Insurance provides a financial safety net to help you take care of your loved ones in case of your unfortunate demise. If you are the only breadwinner, your family depends on you financially to enjoy a decent living standard. Financial needs can be different for each family. Hence insurance company allows you to choose a fixed amount that would be paid to your family in your absence. This makes it crucial to understand the meaning of sum assured and how it works.
What is the Meaning of Sum Assured?
A sum assured is a fixed amount paid to the nominee of the insurance policy in the unfortunate event of the policyholder’s demise during the policy tenure. The insurance company pays the sum assured as per the sum chosen by you at the time of policy purchase. The sum assured also known as the policy cover, is the guaranteed money that the nominee will receive, given you have paid the premiums in full.
How to Calculate your Sum Assured?
You can calculate the sum assured you need using Human Life Value (HLV). It helps you determine the ideal amount required for your family's future needs. There are two methods to calculate the sum assured using HLV.
|Income Replacement Based||In this method, whatever income your family needs for support is covered by a sum assured.
Sum Assured = Annual Income * Years left until Retirement
|Need-Based||In this method, the sum assured is calculated based on the family's monthly expenses till the life expectancy of the spouse or any other dependent member in the family.|
The sum assured varies from person to person and depends on the below factors:
1. Age:Your age will help you determine the coverage you need.
2. Income:Your income helps assess your living standard, and hence it is an essential factor to determine the sum assured.
3. Dependents:The sum assured depends on the total number of dependents. The higher the number of dependents, the higher the sum assured you need.
4. Life and Lifestyle:Lifestyle habits such as drinking and smoking will push your premium up and affect your sum assured.
What is the Difference Between Sum Assured and Sum Insured?
|Sum Insured||Sum Assured|
|Applicability||It is applicable for non-life insurance plans such as home insurance, health insurance, motor insurance, etc.||It is applicable for life insurance plans.|
|Policy nature||The reimbursement is only for the amount of loss or damage.||A fixed, pre-decided amount is given to the nominee in case of a policyholder's death during the policy tenure.|
|Calculation||It is calculated as per the damages incurred by the policyholder.||It is calculated based on the HLV.|
|Benefits||No monetary benefits. The policyholder receives only the amount toward losses.||The monetary benefit is paid to the nominee.|
How Can You Build Sum Assured?
You can invest in life insurance plans for the financial protection of your family. However, life insurance plans are also excellent investment options for long-term goals such as a child’s higher education, marriage, your retirement, etc. All these different life insurance plans carry a life cover by default.
So, you can build your sum assured by investing in different plans or investing in the only protection plan. Your total life cover sum assured consists of the below covers:
1. Term Life Cover
Term insurance cover is a pure protection life insurance. This plan gives you high coverage at a nominal premium cost. The cover ensures the future of your loved ones is secured even when you are not around.
Ideally, you should have a term life cover 10-15 times your annual income. If you are investing in other life insurance plans for important life goals of your children and family you can have a lower term life cover.
However, if you plan to build your wealth through other routes, you better have a larger term cover for the family.
2. Unit Linked Insurance Plan (ULIP)
It is a life insurance policy that allows you to have the benefits of life insurance as well as an aggressive investment portfolio. With ULIPs you can invest in well-diversified portfolios of market-linked instruments such as equity stocks, debt and government securities.
ULIPs like Invest 4G from Canara HSBC Bank of Commerce life insurance allow you to continue your investment till 99 years of age. Thus, ULIPs can also work as a good retirement + pension plan.
3. Endowment Plans
It is a life insurance policy that gives you insurance cover and a saving option. You get a sum assured when the policy matures depending on the policy terms and conditions. In case of your death during the policy tenure, the insurance company pays the nominee the sum assured.
4. Moneyback Plans
These plans offer you a sum assured as survival benefits that are usually evenly distributed throughout the policy term. In case of the unfortunate event of your death, the nominee receives the sum of the whole sum assured.
5. Whole Life Cover
It provides you cover throughout life and not just for specific years, given you have paid all the premiums. The maturity age for these policies is 100 years.
What is Health Insurance Sum Assured?
You can encounter two kinds of health risks in your life – temporary and life-threatening. While temporary health hazards only need temporary medical attention, the life-threatening types will need extensive care. Thus, health insurance covers too, are of two types:
a) Mediclaim Health Insurance
Mediclaim is a sum insured based health insurance policy. Assume you are diagnosed with malaria and get admitted to the hospital. The treatment cost comes to be Rs 80,000. You have a health insurance plan with a sum insured of Rs 5 lakh. As a result, most of the treatment costs will be borne by the insurance company.
b) Critical Health Insurance
Critical health insurance is a health plan with a sum assured. This means you will receive a lump sum benefit from the plan if a covered health event occurs. For example, you buy a health insurance plan with critical illnesses cover like cancer, and the sum assured is Rs 20 lakh. If you are diagnosed with cancer or any other critical illness covered in the plan, you receive a sum assured of Rs 20 lakh.
The world we live in is full of risks and uncertainties. There are various risks like loss of life, assets, health, etc. You cannot possibly prevent the unwanted events from occurring but you can safeguard your financial health from them.
Essential Insurance plans like term life and health insurance plans safeguard you against common hazards in life. At the same time, you can also invest in ULIP plans to build wealth and meet long-term goals.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.