Understand the Significance of Sum Assured in Term Insurance
In today's fast-paced world, life insurance is crucial for protecting your loved ones from the financial impact of an unfortunate event. Everyone is likely to have different needs.
Therefore, term insurance companies allow policyholders to determine the sum assured, which is the amount payable to their nominee in the event of demise. To provide comprehensive coverage, insurers offer various components within a life insurance plan, such as death benefits, premiums, and maturity benefits.
Understanding the concept of sum assured is essential to maximize the benefits of your life insurance policy. Continue reading to learn more about sum assured and its applicability.
Sum Assured: Meaning and Understanding
Sum assured is a pre-determined fixed amount that an insurance company pays to the policyholder's nominee upon an uncertain occurrence. Buying term insurance provides peace of mind, knowing you've secured your family's financial future.
- The fixed amount is decided based on the life insurance policy you choose and its tenure.
- Policyholders can also opt for maturity benefits under specific types of life insurance plans with a sum assured.
- In premium life insurance plans, the company ensures the sum assured is paid as a death benefit to the nominee in unforeseen circumstances.
For instance, the COVID-19 pandemic has heightened awareness of life insurance's importance, prompting many prospective policyholders to opt for higher sums assured under term insurance.
Difference Between Sum Assured and Sum Insured
To understand the difference between sum assured and sum insured, check out the details below in the table:
Sum Assured |
Sum Insured |
|---|---|
| Sum assured is a fixed amount covered under life insurance policies such as term life, whole life insurance, etc. | Sum insured is a fixed amount covered under non-life insurance policies such as motor, travel, health, and accident insurance. |
| Sum assured is typically estimated based on Human Life Value (HLV). | Sum insured is usually estimated based on the value of assets. |
| Sum assured is a pre-determined fixed amount decided at the time of purchasing life insurance. | Sum insured is the compensation an insurance company provides for loss or damage to an asset. |
| Sum assured refers to the pre-decided amount the insured person or nominee receives. In specific types of life insurance plans, policyholders may also receive maturity benefits. | In non-life insurance, no maturity benefit is involved with the sum insured. |
Factors to Consider When Selecting the Ideal Sum Assured
While it's challenging to predict unfortunate circumstances like accidents or serious medical problems, they can incur significant costs. Many people opt for life insurance to financially protect their families. An optimum sum assured provides peace of mind. To maximize your life insurance benefits, consider these factors when deciding on the sum assured:
Age
Your age is a primary factor in determining the required sum assured. Generally, the younger you are, the more sum assured you can secure.
Benefits of buying life insurance early:
- Lower premiums for a higher sum assured.
- For endowment plans, investing early with a well-chosen sum assured can support early retirement goals.
Thus, age is a beneficial factor for purchasing a higher sum assured due to comparatively lower premiums. While your term plan premiums might increase by 6% to 8% annually, remember that the sum assured focuses on providing financial protection, not just premium payments.
Income
According to IRDAI research, 37% of Indian citizens have access to life insurance schemes. A significant factor contributing to this is the lower income rate, leaving approximately 400 million people in India without term insurance. Therefore, your budget is a crucial element to consider when estimating the sum assured.
You can increase the sum assured over time if your income grows. Selecting an insufficient sum assured can leave you underinsured. This could result in your family facing financial hardship upon your demise, as the fixed payable amount might not be adequate.
Lifestyle
When deciding your sum assured, consider your lifestyle needs and habits to cover all potential contingencies.
| Unhealthy Lifestyle | Healthy Lifestyle |
|---|---|
| If you have existing medical issues, consider opting for a higher sum assured for additional financial safety. | If you lead a healthy life, there's a chance you may outlive the policy period. |
| When buying life insurance, disclose all habits, such as alcohol or smoking consumption, to your insurer. | A basic sum assured life insurance plan typically does not offer survival benefits. To avail of maturity benefits, consider opting for a premium cover. |
Inflation
In today's dynamic world, inflation rates fluctuate annually, impacting household, education, and medical expenses. To account for changes in your annual financial budget and future planned funding for your child's education or retirement, you should invest in a life insurance policy while considering the inflation rate.
Medical History
When deciding your sum assured, clarify any policy-related doubts and share your past medical records or any history of specific diseases with your insurer. This will help you choose a sum that covers potential treatment expenses and provides for unforeseen circumstances like death.
Conclusion
After the COVID-19 pandemic, the importance of life insurance has been globally recognized. A clear understanding of sum assured empowers you to financially protect your family and choose a suitable insurance plan based on your needs.
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