What is it?
By definition, it means compensation for damage, loss or injury suffered, which can be measured in money. For instance, loss of a vehicle may cause loss of a certain amount, but loss of life cannot be measured.
Indemnity in insurance
In insurance, the term applies to general insurance policies, which cover the losses only on account of any damage to the insured asset. For instance, if you get hospitalized, your health insurance policy will only reimburse the cost of the hospitalization. So, if you have a policy, which gives you a cover of Rs3 lakh and your hospitalization cost comes to Rs1 lakh, the policy will only reimburse Rs1 lakh.
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 that he has suffered. For this reason, the cover on these policies is called the sum insured.
against benefit plans
In life insurance and other benefit policies, such as a critical illness plan, the insurer pays a lump sum when the claim is made. The amount is mutually agreed upon by both the parties and is not limited to the loss incurred. For instance, in life insurance plans you choose a value that your insurer will pay to your beneficiary on your death. Since there isn’t a monetary value that you can assign to life and limb, the cover on these are not linked to the damages but to the amount the insurer agrees to pay. This is called sum assured.