Sum assured
The amount a policyholder chooses when buying a life insurance policy, paid to the nominee if the insured dies during the policy term — the figure a term insurance plan promises in full.
In plain language
When you buy life insurance, you pick a number first. That number is the sum assured — the amount the insurer promises to pay if you die while the policy is active.
The workbook uses the phrase in exactly one place: under term insurance, where it says that on your unfortunate demise during the policy term, your nominees will receive the "Sum Assured" which you had selected while purchasing the plan. You choose it up front, before you pay a single premium, and it does not change over the life of a term plan.
It is not the premium. The premium is what you pay every year; the sum assured is what your family receives if the worst happens.
How it works
For term insurance, the workbook's rule is simple and complete: die during the term, and the nominee gets the sum assured, in full. Survive the term, and nothing is paid — the workbook's own comparison table is explicit that term insurance is active only for a fixed period.
The workbook describes the other life products differently, and the wording matters. Endowment insurance pays "a lump sum amount" on maturity or on death — the workbook does not use the phrase "sum assured" for it in this booklet. Whole life insurance simply "stays active as long as you pay the premiums", with no payout figure named. A unit linked plan invests part of the premium and pays out based on the resulting investment, not a chosen fixed figure.
So while "sum assured" is everyday insurance vocabulary for the amount a policy promises, the workbook itself attaches the exact phrase only to term insurance in this booklet.
A worked example
Amounts are illustrative; the workbook gives no method for calculating how a sum assured should be chosen.
Vikram, 32, buys a term insurance policy and chooses a sum assured of Rs 75,00,000, based on his own sense of what his family would need if he died. He pays a premium every year to keep the cover active.
He dies in an accident in year 9 of a 25-year term. His nominee — his wife — receives the full Rs 75,00,000, exactly the sum assured he chose at the start, regardless of how many premiums he had paid by then.
Had he instead survived the full 25-year term, the policy would have paid nothing at all on maturity — the workbook's own point about term insurance having no survival benefit. The sum assured only ever becomes payable on death within the term.
Why NISM asks about it
Chapter 6 (Insurance Related Products) introduces "Sum Assured" inside its definition of term insurance, in the same table that contrasts term, endowment, whole life and unit linked insurance. Expect a question naming an amount as the sum assured and asking when it becomes payable — on death during the term, for a term plan — and a question distinguishing the sum assured from the premium.
Common exam traps
- Sum assured is not the premium. One is what you pay; the other is what is paid to your family.
- A term plan pays the sum assured on death and nothing on survival. There is no maturity value to add to it.
- The workbook's own wording ties the exact phrase "Sum Assured" to term insurance. Endowment's payout is described as a "lump sum amount"; a unit linked plan's payout depends on fund performance. Do not assume every life policy in this booklet pays a fixed "sum assured" figure.
- You choose the sum assured when you buy the policy, not when you make a claim — it is fixed at the outset.
- Do not confuse this with sum insured, the corresponding figure in a general or health insurance policy, which reimburses an actual loss rather than paying a fixed promised amount.
Check yourself
1.A household spends ₹30,000 a month. The sole earner holds one endowment policy with a sum assured of ₹3,00,000. How should the adequacy of this cover be assessed?
- a)It is adequate, since some cover exists
- b)It covers under one year of household expenditure — the test is how long the family could live on it, plus outstanding liabilities and dated goals at future value
- c)It is adequate because the premium is affordable
- d)Adequacy cannot be assessed without knowing the maturity value
Show the answer
Answer: (b) It covers under one year of household expenditure — the test is how long the family could live on it, plus outstanding liabilities and dated goals at future value
Annual expenditure is ₹3,60,000, so a sum assured of ₹3,00,000 buys the family about ten months. That is not protection; it is a delay — the household arrives where it would have been anyway, a year later. The booklet gives no formula, and none is examinable, but the reasoning comes straight from Chapter 3: a plan must estimate financial needs "during his or her lifetime", and goal-based investing works from future value. Three things therefore belong in the calculation — ongoing household expenditure until the children earn, outstanding liabilities, and dated goals such as education and marriage at their future cost, since inflation does not pause for a death. Option (c) reverses the logic: affordability is a constraint on the premium, not a measure of the cover. Option (d) confuses two products — under term insurance there is no maturity value at all, and the family's need is unaffected by whether any exists.
2.Why does a term policy provide a much larger sum assured than an endowment policy for the same annual premium?
- a)Because term policies are subsidised by the regulator
- b)Because every rupee of premium either buys cover or is saved for you — term uses almost all of it for cover, while endowment splits it between cover and a maturity lump sum
- c)Because endowment policies cover more causes of death
- d)Because term policies are available only to young people
Show the answer
Answer: (b) Because every rupee of premium either buys cover or is saved for you — term uses almost all of it for cover, while endowment splits it between cover and a maturity lump sum
The difference is structural, not promotional. Term insurance pays the sum assured only "in event of your unfortunate demise DURING THE POLICY TERM" and is "active for a fixed period of time" — nothing is returned on survival, so almost the entire premium buys cover. Endowment insurance is "designed to pay a lump sum amount AFTER A SPECIFIC TERM (on the maturity of the policy) OR ON DEATH" — part of each premium must therefore be set aside to build that maturity amount, leaving less to buy protection. The same arithmetic applies to a ULIP, where "a PORTION of the premium... is utilized to provide insurance coverage and the REMAINING PORTION invested in equity and debt instruments." None of these is a bad product; the error is buying one believing it does the job of another — and the family discovers that only on the worst day of its life. The plain alternative is to buy protection as protection and invest the rest separately, where each charge is visible.
3.Which statement describes term insurance?
- a)It pays a lump sum on maturity as well as on death
- b)Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
- c)It stays active as long as premiums are paid, with no fixed term
- d)A portion of the premium is invested in equity and debt
Show the answer
Answer: (b) Nominees receive the sum assured if the insured dies during the policy term, and the policy is active for a fixed period of time
"In event of your unfortunate demise DURING THE POLICY TERM, your nominees will receive the 'SUM ASSURED' which you had selected while purchasing the plan. Active for a FIXED PERIOD OF TIME (popularly referred to as the 'term of the policy')." Nothing about maturity, nothing returned on survival — and that bareness is exactly what makes the cover so large for so small a premium, since almost the whole premium buys protection rather than being saved for you. The wrong options each describe a different product: (a) is endowment, which pays "a lump sum amount after a specific term (on the maturity of the policy) OR on death"; (c) is whole life, which "stays active as long as you pay the premiums"; and (d) is unit linked insurance, where "a portion of the premium... is utilized to provide insurance coverage... and the remaining portion invested in equity and debt instruments."
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Endowment policyA life insurance policy that pays the sum assured plus accrued bonus on survival to the end of the term as well as on death — an investment-cum-insurance contract with a level premium.
- NomineeThe person you name to receive custody of your money or securities when you die — a custodian who must pass the asset to the legal heirs, not the owner of it.
- Term insuranceLife cover for a fixed period: if you die during the term your nominee receives the sum assured, and if you survive it nothing is paid back. It is the cheapest way to buy protection.
- Keyman insuranceA life insurance policy a company buys on the life of a key executive, paying the premiums and taking the benefit itself — and the one life policy whose proceeds are not exempt under section 10(10D).
- Minimum sum assured ruleThe IRDAI requirement that a life policy provide a minimum sum assured of 10 times the annual premium below age 45, 7 times above 45, and 5 times where the term is under 10 years.
- Sum insuredThe amount specified in a non-life policy that represents the insurer's maximum liability for claims made during the policy period - the ceiling on what the policy can ever pay.
- Telescopic premiumsLife insurance premiums that do not rise in the same proportion as the sum assured - a larger cover costs a lower rate of premium per thousand of sum assured, up to a limit set by each insurer.