‘Sum insured’ and ‘sum assured’ are among the fundamental terms an individual essentially needs to understand before choosing a life insurance plan. The two terms are the basis on which a plan is evaluated.
Though a novice may interpret the two to mean the same, the actual meanings are significantly different. While sum assured refers to the benefit, sum insured is the reimbursement of insured loss.
What is sum insured?
Non-life insurance policies, such as motor, home and health, which work on the principle of indemnity offer an amount called sum insured.
Indemnity refers to the compensation that insurer pays for any loss, damage, or injury. These policies provide coverage only for the losses due to any damage that happens to the insured asset.
For instance, an individual buys a health insurance policy that offers a sum insured of ₹1 lakh. Now, in case of the insured person’s hospitalisation, any bill amounting to less than ₹ 1 lakh will be entirely paid by the insurance company.
However, if the bill amount exceeds ₹1 lakh, then the insurer will be liable to pay only ₹1 lakh and the remainder will have to be borne by the policyholder.
The idea behind this concept is the compensation should not lead to a monetary benefit to the policyholder and only the amount that is equal to the actual loss suffered should be paid to him. This is why the cover in non-life insurance policies is known as the sum insured.
What is sum assured?
Sum assured is a pre-decided amount that the insurance company pays to the policyholder when the insured event takes place.
For example, when you buy a life insurance policy, the insurer guarantees to pay a sum assured to the nominee in case of the insured person’s demise. It is the sum assured that determines the amount of premium payable by the policyholder to the insurer. Typically, life insurance plans offer sum assured and non-life insurance policies sum insured.
(Sourced from Policybazaar.com)
