What is Sum Assured in Life Insurance? Understanding Its Meaning and Significance

Life insurance is one of the most important tools you can use to protect your family's future. But understanding all the terms related to insurance can feel like trying to read a foreign language. One common term that often confuses people is sum assured in life insurance.

In this article, we'll try to  understand what  sum assured means in life insurance so that you  feel confident about choosing the right amount for your family. Let's begin!

Meaning of Sum Assured in Life Insurance 

Sum assured  is the amount of money your insurance company promises to pay to your loved ones, if something happens to you. It's like a strong financial safeguard to help them stay secure when you're not around. 

When you buy a life insurance policy, you make  a deal with the insurance company. You agree to pay them a small amount regularly (called a premium), and in return, they promise to give your family a fixed amount (the sum assured) if something happens to you. 

This amount isn’t random — it's carefully calculated to make sure your family can pay for things like daily expenses, loans, or even your child's education. It's the heart of your life insurance policy, whether you're at a term insurance plan or a ULIP or a savings plan.

Sum Assured: How It Works 

The life insurance company pays the sum assured to your loved ones if something happens to you.  

Let’s understand it with an example: 

• Scenario: You’re 35 years old and buy a life insurance policy with a sum assured of ₹1 crore for 20 years. 
• What Happens: If something happens to you during those 20 years, your family gets ₹1 crore. If you live longer than 20 years, the policy ends, and no money is paid out (unless it's a policy with a maturity benefit). 

The sum assured is decided based on things like your age, lifestyle, income, and what your family might need in the future. 

How to Calculate the Sum Assured in Life Insurance Policy? 

Choosing the right life insurance sum assured is super important. If it's too low, your family might struggle financially. If it's too high, you might end up paying more than you need to. Here's how you can calculate it: 

Step 1: Think about how much you earn in a year 

Step 2: Multiply that by 10–15 times to account for future expenses and inflation 

Step 3: Add any loans or debts you have (like a home loan or car loan) 

Step 4: Include future goals, like your child's education or wedding 

Step 5: Subtract any savings or investments you already have for these goals 

For example, if you earn ₹10 lakh a year, your sum assured could be around ₹1–1.5 crore, depending on your debts and goals. 

Sum Assured vs. Sum Insured – What's the Difference? 

You might have heard the terms sum assured and sum insured and wondered if they're the same thing. To clarify, they're not the same!

Here's the difference:

In simple terms, sum assured is for life insurance, and it's a fixed amount. Sum insured is for things like health or car insurance, and it's the maximum amount the insurance company will pay if something goes wrong. 

For a deeper understanding, read our blog on difference between  life assurance and life insurance.   

Factors That Influence the Sum Assured You Choose 

Choosing the right sum assured isn't a one-size-fits-all thing. Here are the key factors to think about:

• Age: Your age matters a lot. If you're young, you can get a higher sum assured at a lower cost. If you're older, you might need to balance coverage with what you can afford. For example, if you're 25 and just starting your career. You're healthy, and the chances of health issues are low. This means you can get a higher sum assured at a lower premium. But if you're 45, you might need to think about health risks and choose a sum assured that fits your budget. 
• Income: Your income is the foundation of your sum assured. A good rule of thumb is to choose a sum assured that's 10–15 times your annual income. Let's say you earn ₹8 lakh a year. A sum assured of ₹80 lakh to ₹1.2 crore would be a good starting point. This ensures your family can maintain their lifestyle for at least 10–15 years if something happens to you. 
• Lifestyle: Do you have a lavish lifestyle? Or maybe dependents with special needs? These things can affect how much coverage you need. For example, if you have a family of four and live in a big city, your expenses will be higher. You'll need a higher sum assured to cover your daily expenses, rent etc. On the other hand, if you have a small family and live a simple life, you might need less coverage. 
• Future Financial Goals: Think about your children's education, your spouse's retirement, or even paying off a mortgage. Your sum assured should cover these goals. For example, if you have a home loan of ₹50 lakh and want to save ₹20 lakh for your child's education, your sum assured should be at least ₹70 lakh plus enough to cover daily expenses.

Types of Sum Assured in Insurance 

Not all sum assured policies are the same. Here are the three main types: 

1. Level Sum Assured: This is the simplest type. The amount stays the same throughout the policy. For example, if you choose ₹1 crore, your family will get ₹1 crore no matter when something happens. 
2. Increasing Sum Assured: This type grows over time. It's great for keeping up with inflation. For example, your coverage might start at ₹50 lakh and increase by 5% every year. Suppose you buy a policy today with ₹50 lakh coverage. In ten years, due to inflation, ₹50 lakh might not be enough. But with an increasing sum assured, your coverage grows to ₹81 lakh in ten years (at 5% annual growth). This ensures your family's needs are met even as prices rise. 
3. Decreasing Sum Assured: This type goes down over time. It's often used for policies tied to loans. For example, if you have a home loan, your coverage might decrease as you pay off the loan. Let's say you take a home loan of ₹1 crore for 20 years. In the first year, your loan balance is ₹1 crore, so your sum assured is ₹1 crore. By the 10th year, you've paid off half the loan, so your sum assured decreases to ₹50 lakh. This way, you're only paying for the coverage you need. 

Each type has its pros and cons, so think about what works best for you. 

Why Choosing the Right Sum Assured Matters? 

Picking the right sum assured is very important. Here's why:

• Financial Security: It ensures your family can keep living the way they're used to, even if you're not around.  Without the right sum assured, your family might struggle financially. 
• Debt Repayment: It helps pay off loans or debts, so your family isn't stuck with them. For example, if you have a home loan of ₹50 lakh, your sum assured should be enough to pay it off. This way, your family doesn't have to worry about losing their home. 
• Future Goals: It can fund big things like your child's education or wedding. Let's say you want to save ₹20 lakh for your child's education. Your life insurance sum assured should include this amount so your child's future isn't compromised. 

In other words, these essential features of life insurance are there to catch your family and make sure they're okay. 

Common Mistakes to Avoid When Choosing Sum Assured 

Choosing the right sum assured in insurance is like selecting the right-sized umbrella — too small, and you'll get drenched; too big, and it's simply unnecessary. So let’s steer clear of the mistakes people often make while choosing a sum assured:

• Underestimating Your Family's Needs: One of the biggest mistakes is choosing a sum assured that's too low. Think about it: if your family needs ₹1 crore to cover expenses but you've only insured yourself for ₹50 lakh, they'll be left struggling. 
• Ignoring Inflation: Prices go up over time — what costs ₹50 today might cost ₹100 in a few years. If your sum assured doesn't account for inflation, it might not be enough to cover future expenses.

If your child's education costs ₹10 lakh today, it could cost ₹20 lakh in 10 years due to inflation. Go for an increasing sum assured policy that grows over time to keep up with rising costs.

• Focussing Only on Premiums: It's tempting to pick a policy with the lowest premium, but this can backfire. A cheap policy might not offer enough coverage, leaving your family underinsured.

For example, a policy with a ₹10 lakh sum assured might have a low premium, but it won't cover your family's needs if something happens to you. You must alance affordability with adequate coverage. Remember, the goal is to protect your family, not just save money. 

• Forgetting About Future Goals: Your sum assured should cover not just current expenses but also future goals like your child's education, wedding, or your spouse's retirement.
• Not Reviewing Your Policy Regularly: Life changes — you might get married, have kids, buy a house, or get a promotion. If your sum assured doesn't change with your life, it might not be enough. 

For Example: If you bought a policy with ₹50 lakh coverage when you were single, it might not be enough now that you have a family. 

The Solution? Review your policy every 2–3 years or after major life events. Update your sum assured if needed.

• Overlooking Riders: Riders are like add-ons that give your policy extra protection. Skipping them can leave you underinsured. 

For Example: A critical illness rider can pay an extra ₹10 lakh if you're diagnosed with a serious illness. Without it, you might have to dip into your savings. 

The Solution? Add riders like accidental death benefit, critical illness cover, or waiver of premium to enhance your coverage.

• Not Considering Loans and Debts: If you have loans or debts, your sum assured should be enough to pay them off. Otherwise, your family might be stuck with the burden. For example, if you have a home loan of ₹50 lakh, your sum assured should include this amount. When you calculate your life insurance sum assured, add all your loans and debts. . 
• Assuming One Size Fits All: Suppose your friend bought a ₹1 crore term plan and you decide to follow suit. However, his sum assured might not work for you. Everyone's financial situation, lifestyle, and goals are different.
• Ignoring the Claim Settlement Ratio: The claim settlement ratio tells you how often an insurer pays claims. Choosing a company with a low ratio can lead to delays or rejections If an insurer has a 90% claim settlement ratio, 10 out of 100 claims are rejected. Pick an insurer with a high claim settlement ratio (above 95%).

Final Thoughts 

Understanding sum assured in life insurance doesn't have to be hard. It's all about making sure your family is protected, no matter what happens. Whether you're just starting to look into life insurance online or updating your policy, choosing the right sum assured is a big step toward peace of mind. 

At Bandhan Life, we're here to make life insurance simple and easy for you. So, why wait? Take the first step toward securing your family's future today. If you have any questions, feel free to ask — we're here to assist you.

Frequently Asked Questions 

What happens if my sum assured is too low? 

If your sum assured is too low, your family might struggle to pay for daily expenses, debts, or future goals. Always aim for enough coverage. 

For example, if your sum assured is only ₹20 lakh but your family needs ₹1 crore to cover expenses, they'll face financial difficulties. 

Does the Sum Assured include bonuses? 

Sometimes, yes. In some policies, bonuses can be added to the sum assured. But this depends on the type of policy and the insurance company. 

For example, if you have a participating policy, the insurance company might add bonuses based on their profits. 

Can I increase my sum assured after purchasing a policy? 

Yes, some insurers let you increase your sum assured by paying higher premiums. Check with your provider for details. 

For example, if you get a promotion and your income increases, you might want to increase your sum assured to match your new lifestyle. 

How much sum assured is ideal for me? 

A good starting point is 10–15 times your annual income, adjusted for debts and future goals. 

For example, if you earn ₹10 lakh a year, your sum assured could be around ₹1–1.5 crore, depending on your debts and goals.