Life insurance has numerous terminologies which a layman may find daunting but is, in reality, easy to understand. Understanding these terminologies will help you become an informed policyholder and empower you to manage your policy better.
Detailed below are the common terminologies with their explanations.
1. Policy Owner/Policyholder
The policyholder is the person/entity who proposes the policy. The policyholder owns the policy. He pays the premium and all benefits under the policy are payable to him only. He alone can ask for any changes/alterations to the policy and the insurance company will act only on his request/instructions. The policyholder appoints the nominee. The policyholder may or may not be the life insured.
2. Life Insured
He is the person whose life is insured/covered under the life insurance policy. The life insured is the person whose untimely death can cause financial loss to the family i.e in most policies the life insured is the breadwinner of the family. The policy owner and life insured can be the same or different persons. For eg: Manoj has a term insurance policy where he is both the policy owner and life insured. Manoj has a money-back plan where he is the policy owner whereas his son Yash is the life insured.
An important point to note is that even though the policy covers the life insured’s life, the insurance company would proceed with any changes to the policy only based on the policyholder’s instructions (applicable for policies where policy owner and life insured are different).
The nominee has a limited role to play in the policy. It involves receiving the policy benefits if the life insured passes away during the policy tenure. If the life insured survives the policy tenure policy benefits are payable to him alone. The policyholder can change the nominee anytime during the policy tenure. One can appoint more than one nominee. The nominee can also be a minor in which case an appointee may need to be appointed to receive the death benefit on behalf of the nominee should the life insured pass away during the minority of the nominee.
An important point to note is that nomination is possible only in policies where policyholders and life insured are the same. In case policyholder and life insured are different, a nomination is not permitted as the policyholder is there to receive the death benefit in case of death of the life insured during the policy tenure.
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Premium is by the policy owner to enjoy the policy benefits and to keep the policy active. The premium amount for a policy is arrived at based on age, gender, personal habits, medical history, occupation, hobbies, coverage amount, etc of the life insured. The premium is payable on the due date or within the grace period failing which the policy lapses.
5. Premium Mode
The premium can be paid in various frequencies as per your convenience. Some of the premium modes offered are annual, semi-annual, quarterly and monthly modes. Usually, monthly modes are offered only when policyholders subscribe to auto-debit options such as electronic clearing system (ECS) and direct debit from bank or credit card accounts.
6. Due Date
The date on which the premium falls due.
7. Grace Period
It refers to the number of days available after the due date to pay the premium and keep the policy in force. Most companies offer a due date of 30 days from the due date. For Monthly mode, it is usually 15 days from the due date. What happens if the life insured passes away in the grace period and the premium is not paid? Is the claim rejected? Please note that the insurance cover remains active in the grace period. So if the life insured passes away in the grace period, then the due premium is deducted from the policy benefits and the remaining amount is paid to the nominee. On completion of the grace period, if the premium is still not paid, the policy lapses.
8. Payment Term
While buying a policy, you can choose a premium payment term as per your choice. The various premium payment terms that you can choose from are, are as follows:
- Single Pay – At the inception of the policy you need to pay a lump sum amount for the entire tenure of the policy.
- Short Pay – The payment tenure is less than the policy tenure. You need to pay only for a limited number of years. For eg: a premium payment tenure of 5 years with a policy tenure of 15 years.
- Regular Pay – In this the payment tenure is equal to the policy tenure. For eg: A policy with payment and policy tenure as 20 years. The premium payment has to be made for the entire tenure of the policy.
9. Policy Tenure
This is the period/duration/term for which insurance coverage is provided under the policy. It can be for a fixed number of years like 15, 20, 25 years or up to a specific age of the life insured such as up to age 60, up to age 65, etc. The policy tenure can also be for the entire life in case of a whole life policy.
10. Maturity Date
This is the date up to which insurance coverage is provided under the policy. On the maturity date the insurance coverage ceases, the policy comes to an end and the maturity benefit (not applicable for term insurance) is payable to the policyholder.
11. Maturity Benefit
The maturity benefit is the amount payable to the policyholder on the maturity date. It does not apply to term life insurance policies. For traditional policies, the maturity benefit is usually the amount guaranteed at inception plus any accrued bonuses and loyalty additions if any. In ULIPs it is usually the policy fund value.
12. Survival Benefit
The survival benefit is the periodic payouts made at predefined intervals in case of money-back policies.
13. Sum Assured
It is the amount for which one is covered under the policy. The thumb rule is to choose a sum assured which is 10-12 times your annual income plus your outstanding liabilities. The sum assured is payable by the insurance company to the nominee in case of death of the life insured or happening of an insured event during the policy tenure.
14. Death Benefit
The death benefit is the amount payable by the insurance company in case of death of the life insured during the policy tenure. Is it the same as the sum assured? For term policies, yes. However, for other policy types, the death benefit may include in addition to the sum assured, accrued bonuses and loyalty additions.
Riders are add-on benefits that can be attached to the policy for enhanced and optimum insurance coverage. Riders can be purchased during the inception of the policy or added subsequently during policy anniversaries. The common types of riders are:
- Accidental death and dismemberment rider
- A total and permanent disability rider
- Critical Illness rider
- Waiver of premium rider
- Term rider
16. Paid-up Value
When a policy is made paid-up, the policyholder is no longer obliged to pay premiums. The company reduces the life insurance coverage (sum assured) in proportion to the premiums paid. For eg: In case the policy and premium payment term is 20 years and Sum Assured is Rs 10 lacs and after paying 5 full premiums, you wish to make your policy paid-up then the paid-up Sum Assured will be 5/20 of 10 lakhs i.e. Rs 2.5 Lacs. This reduced sum assured is payable as death or maturity benefits. All other benefits are also payable as per the reduced sum assured. The paid-up concept does not apply to term policies.
17. Free Look Period
This is a facility provided to all new policyholders. The free look period is typically fifteen days from the date of receipt of the policy document during which the policyholder can review his decision and return policy if he feels that the policy terms and conditions are not as per his expectations or for any other reason. The policy owner has to communicate his decision in writing to the insurance company and after deduction of certain charges (proportionate risk premium for the period on cover, medical charges if any and stamp duty charges) the premium is refunded.
These are the events that are not covered by the life insurance policy. The exclusions are mentioned in the policy brochures and also in the policy document. For eg: suicide in the first policy year, death caused due to driving in an intoxicated state, etc.
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