Though on the face of it, the difference lies in only two alphabets, in principle the two terms have very different meanings. While a sum assured defines the benefit, sum insured only reimburses the insured loss.
It is a pre-defined benefit that the insurer pays to the policyholder in case the insured event takes place. For instance, in a life insurance policy, the insurer promises to pay the nominee a sum assured—a pre-decided amount—in case of the policyholder’s death. For this amount, the policyholder pays a premium to the insurer. If the policyholder dies during the term of the policy, the insurer will pay the nominee the sum assured and the policy terminates.
A policy that offers a sum insured works on the principle of indemnity. By definition, indemnity means compensation for any damage, loss or injury suffered. Non-life insurance policies such as health, motor and householder’s work on the principle of indemnity. These policies only cover the losses on account of any damage to the insured asset. Let’s take a health insurance policy that offers a sum insured of Rs1 lakh. If the insured person gets hospitalized and has to pay Rs50,000, the insurer will pay the entire amount. However, if the bill runs up to Rs2 lakh, the insurer will pay only Rs1 lakh and the insured person will have to foot the remainder.
The idea is that the compensation should not result in a monetary benefit and so the policyholder should not be given more than the loss he has suffered. For this reason, the cover on these policies is referred to as the sum insured.
Policies that offer both
While a typical health insurance policy reimburses your hospital bills, insurers have also started offering plans that give you a pre-defined benefit on a pre-defined medical situation. These benefit policies are offered by both life as well as non-life insurance companies. Such plans come packaged in variants such as critical illness plans that gives a one-time benefit if you suffer from any specified illness such as heart attack, cancer or paralysis. A hospital cash policy that gives a pre-defined daily cash benefit till the time the policyholder is hospitalized and surgical benefit plans pays the sum assured against a defined surgery.
While for you the difference between the two terms may not hold great immediate importance, the knowledge may come handy at the time of buying a policy. If the agent offers you a sum assured on your health insurance policy, he is selling you a defined benefit plan. But what you need first is the basic health insurance plan that reimburses your medical expenses.