Sum insured
Also written Sum insured limit · Cover amount
The 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.
In plain language
Every non-life policy carries a number at the top of it. That number is the sum insured.
It is the amount specified in the policy that represents the insurer's maximum liability for claims made during the policy period. Whatever the actual loss, the policy cannot pay more than this.
The insurer may specify a minimum and a maximum sum available. So the buyer chooses within a range the insurer sets.
The premium follows from it. Premium payable is a function of the sum insured and the assessed risk.
One more thing to hold on to. The sum insured is a limit for the whole policy period, not for each claim. Three claims in one year draw on the same pot.
How it works
The definition and the two bounds. The sum insured is the amount specified in the policy representing the insurer's maximum liability for claims made during the policy period. The minimum and maximum sum may be specified by the insurer.
How it drives the premium. Premium payable is a function of the sum insured and the assessed risk. Risk is assessed by the type of cover: age, gender and health history for medical cover; cubic capacity of the vehicle, place of registration and age of the vehicle for motor insurance. Premium is typically paid at the inception of the policy.
And how much it drives it. In health insurance the premium rate per additional lakh of coverage drops significantly as coverage increases, and becomes almost negligible after a certain amount. The workbook's illustration: the premium on a Rs 100 lakh health policy may be just a few single digit thousand rupees more than on a Rs 50 lakh policy.
Two benefits that put the sum insured back.
| Benefit | What it does |
|---|---|
| Restoration | The insurer restores the sum insured to 100% in case of either partial or full exhaustion of the sum insured |
| Recharge | The sum insured is restored to 100% only when it gets reduced due to a claim |
The ceiling across multiple policies. Multiple indemnity policies such as health policies make very little sense, because the total claim amount cannot exceed the sum insured on all policies put together. Multiple policies also mean dealing with multiple insurers at claim time.
The one IRDAI override on that. Where the insured has covered the same risk with more than one company, it is the insured who chooses which insurer to claim from. The chosen insurer has no option to apply the contribution clause where the claim amount is less than the sum insured in the chosen policy. Where the claim exceeds the sum insured under the chosen policy, the insured may claim under another policy, and the claim is then settled by applying the contribution provisions. The workbook's advice is that the insured should normally choose the employer policy first.
The other rules that reference it.
- Term. Non-life insurance is typically for 1 year, and two or three years for some health and two-wheeler policies. The sum insured is the limit for that period.
- Deductible is the portion of the claim met by the insured; a top up policy pays above a threshold rather than raising the base sum insured.
- No claim bonus may be given as lower premiums, or as an additional bonus cover on top of the sum insured.
- Health moratorium. Where the basic sum insured is enhanced after the first policy year, the 5 continuous years of the moratorium run afresh from the date of enhancement for the enhanced limit.
A worked example
Part 1 - the ceiling bites. Mr and Mrs Trivedi hold a family floater with a sum insured of Rs 5,00,000 for the year. Three hospitalisations occur.
| Claim | Bill | Paid | Sum insured left |
|---|---|---|---|
| 1 | Rs 2,20,000 | Rs 2,20,000 | Rs 2,80,000 |
| 2 | Rs 1,90,000 | Rs 1,90,000 | Rs 90,000 |
| 3 | Rs 2,40,000 | Rs 90,000 | Nil |
| Total | Rs 6,50,000 | Rs 5,00,000 |
The third bill is met only to the extent of Rs 90,000. The family pays Rs 1,50,000 itself. The sum insured is the limit for the whole year, not per claim.
Had the policy carried a restoration benefit, the sum insured would have been restored to 100% on partial or full exhaustion, and the third claim would have been met in full.
Part 2 - the workbook's contribution example. The insured takes two policies of Rs 5 lakh each, from Company A and Company B, against loss from floods. Floods occur and the ascertained loss is Rs 30,000.
| Item | Amount |
|---|---|
| Ascertained loss | Rs 30,000 |
| Paid by Company A to the insured | Rs 30,000 |
| Recovered by A from B, in proportion to the share in the sum insured | Rs 15,000 |
| Net borne by Company A | Rs 15,000 |
Two policies of Rs 5 lakh did not produce Rs 10 lakh of cover for this loss. They produced Rs 30,000, split between the insurers, because the total claim cannot exceed the ascertained loss.
Part 3 - why one bigger policy usually beats two. Taking the workbook's own illustration, a Rs 100 lakh health policy may cost only a few thousand rupees a year more than a Rs 50 lakh one. So a household wanting more cover is almost always better off raising the sum insured on one policy than buying a second indemnity policy it cannot fully use.
Why NISM asks about it
Chapter 3 (Features of non-Life Insurance Products), section 3.1.1, defines the sum insured as the first element of a non-life product and links it to the premium, the deductible, restore and recharge and no claim bonus. Section 3.2 gives the multiple-policy ceiling, the per-lakh premium illustration and the contribution override. Chapter 1, section 1.4(d), works the two-flood-policy contribution example, and the passage on health insurance policies not being contestable post the moratorium period gives the reset on an enhanced sum insured. Expect a multi-claim computation like Part 1, and the direct definition question: the sum insured is the insurer's maximum liability for the policy period.
Common exam traps
- Sum insured is per policy period, not per claim. This is the single most commonly missed feature, and it is what makes restore and recharge worth paying for.
- Sum insured is not sum assured. Sum insured belongs to a non-life, indemnity policy and caps reimbursement of an actual loss. Sum assured is the fixed amount a life policy promises. The workbook itself slips once, describing the contribution apportionment in a flood-policy example as based on the share in the Sum Assured, where it means the sum insured.
- Two policies of Rs 5 lakh do not give Rs 10 lakh of usable cover on one loss. The total claim cannot exceed the sum insured on all policies put together, nor the ascertained loss.
- Restore and recharge are not the same. Restoration applies on partial or full exhaustion. Recharge applies only when the sum insured is reduced due to a claim.
- The insured chooses the insurer, and contribution cannot be forced on a claim within the chosen policy's sum insured. Only where the claim exceeds it does contribution come in.
- A top up policy does not raise the sum insured. It pays above a threshold, which is a different structure with its own deductible.
- Enhancing the basic sum insured restarts the moratorium clock for the enhanced limit only, and that is a 5-continuous-year count from the date of enhancement.
Check yourself
1.What is the difference between the restoration benefit and the recharge benefit in health insurance?
- a)Restoration restores the sum insured to 100 per cent on either partial or full exhaustion, while recharge restores it to 100 per cent only when it gets reduced due to a claim
- b)Restoration applies only to family floaters and recharge only to individual policies
- c)Restoration applies to the premium and recharge to the sum insured
- d)They are two names for the same benefit
Show the answer
Answer: (a) Restoration restores the sum insured to 100 per cent on either partial or full exhaustion, while recharge restores it to 100 per cent only when it gets reduced due to a claim
In RESTORATION benefit, the health insurance company restores the sum insured to 100% in case of EITHER PARTIAL OR FULL EXHAUSTION of the sum insured amount. Alternatively, in RECHARGE benefit, the sum insured is restored to 100% ONLY WHEN IT GETS REDUCED DUE TO A CLAIM. Learn them by their trigger, because an option will simply swap the two words.
2.How should the amount of critical illness cover required be calculated, according to the workbook?
- a)As a fixed multiple of the health insurance sum insured
- b)Like a life insurance policy, since it is an income replacement policy, and such a large sum is normally available only as a standalone policy or an accelerated sum insured rider on a life policy
- c)As the expected hospitalisation cost of the specified illnesses
- d)As one year of annual income
Show the answer
Answer: (b) Like a life insurance policy, since it is an income replacement policy, and such a large sum is normally available only as a standalone policy or an accelerated sum insured rider on a life policy
The workbook criticises the common view: critical illness policies are MOSTLY THOUGHT OF AS AN ADDITIONAL COVERAGE to receive a much smaller lump sum. THERE IS A LACK OF AWARENESS ABOUT THE IMPORTANCE OF CRITICAL ILLNESS POLICY AS AN INCOME REPLACEMENT POLICY. THE CALCULATION FOR AMOUNT OF CRITICAL ILLNESS COVERAGE REQUIRED HAS TO BE DONE LIKE A LIFE INSURANCE POLICY. NORMALLY SUCH A LARGE SUM WILL NOT BE AVAILABLE AS A RIDER TO A HEALTH INSURANCE POLICY, BUT ONLY AS A STAND-ALONE CRITICAL ILLNESS POLICY OR AS AN ACCELERATED SUM INSURED RIDER ON A LIFE INSURANCE POLICY.
3.A health insurance claim is typically allowed only for "in-patient" and domiciliary treatments. How does the workbook define an in-patient?
- a)A patient admitted in a hospital for treatment that requires at least overnight or 24 hours of stay in hospital
- b)A patient treated at home because he is not in a condition to be moved to the hospital
- c)A patient who consults a specialist at the hospital's out-patient department
- d)A patient who undergoes a procedure needing hospitalisation but is released on the same day because of advances in technology
Show the answer
Answer: (a) A patient admitted in a hospital for treatment that requires at least overnight or 24 hours of stay in hospital
The workbook: "Claim is typically allowed only for 'In-patient' (patients who are admitted in a hospital for treatment that requires at least overnight or 24 hours of stay in hospital) treatments and domiciliary treatments (patients can be treated at home when they are not in a condition to be moved to the hospital), according to the terms of the policy."
Option B is wrong — that is domiciliary treatment, the second category the workbook allows, not in-patient treatment.
Option C is wrong — an out-patient consultation involves no admission and no overnight stay, so it does not meet the definition.
Option D is wrong — that describes day care treatment: "Now many policies cover day care treatment for certain procedures which require hospitalisation but due to advancement of technology the insured may be released on the same day." Day care is covered by many policies precisely because it would otherwise fail the 24-hour test.
Related points on the same page: the policy reimburses "hospitalization or domiciliary treatment expenses for illness or accidental injury up to the sum insured"; "sub-limits may be fixed for each head"; and "Pre-existing illnesses may be excluded from cover for a fixed period when insurance is being taken for the first time or if it is being renewed after a lapse."
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Accelerated sum insuredA critical-illness or disability rider that pays out of the same sum assured as the life cover, so a claim reduces the death benefit — cheaper than a rider that pays an amount over and above the life cover.
- Co-payA fixed percentage of every admitted claim that the insured pays out of pocket — a proportional share of the loss, applied after any deductible, in exchange for a lower premium.
- DeductibleThe portion of a claim the insured bears before the insurer pays anything — a fixed rupee threshold that lowers the premium and keeps small claims out of the system.
- Family floater policyA single health insurance policy covering several named family members under one shared sum insured, instead of separate policies for each — cheaper, but the pool can run out for later claims.
- Health insurance moratoriumAfter 5 continuous years of unbroken premium payment, a health insurance claim cannot be contested except for proven fraud or a permanent exclusion named in the policy.
- Indemnity insuranceA policy that pays the actual loss the insured is shown to have suffered, so a claim cannot be settled until that loss has been determined — the opposite structure to a defined benefit policy.
- No claim bonusThe benefit of a lower premium in later years for each claim-free year — in motor insurance a discount of up to 50% on the own-damage premium after five claim-free years.
- Recharge benefitA health insurance feature that restores the sum insured to 100% once it has been reduced by a claim in the policy year — the counterpart to a restoration benefit, which restores on any exhaustion.
- Sum assuredThe 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.
- Insurable interestThe requirement that the person seeking insurance would suffer a monetary loss if the subject matter were lost or destroyed — the test that separates insurance from a wager.
- Top up policyA health policy that pays hospitalisation expenses above a pre-agreed threshold (deductible) — applied to each claim separately, unlike a super top-up, which applies it to the year's total.
- 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.
- Third party motor insuranceThe compulsory part of motor insurance: cover for what the insured becomes legally liable to pay others for death, bodily injury or property damage — no motor vehicle may be used in a public place without it.