Friday, December 12, 2008

What is Sum Assured?

Almost everyone who has a Life Insurance, must have heard the term "Sum Assured". But, do we know the real meaning of the term? How does this affect ourselves? We will try to put some light on this in this post...

The Sum Assured is actually the reason for which we buy Life Insurance. This amount affect the insured while living as well as after life. It is the amount that would be paid to the nominee in case of the death of the insured person (The after life effect) and plays a crucial role in determining the premium one has to pay to get the policy (The effect on an alive person).

What does Sum Assured (SA) mean?

At the time of signing a life insurance contract, the insurer (insurance company) and the insured (buyer of the policy), agree on an amount that would be payable if the insured dies. This would be handed to the nominee, which is decided by the insured. This is actually the amount for which the insured is paying the premium (a regular payment made to the insurer).

How do we reach the amount?

But how would I know what is sufficient amount in my case? As such there are no formal rules for arriving at this value. It can vary depending on your life style. Ideally it should be enough to last till the dependents are not able to earn themselves. It is suggested to have this amount at 6 to 10 times the current annual income of the person insured. A high SA would push the premium to a higher level and may also make a medical check-up necessary.

Relation with Premium

This actually depends on the type of the policy. In traditional policies (Term insurance, Endowment, money back etc.), SA determines the premium where as in case of market linked plans (ULIP), premium determines the SA. In ULIPS, insurer typically lets you choose 5-50 times the premium as SA amount. However, the cost increases as the SA goes high in such a scenario.

Sum Assured v/s Sum Insured

SA is the pre-agreed sum that the insurer pays in case of a death of the insured. The sum insured (SI), is the compensation paid to the insured for his losses. SI is generally a term used in insurances other than Life. For example, if you have a car insurance of Rs 2 Lac, you will get upto 2 Lac in case of any damages to the car.


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