When we talk about life insurance plans or critical illness insurance plans, there is an assurance that your family will receive the entire cover amount in case of the occurrence of a certain insured event. This is called sum assured. For example- you’ve purchased a term insurance policy of INR 1 Crore, and during your policy duration you pass away, your family will receive the sum assured of INR 1 Crore. 

However, in health insurance, the cover is expressed as a sum insured. Now, before we get into the details of what is sum insured and how it works, let us take a step back and learn a bit about health insurance first. 

What is Health Insurance and how does it work? 

In a health insurance policy, all the expenses related to your hospitalization are covered. It includes your room charges, the cost of your surgery, doctor’s fees, post-surgery follow-up, etc. This is usually a yearly contract (could also be a 2-3 year contract) that is renewable for a lifetime. 

Health insurance claim, however, works on the basis of indemnity. 

The concept of indemnity basically means that the plan will pay for the expenses that are actually incurred - and not the entire amount available to you. Let us understand this with the help of an example.

Say you have a health insurance plan of INR 20 Lakhs. You meet with an accident for which you are required to undergo surgery. The overall cost of the surgery and hospitalization comes up to INR 2 Lakhs. In such a scenario, your health insurance will only provide you with an indemnity cover of INR 2 Lakhs (considering other terms and conditions) instead of giving you the entire INR 20 Lakhs cover amount that is available.

How is it different from a Critical Illness Cover or a term insurance cover? 

In a term insurance plan, once the death occurs - the claim is paid out and the policy is closed. Similarly, in a critical illness cover, the insurer pays you a sum assured in case you get diagnosed with a serious illness that is listed in your insurance policy. Once the claim is paid out - the policy is closed, since the insured event has occurred and has been covered. 

Now, if you get another critical illness, later on in life - the policy will not pay for it again. 

For example- you purchase a critical illness policy and are diagnosed with kidney disease (that is listed in your policy). With the help of your critical illness policy, you will receive a sum of money. As soon as this happens, your critical illness cover will become void and be closed.

Let’s say 5 years down the lane you have developed heart disease. Although the illness is listed in your policy, you will not be receiving any sum assured for this illness. This is because a Critical Illness policy only helps you cover one insured event or illness throughout your lifetime.

On the other hand, a health insurance policy allows you to make various claims for multiple valid events throughout your lifetime. In a given year, you can make any number of claims, up until the total sum insured is exhausted. 

What is the meaning of Sum Insured?

Sum insured is the amount of money that is available to you, for the purpose of your hospitalization expenses - per year. It is the maximum amount that the insurance company will pay in a particular year if you undergo hospitalization. If your hospitalization expenses exceed the sum insured, you will have to pay the excess amount out of your pocket.

Does the Sum Insured expire once used? 

This question is likely to come to your mind at some point when we talk about sum insured. In health insurance, the sum insured is per year. Say - if you have a health insurance cover of 5 Lakhs, it means that you have a cover of 5 lakhs per year. 

At the end of every policy year, your policy gets replenished - and your entire sum insured is restored if you renew your policy. 

For example - you have a Rs 5 lakh health insurance policy. After paying the premiums for a few years, you get hospitalized for surgery, and the entire Rs 5 lakhs get exhausted in that one year. Now, if you go undergo another hospitalization in the same year, you’ll have to for the expenses out of your pocket (unless you have a policy with the restoration benefit feature) because your entire sum insured is used up.

Now, let’s say you need to get hospitalized next year. As the sum insured gets revoked every year, you will receive a fund of Rs 5 lakhs again if you renew your policy - to help you with the hospitalization expenses. 

So, as long as you renew your health insurance policy and pay the premiums regularly, you will receive the sum insured every year. 

Now that you’ve understood what is sum insured in insurance, let’s understand how much sum insured you should buy.

How much Sum Insured do you need? 

If you are planning to purchase a health insurance plan at a young age, then you should make sure your coverage amount is relevant for your lifetime. Today, the health care inflation is around 8% to 10%. The younger you are, the more years of inflation you are likely to face in your lifetime. 

Let’s say you, a 25-year-old young man, have purchased a health insurance plan. Your cousin, who is around 40 years old, decides to purchase a health insurance plan along with you. For the sake of simplicity, let’s assume that we all need a cover that is enough for us until we are 60 years old. 

You will be required to get a cover that will be enough after 35 years of inflation, while your cousin will only need to prepare for 20 years of inflation. As a result - the amount you’ll need to cover for your old age will be much higher than the amount your cousin will need to cover for the same age.

Hope this article clarifies the basics of how a health insurance sum insured works, and how you should go about choosing the right amount for your lifetime. 

If you have any further questions, you can post it on the Beshak Insurance Forum and get answers from insurance experts within 6 to 8 hours.