Sum Assured v/s Sum Insured : What is The Difference?

If you buy a term life insurance policy, your policy document would mention the cover amount or the benefit amount under your term insurance policy as Sum Assured. So is Sum Assured the technical word used in every policy document for the amount of cover that a policy extends to the insured person?

But if you buy a health insurance policy or any other policy, your policy document would refer to the benefit amount as Sum Insured. It is perplexing. 

Why are there two different terms used for the cover amount under 2 different types of insurance policies? What is the difference between the Sum Assured and Sum Insured?

Types of Benefits

Before we explain the difference between Sum Assured and Sum Insured, you need to understand how the benefit is paid under different insurance plans and the quantum of benefit which is payable to you when you raise a claim. 

When we just consider the amount of benefits paid under an insurance policy, we can think of 2 types of policies.

• Fixed Benefit Policy
• Indemnity Policy.

Fixed Benefit Plans

Fixed benefit policies are those insurance contracts which mention the exact amount of benefit which would be paid to the nominee in case the adverse event happens. Take for example term insurance policies which are offered by life insurers. 

Here the amount of benefit which is to be paid to the nominee in case of death of the insured person is exactly mentioned in the policy document. If the insured person dies, the family receives the same amount; not a penny less, not a penny more. This is an example of fixed benefit policy. And the benefit amount under such policies is called Sum Assured. The amount of benefit which the nominee would receive is assured in advance, when the policy starts. 

Other examples of such policies could be critical illness assurance, hospital cash etc.

Indemnity Benefit Plans

On the other hand, there are insurance contracts where the amount of benefit received is equal to the actual damage caused by an adverse event subject to an upper limit. 

Consider your regular health insurance policy. How much will it pay you if you unfortunately end up in a hospital taking treatment for a serious illness? It will just pay your hospital bill subject to a maximum of cover amount available under your health insurance policy.

If your policy provides a cover of Rs. 5 Lakh and your hospital bill comes to Rs. 4 lakh, your policy will just pay Rs. 4 lakh. If your hospital bill is Rs. 6 lakh, your policy will pay only Rs. 5 lakh and you will have to pay the remaining Rs. 1 lakh out of your own pocket.

Other types of insurance policies which provide indemnity benefits are car insurance, bike insurance, home insurance etc.

Such policies which make good only for the financial losses you suffer due to an adverse event are called policies with indemnity benefits. They usually have an upper limit to the benefit which they provide. This upper limit is called Sum Insured. 

Sum Insured is the maximum amount which a policy can pay in case the covered adverse event occurs. However, the exact amount which would be paid under the policy is the minimum of Sum Insured and the exact amount of damages. 

Summary

Sum assured is a fixed benefit amount paid by the insurer in case of the insured’s death under a life insurance policy. Sum insured, on the other hand, is the maximum amount payable by the insurer under a health insurance policy to cover medical expenses incurred due to illness or hospitalization.

Key Takeaways

• Life insurance policies provide a fixed amount of benefit in case of death of the insured person.
• The amount of benefit is fixed in advance and mentioned in the policy contract and is called Sum Assured.
• Other types of insurance policies which provide fixed amounts of benefit are critical illness insurance or hospital cash.
• On the other hand, health insurance policies only provide indemnity cover to the extent of financial damage caused by an illness in the form of a hospital bill. 
• Actual amount paid by a policy in case of a health claim is equal to the hospital bill subject to a maximum limit. This maximum limit is called Sum Insured.