Many of you might have had a doubt, why the full sum insured is not paid in case of health insurance? But the full sum assured is paid in case of life insurance. Health insurance can be defined as the agreement between the insurance company and the policyholder where the insurance company agrees to reimburse a pre determined amount in case of hospitalization of the policyholder on payment of a certain premium. The maximum amount of liability of the insurance company in case of health insurance is called as the sum insured, whereas in case of life insurance it is known as sum assured.
To understand the reason behind the question we need to understand the difference between indemnity policies and benefit policies. Lets us understand each of them in detail.
Indemnity Based Insurance – Health Insurance:
Almost all the health insurance policies available in the market are indemnity based products. Indemnity based health insurance policies are basically those insurance policies where the insured is reimbursed the actual expense incurred during the hospitalization.
The maximum amount payable by the health insurance company would be the actual expenses incurred or the sum insured, whichever is lower.
This basically means that the amount spent on the treatment is reimbursed maximum up to the sum insured mentioned under the policy. For example, you have taken a health insurance policy of sum insured Rs.5 Lacs and you are admitted to a hospital and the hospitalization expenses came around Rs.3 Lacs. Now, the insurance company pays only Rs.3Lacs which is the actual expense incurred by the policyholder. If the hospitalization expense is Rs.6 Lacs, still the insurance company will reimburse you only for Rs.5 Lacs which is the maximum liability under the policy.
Benefit Based Insurance – Life Insurance:
Life insurance policies available in the market are benefit bases products, where as few of the personal accident policies are also benefit based products. Benefit based insurance policies are those in which the insurance company pays the total sum assured mentioned under the policy in the event of death of the policyholder to the beneficiaries.
The maximum amount of claim payable under the benefit policies would be the maximum of sum assured specified under the policy.
Unlike the indemnity based policies, benefit policies pay the whole sum assured to the policyholder or beneficiary in the event of death of policyholder or maturity of the policy. The actual expenses incurred cannot be calculated in the benefit based policies so the total sum assured is paid to the policyholder or beneficiary.
For instance if you take a life insurance policy with sum assured Rs.50 Lac, in the event of your death the whole sum assured Rs.50Lac will be paid to your nominee. Since the complete sum assured is paid to the nominee or policyholder these policies are referred to as benefit policies.
The basic concept of insurance is to determine the value of the product before insuring it and the human value cannot be determined in any case. Only the earning capacity of an individual can be calculated and the same can be insured under the life insurance.
Another concept of insurance is called indemnity, replacing the insured in the same state as he/she was just before the occurrence of the loss. But in case of death of the policyholder it is not possible to replace policyholder in the same position just before the occurrence of the event (death). So, the whole sum assured is paid to the nominees in case of benefit based insurance policies.
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