In the realm of life insurance, Sum Assured refers to the guaranteed amount the insurance company pays to the beneficiary if the policyholder passes away during the term of the policy. This figure is agreed upon at the inception of the policy and does not fluctuate, ensuring certainty for the beneficiaries.
Importance and Calculation
How is Sum Assured Determined?
The Sum Assured is calculated based on several factors, including:
- Policyholder’s Age: Younger individuals typically get higher sums assured for lower premiums.
- Health Condition: Healthier individuals are likely to attract better sums assured.
- Occupation: High-risk jobs can lead to lower sums assured or higher premiums.
- Income and Financial Obligations: Higher income and significant financial responsibilities may warrant a higher sum assured.
The formula for calculating premiums can be variable, but generally includes a base rate which is influenced by an underwriting process considering the factors mentioned above.
Example
If a policyholder selects a life insurance policy with a sum assured of $100,000, this is the amount paid to the beneficiaries upon the death of the policyholder, irrespective of the premiums paid over time or the policy’s remaining duration.
Types and Considerations
Types of Life Insurance Based on Sum Assured
- Term Insurance: Pure risk cover where the sum assured is payable only if the policyholder dies within the term of the policy.
- Whole Life Insurance: The sum assured is payable whenever the policyholder dies, adding the element of savings and sometimes dividends.
- Endowment Plans: Provides the benefit of a sum assured payable either upon death within the term or as a lump sum at the end of the policy term.
Special Considerations
- Critical Illness Rider: Some policies offer an additional sum assured in case of diagnosis with critical illnesses.
- Inflation Protection: Options to increase the sum assured periodically to keep pace with inflation.
- Loans and Advances: Some policies allow borrowing against the sum assured.
Historical Context
The concept of the sum assured in life insurance dates back to the formation of the first insurance contracts in the 17th century. This fixed amount provided a form of financial security to beneficiaries at a time when such protections were scarce.
Applicability and Comparisons
Sum Assured vs. Sum Insured: Though they may sound similar, sum insured typically refers to the amount covered in general insurance policies like health or property insurance, whereas sum assured is specific to life insurance.
Related Terms
- Policyholder: The individual who owns the life insurance policy.
- Beneficiary: The person or entity entitled to receive the sum assured upon the policyholder’s death.
- Premium: The periodic payment made to keep the insurance policy active.
- Underwriting: The process insurance companies use to assess risk and determine the sum assured and premium.
FAQs
Q1: Can the sum assured be changed after the policy is issued? A: Generally, the sum assured is fixed at the policy’s inception. However, some policies may offer the option to increase the sum assured at specified intervals.
Q2: Are there tax benefits associated with the sum assured? A: Yes, premiums paid towards a life insurance policy can provide tax benefits under sections like 80C of the Income Tax Act in several jurisdictions.
Q3: How does the sum assured differ from the maturity benefit? A: The sum assured is the guaranteed amount payable on death, whereas the maturity benefit is the amount payable to the policyholder if they survive the policy term, applicable in endowment and similar policies.
References
- “Life Insurance: Principles and Practices” by Brian Apap
- “Essentials of Personal Financial Planning” by Susan M. Tillery, Thomas N. Tillery
- “The Fundamentals of Insurance” by Hogh John
Summary
The sum assured in a life insurance policy signifies the guaranteed benefit payable upon the policyholder’s death, providing financial security and peace of mind to the beneficiaries. Determined at the inception of the policy, the sum assured is influenced by various factors like age, health, and occupation. Understanding the intricacies of the sum assured, including its determination, types, and implications, is crucial for making informed insurance decisions.
