Sum insured (often abbreviated as UP in Indonesian) refers to the amount of money agreed upon between the policyholder and the insurance company when the insurance is first purchased. This term is not limited to life insurance—it also applies to other types of insurance, such as motor vehicle insurance, accident insurance, and property insurance.
The sum insured is a crucial term in life insurance, referring to the amount of money agreed upon to be paid by the insurance company to the beneficiaries in the event of a risk, such as death or permanent disability. Understanding what the sum insured is helps ensure that the chosen protection matches your needs, minimizing the risk of making the wrong choice and suffering financial losses.
Let’s explore the benefits of the sum insured in life insurance and how to calculate the ideal coverage amount in this Roojai article.
In insurance terms, the sum insured (often abbreviated as UP in Indonesian) refers to the amount of money agreed upon between the policyholder and the insurance company when the insurance is first purchased. This term is not limited to life insurance—it also applies to other types of insurance, such as motor vehicle insurance, accident insurance, and property insurance.
In life insurance, if a risk stated in the policy occurs—such as the insured person passing away—the sum insured will be paid out to the beneficiaries or other parties designated by the policyholder. This payment could be in the form of a death benefit or compensation in the case of permanent total disability, depending on the type of insurance selected.
The amount of the sum insured is typically influenced by several factors, such as premium costs, type of insurance, the insured’s age, and health condition at the time the policy is agreed upon.
Here are several key benefits of the sum insured in an insurance policy:
One of the main benefits of the sum insured is that it guarantees financial security for the insured’s family or dependents. If the insured can no longer generate income due to an insured risk, this fund provides financial support to the family.
The family won’t have to worry about suddenly losing the main income source. The money can be used to cover daily expenses, allowing them to remain financially stable despite the loss.
Another important benefit is settling the insured person’s outstanding debts or financial responsibilities. In the event of death or total disability, the family may be burdened by mortgage payments, car loans, or other debts that need immediate settlement.
The sum insured offers a timely solution to cover these obligations, sparing the family from additional stress caused by unresolved debts, and helping them move forward without financial burdens.
Children’s education is a long-term necessity that must be ensured, even if the insured is no longer around to fund it. The sum insured can help secure educational expenses—from elementary school through college.
This ensures that the child’s future remains intact despite the risk faced by the insured, giving the family peace of mind knowing that education is well-covered.
The sum insured can also function as a replacement for lost income due to the insured’s death or permanent disability. Without the insured’s regular income, the family may struggle financially.
With the sum insured, the family can maintain their lifestyle and cover essential needs without worrying about the sudden loss of income. The money can be used for daily necessities and provides a sense of financial security.
In addition to the benefits mentioned above, the sum insured also helps cover final expenses, such as funeral and administrative costs related to death. These expenses can be significant and burden a grieving family.
Having a sum insured means the family doesn’t have to dip into savings or sell assets to pay for these costs, helping them get through a difficult time without added financial stress.
After understanding its benefits, it’s also important to know how to calculate the ideal amount of sum insured. Here are a few common approaches:
This method calculates the sum insured based on the insured’s annual income that needs to be replaced.
For example, if the insured earns IDR 120 million per year and wants to provide protection for 10 years, the ideal sum insured would be IDR 1.2 billion (IDR 120 million × 10 years).
This approach calculates the sum insured based on the economic value of the insured’s life.
For example, with an annual income of IDR 120 million and an investment return rate of 5%, the ideal sum insured would be IDR 2.4 billion (IDR 120 million ÷ 5%). This method factors in the potential lost income if the insured passes away or becomes disabled.
This is the most detailed method, as it considers various financial needs of the family, such as living expenses, children’s education, and outstanding debts.
For example, if the family’s total living expenses over 15 years amount to IDR 1.8 billion, plus education costs of IDR 500 million, minus IDR 300 million in savings or assets, the ideal sum insured would be IDR 2 billion (IDR 1.8B + IDR 500M - IDR 300M).
Here are some common mistakes when selecting a sum insured in insurance:
Insurance plays a vital role in providing financial protection for individuals and families in the face of unexpected risks. Without insurance, sudden illness, accidents, or death could have a devastating financial impact on loved ones.
With the right insurance coverage, you and your family can avoid such scenarios, as the insurer will cover the costs resulting from these risks. That’s why it’s important to get insurance that suits your needs as soon as possible.
Visit Roojai Indonesia’s website for more useful insights about the world of insurance.