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Life Insurance Policies are often considered difficult to understand, primarily due to the lack of awareness around them.
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Life Insurance Policies are often considered difficult to understand, primarily due to the lack of awareness around them. However, if you are looking to buy life insurance and feel overwhelmed with the many types of policies available, do not fret. As there is a learning curve to understanding it, you can start with this glossary of the most common terminologies related to life insurance and its various products.
● Policyholder - The person who opts to purchase a life insurance plan and consistently pays the set premium is known as the policyholder, sometimes also known as the policy owner.
● Nominee - When the life insurance passes away during the policy term, the nominee is the person who receives the life insurance coverage amount. The policyholder chooses their nominee(s).
● Sum Assured - Sum assured is the amount the insurer promised to pay the designated beneficiary or person upon the policyholder's death. As an illustration, suppose you purchase term insurance and name your wife as the nominee or beneficiary. When purchasing the life insurance policy, you must select a sum assured. Say you decided on Rs. 1 crore. Therefore, your wife will receive the amount of Rs. 1 crore from the insurer in the unfortunate event of your passing during the policy period.
● Life Assured - The Life Assured is the individual who has life insurance acquired on their behalf to ensure financial security for their nominee against the possibility of their untimely death. They may typically be the primary source of the family's income. The policyholder may or may not be the same as the life assured.
● Policy Term/Tenure - The length of time the life insurance plan is valid, or in effect, is known as the policy term. Depending on the various life insurance policies and their terms and conditions, this can range from 1 to 100 years or the policyholder's entire lifetime. This is also known as policy tenure.
● Premium/Policy Premium - It is the set sum that a policyholder is required to pay the insurance company in exchange for life insurance cover. You can choose from various premium payment terms, including monthly, quarterly, half-yearly, and yearly. This can be easily calculated using a free online life insurance premium calculator offered by most reputed insurance companies.
● Premium Payment Mode - It alludes to the many methods via which you might pay your insurance premium. There are primarily three categories of payment methods:
Regular Payment: The policyholder continues to pay premiums throughout the contract.
Limited Pay: Policyholders can select any specific period for paying premiums, such as five years.
Single Pay: The policyholder makes a single lump sum payment of the premium, often made when purchasing an insurance policy.
● Death Benefit - The entire sum paid by the insurer to the nominee in the event of the policyholder's passing is known as the death benefit. The death benefit given by the insurer is not necessarily equal to the sum assured. In case the policyholder is less than 45 years old, then the death benefit is either the sum assured, or 10 times the annual premium, or 105% of the total premiums paid till date, whichever is higher of the three.
● Maturity Benefit - The total amount received by the policyholder at the time of the policy’s maturity is called maturity benefit. Only when the premiums are paid on time will the life assured get the maturity benefit. It is important to note that not all life insurance policies have maturity benefits. In cases where it is applicable, the maturity lump sum benefit is generally equal to the sum of all premiums paid up until the moment of maturity plus any additional bonus payment that the insurance company decides to give the life assured. This, however, depends on the type of life insurance you are opting for.
● Riders - The additional benefits to your current base life insurance policy are known as riders. They are available for purchase at the time your policy is issued. A few standard riders offered with life insurance policies are Accidental Death benefit Rider, Critical Illness Cover, and Waiver of Premium.
● Claim - The nominee is required to submit a claim to the insurance company to receive the coverage amount if the life assured dies within the policy term. The payout of the death benefit is not automatic.
●Surrender Value - The company pays the policyholder an amount known as the Surrender Value if they decide to cancel the plan before it reaches maturity.
● Paid-up Value - Companies offer a choice to convert the plan to a reduced paid-up plan if a policyholder wishes to stop paying premiums after a predetermined amount of time. In this case, the sum assured is reduced proportionately to the premium paid.
● Free Look Period - The free look period is when the policyholder has the option of returning the purchased plan. If the terms and conditions of the life insurance policy don't meet your needs, you can return the plan during this period. The insurance company will return the remaining premium after deducting the medical examination costs, stamp duty rates, and other charges incurred when purchasing the plan. The free look period stipulated by IRDAI for life insurance is 15 or 30 days.
●Grace Period - The period extended to the policyholder to allow them to pay the premium after the due date has passed. The policy's protection coverage will continue as long as the outstanding premium is paid in this period.
● Lapsed Policy - The life insurance policy will expire if the required premium is not paid even in the grace period. If the policyholder pays the unpaid premiums, certain life insurance firms give the option to reinstate the expired policy.
● Revival Time - If you wish to restart a lapsed life insurance policy after the grace period expires, the re-activation procedure must be finished within a set timeframe. This time frame is referred to as a revival period.
● Exclusions - These are some events that a life insurance policy does not cover. When a claim is lodged based on one of these exclusions, the insurance provider has the right of refusal to provide any benefits.
This glossary can prove helpful for those looking to get a deeper understanding of life insurance and its various products. Once these basic terms are understood, most articles regarding life insurance should prove comprehensible.