contexts and serve different purposes. Sum Insured safeguards against losses incurred due to unforeseen events in general insurance policies, whereas Sum Assured provides a guaranteed payout to beneficiaries in life insurance policies.
Understanding these disparities empowers individuals to make informed decisions while purchasing insurance, ensuring that their coverage aligns with their specific needs and offers comprehensive protection against life's uncertainties.
FAQs
What is Sum Assured and Sum Insured?
Sum Assured primarily applies to life insurance policies and represents the guaranteed amount payable to the nominee or beneficiary in case of the policyholder's demise. On the other hand, Sum Insured is prevalent in general insurance policies, indicating the maximum amount an insurer will pay out for damages or losses covered by the policy.
How does Sum Assured differ from Sum Insured?
While Sum Assured pertains to life insurance and guarantees a payout upon the policyholder's death, Sum Insured is relevant to general insurance policies, ensuring compensation for specified damages or losses.
What factors determine the Sum Assured in life insurance?
The Sum Assured in life insurance is influenced by various factors, including the policyholder's income, financial obligations, lifestyle, age, health condition, and the desired level of coverage to ensure adequate financial protection for the family or dependents.
What factors affect the Sum Insured in general insurance policies?
The Sum Insured in general insurance is determined by factors such as the value of the insured asset (e.g., property, vehicle), prevailing market rates, replacement cost, and the extent of coverage required to mitigate potential risks adequately.
Why is it essential to ensure an adequate Sum Assured in life insurance?
A sufficient Sum Assured in life insurance ensures that the policyholder's dependents or beneficiaries are financially secure in the event of their untimely demise, covering expenses such as outstanding debts, daily living expenses, education, and other financial obligations.
How can one determine the appropriate Sum Insured for general insurance policies?
Assessing the replacement value of assets, estimating potential risks, considering inflation, and evaluating current and future financial liabilities are essential steps in determining the appropriate Sum Insured for general insurance policies.
What happens if the Sum Assured or Sum Insured is insufficient?
Insufficient Sum Assured in life insurance may lead to financial hardships for the policyholder's beneficiaries, while inadequate Sum Insured in general insurance could result in out-of-pocket expenses or under compensation for damages or losses incurred.
How can I ensure I have the right Sum Assured or Sum Insured for my insurance needs?
Seeking guidance from insurance professionals, conducting thorough assessments of your financial situation and insurance requirements, and reviewing policy terms and coverage options can help ensure you have the appropriate Sum Assured or Sum Insured to meet your insurance needs effectively.
Whether you are looking for insurance for your business, vehicle, home, or family, or even if you want to become a PoSP agent in India, PBPartners is here for you!
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