What Is 'Sum Assured' In Insurance? Explained

A life insurance policy is a contract between the policyholder, also known as the insured, and the insurance company in the event of the former’s untimely death. The insurance company agrees to pay a predetermined amount to the insured person’s family. The most basic type of life insurance, term insurance provides the family with all-inclusive financial security against life’s unforeseen events. A life insurance policy can make a big difference in one’s long-term financial planning for a secure future by ensuring adequate financial help to safeguard one’s family from life’s uncertainties.

In order to have appropriate financial protection from life insurance, the first step is to understand the concept of sum assured, which determines the degree of coverage for the policy taken.

Under a term life insurance plan, the insurer guarantees to provide financial security for the policyholders’ dependents in the event of their death. The sum assured is the predetermined amount that will be paid to the nominee in the event of the policyholder’s death. The company pays the amount as per the sum chosen by the customer at the time of purchasing the policy.

The optimal sum assured will depend on a variety of factors, including the policyholder’s income, the needs and future aspirations of your dependents, family assets, and any outstanding debts. The sum assured amount must be enough to cover the aforementioned aspects of the dependents’ lives. Your policy’s premium is determined by the sum assured as well as other elements including your age and general health.

When purchasing a life insurance policy, it is crucial that the sum assured be the appropriate amount for the dependents. So, how much should your sum assured be? Well according to Forbes adviser, the standard recommendation states that the sum assured be 10 times your annual salary. The determination of the sum assured can also be done keeping one’s age in mind. For those who are under 30 years old, the sum assured should be 14–15 times the policyholder’s yearly income and 7-8 times the policyholder’s age, for those over 50. It should be at least 12–15 times the yearly expenses when calculated in terms of expenses, taking into account debt commitments like the balance of any existing personal loans or home loans.

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