Insured value, often referred to as the sum insured or coverage amount, is the maximum monetary amount that an insurance company agrees to pay in the event of a claim. It represents the value for which an asset, individual, or entity is insured under a policy. This value is a crucial component of an insurance contract and is determined at the inception of the policy, based on an assessment of the worth of the insured item or the level of risk associated with the individual or entity.
The insured value is used to calculate premiums and is the cap on the insurer’s financial responsibility. For property and casualty insurance, it typically reflects the replacement cost or actual cash value of the property insured, ensuring that the policyholder can repair, rebuild, or replace the property in the case of loss or damage. In life insurance, the insured value is the amount that will be paid to the beneficiaries upon the death of the insured or at the end of the policy term. It is essential for policyholders to accurately determine the insured value to avoid underinsurance, where the coverage might not be sufficient to cover the full extent of a loss, or overinsurance, where the policyholder may be paying for more coverage than necessary.