How to Choose the Right Sum Insured

The sum insured is the most consequential decision in any insurance purchase. Too low, and it fails when you need it most. Too high, and you overpay needlessly. The right number is not a feeling — it can be calculated. Here is how to approach each type of cover.

Health Insurance: The Floor, Not the Ceiling

Think of the sum insured for health insurance as the maximum you might spend on medical care in the worst single year — not a typical year. Consider:

• The cost of a critical illness admission (cancer, cardiac surgery, major trauma) in a private hospital in your city: typically ₹5–25 lakh depending on the procedure and location.
• Add a buffer of 30–50% for medical inflation over the next 5 years.
• For a family: add the likelihood of two major claims in the same year if using a floater.

The resulting number is your minimum sum insured. In most Indian metros, this is at least ₹10–15 lakh per person.

Term Life Insurance: The Income Replacement Method

Start with the Human Life Value (HLV) approach:

• Estimate annual income × remaining earning years × a present-value discount factor
• A simpler proxy: 10–15× annual income for most earning adults
• Add outstanding liabilities (home loan, car loan, personal loans) to the above
• Subtract existing assets your family could liquidate comfortably

This gives a sum assured that keeps your family financially whole.

Motor Insurance: Insured Declared Value (IDV)

For comprehensive motor insurance, the IDV (Insured Declared Value) is the insurer''s estimate of your vehicle''s current market value — this is what you receive in case of total loss or theft. Do not artificially lower the IDV to reduce the premium; the premium saving is small but the shortfall in a total loss can be substantial.

Home Insurance: Reinstatement Value, Not Market Value

If you buy home structure insurance, insure for the cost of rebuilding, not the market value. Land value is not insured (land does not burn); only the structure is. Underestimating reconstruction costs is one of the most common home insurance mistakes.

Step-by-Step: Finalising Your Number

• Calculate the base need using the methods above.
• Round up to the nearest standard sum insured tier offered by insurers.
• Check whether adding a top-up plan makes the target sum more affordable.
• Review and revise the number every 3 years or after a significant life event.

The Cost of Getting It Wrong

Under-insurance is the far more common mistake in India. A ₹5 lakh health policy in 2010 was adequate; in 2025, it covers barely two nights in a private ICU in a tier-1 city. Build in a growth buffer when you set the sum insured — it is far cheaper than buying additional cover later at an older age.

Conclusion

Choosing the right sum insured is a calculation, not a guess. Use the frameworks above to arrive at a defensible number for each type of cover you hold. For a personalised assessment across all your policies, TruePolicy advisors can run the numbers with you and recommend the most cost-efficient path to adequate protection.