Sum Assured of Insurance Policies: Overview, Factors and Explanation

Sum assured; source: Uzochukwu Mike's Zone

In every field or discipline, there are some terms used. These terms are used by people that specialize in that field on daily basis. It is hard for a day to pass without making use of those terminologies. It is part of the business and is made to be applied in business communication.

In insurance, the use of sum assured is very common. The term is used mostly in life insurance. If you are newly employed by any insurance company, sum assured is one of the major terms you have to learn. The reason is because any proposal form you submit to the administrator for capturing and conversion, the sum assured must be calculated. It is this sum assured the shows how much the policyholder or the beneficiary to the policyholder will be paid if the unforseen happens or at the maturity of the policy.

Depending on the insurance company and the country the company is located, there is a unique formula for calculating sum assured of any policy. In Nigerian and in FBN Insurance for instance, the formula for calculating sum assured of life insurance policies is =
Premium x Rate / 1000. This formula can change depending on the unit of the rate and other factors. The rate is generated from the rate table given by the body responsible for insurance in the country.

What is Sum Assured

Sum assured is the total guaranteed amount of money a policyholder or beneficiary will claim at the maturity of the policy or if the unforeseen happens so far the initial agreed premiums are paid as suppose. The sum assured is the amount of money an insurance policy guarantees to pay up before any bonuses are added. In other words, sum assured is the guaranteed amount the policyholder will receive. Sum assured is calculated at the initial signing into any insurance policy.

If at the beginning of a policy that an insurance company agrees to pay a total sum of $500000 to your family if you happen to die within a period of one year while you pay yearly premium of $5000, the 500000 becomes the sum assured. What it mean is that if you happen to die within one year of this life insurance coverage, your family or your beneficiary will be paid $500000. The beneficiary reports to the insurance company when the death occurs and the sum assured is paid as claim within weeks or days. But know that some documents like death certificate of the life assured, valid means of identity and letter notifying the insurance company of the death of the assured are usually required from the family of the life insured before claim payment.

Sum Assure of Term Insurance Policies

Term insurance policies are policies that pays lump sum to the beneficiary if the life assured dies during the period of cover. This is the oldest known type of life insurance. Term life insurance can be taken by individual or group of persons that make up an organization. Some life insurance companies call term insurance products as risk products.

Sum assured of term insurance products are usually higher than that of those of endowment and savings policies. Premiums paid in most term insurance products are not refundable after the cool off grace period. If at the end of the period of the life cover and the life assured do not die, the premiums paid during this period are not refunded. As a result of this, term insurance policies has higher sum assured. Also, the chances of higher number of people that signed up for term insurance dying is low. This is also why the high quote of sum assured in term insurance.

Sum assured of endowment policies

Sum Assured of Endowment Policies 

Endowment policies are the major products selling high in some life insurance companies in the recent years. They are nice insurance policies created for specific and unique purposes. In some companies, example of endowment policies are education policies for children. In Nigerian life insurance companies for instance, this kind of endowment policy sells most.

The sum assured in endowment policies are usually much lesser than that of term insurance policies. An endowment policy is a life insurance contract designed to pay a lump sum after a specific term or on death. You may wonder why the sum assured of endowment policies are lesser than that of term policies.

The reason is because in endowment policies, the policyholder receives the total money he pays and interest if he survives the duration of savings. That is to say that endowment policies have survival benefits. But in term insurance, no money is usually given to the policyholder when he survives the duration of cover. But if a person takes term insurance policy for ten years, one year premium can be returned after 5 years but it depends on the insurance company involved.

Factors that affect sum assured; source: Uzochukwu Mike's Zone

Factors that Affect the Sum Assured of Life Insurance Policies

There are some factors that affect the sum assured of life insurance policies. These factors determine whether the sum assured of a person can be higher than that of the other person. The factors that affect sum assured are as follow:

• Age
• Duration 
• Gender and 
• Premium

Age

Age is an important factor that determines whether the sum assured of a customer will be high or less. The younger a person is, the higher the sum assured. On the contrary, the older a policyholder, the lesser the sum assured. A man of 55 years cannot have the same value of sum assured with a young guy of 20 years. The older a person, the closer the person to his grave. In the sense of insurance, the older in age is likely to die before the young. What it implies is that insurance companies bear more risk when older people signs up and because of that they the old have lesser sum assured than the young. 

Duration

The duration a person signs up for insurance policy matters to insurance companies. It matters to them because they want to know the people they can trade with their premiums for long time to make more profit in return. When customers sign insurance contracts for longer duration, they have higher sum assured in their quotes. The lengthier the policy duration the higher the sum assured given by the insurer to the insured. 

Gender

Gender is another player in calculation of sum assured though not a much significant player. But its role is still taken into consideration. Insurance companies believe that men work harder than women because they are the head. They pass through much stress. 

As a result of this, their lifespan may be lesser than that of female gender. In the pursuit of what may keep their families happy and in order, they have higher chances of dying. They may have accidents and dye or have other health challenges that may led to their death. Because of things like this, male gender has lesser sum assured than women in life insurance. 

Premium

It is another important factor. How much premium do you have to pay in life insurance policies every month or yearly? Are you paying $1000 monthly or $50 every month? The amount paid has way of affecting your sum assured.

Premium is the amount of money a policyholder or the insured agrees to pay at specified period to keep his policy active. It is this regular payment as specified that will give the insured the needed cover. If the insured pays higher premium, his sum assured will be high as well. And if he pays lesser, the sum assured will be low.