Don’t know anything about life insurance? No worries! Start here and learn about the basic terminologies involved in life insurance.
20 Things to Know Before Buying a Life Insurance Policy
Common Life Insurance Terms You Should Know About:
The policyholder is the one who proposes the purchase of the life insurance policy and pays the premium (see #7 Premium). The policyholder is the owner of the policy and s/he may or may not be the life assured (see # 2 Life assured).
2. Life assured:
Life assured is the insured person. Life assured is the one for whom the life insurance plan is purchased to cover the risk of untimely death. Primarily, the breadwinner of the family is the life assured.
Life assured may or may not be the policyholder. For instance, a husband buys a life insurance plan for his wife. As the wife is a homemaker, husband pays the premium, thus the husband is the policyholder, and wife is the life assured.
3. Sum assured (coverage):
Life insurance is meant to provide a life cover to the insured.
The financial loss that may arise due to the passing away of the life assured is generally chosen as a life cover when buying a life insurance plan. In technical terms, ‘Sum Assured’ is the term used for an amount that the insurer agrees to pay on death of the insured person or occurrence of any other insured event.
You may come across the term ‘sum assured’ at the time of comparing policies online, when buying life insurance plan, and in the policy document. The sum assured is the amount that the life insurance company will pay to the nominee (see #4 Nominee) if the insured person dies during the policy tenure (see #5 Policy tenure).
The sum assured is chosen by the policyholder at the time of purchase. To know more and to choose the right coverage, read this.
The ‘nominee’ is the person (legal heir) nominated by the policyholder to whom the sum assured and other benefits will be paid by the life insurance company in case of an unfortunate eventuality. The nominee could be the wife, child, parents, etc. of the policyholder. The nominee needs to claim life insurance, if the life assured dies during the policy tenure (see #5 Policy tenure).
5. Policy tenure:
The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy tenure can be any period ranging from 1 year to 100 years or whole life, depending on the type of life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy duration.
The policy tenure decides for how long the company is providing the risk coverage. However, in the case of whole life insurance plans, the life coverage is till the time life assured is alive.
6. Maturity age:
Maturity age is the age of the life assured at which the policy ends or terminates. This is similar to policy tenure, but a different way to say how long the plan will be in force. Basically, the life insurance company declares up front the maximum age till which the life insurance coverage will be provided to the life insured. For instance, you are 30 years old, you opt for a term plan with a maturity age of 65 years. That means the policy will have a coverage till you are 65 years old, which also means, the maximum policy tenure for a 30-year-old is 35 years.
The premium is the amount you pay to keep the life insurance plan active and enjoy continued coverage. If you are unable to pay the premium before the payment due date and even during the grace period (#13 Grace period), the policy terminates.
There are various options on how you can pay the premium – regular payment, limited payment term, single payment (discussed below #8 Premium payment mode).
8. Premium payment term/mode/ frequency:
You can pay the life insurance premium as per your convenience.
Regular Premium Payment - You can pay premium regularly throughout the policy term either – monthly, quarterly, half-yearly or yearly.
Limited Premium Payment – You can choose to pay the premiums for a limited amount of time. In this option, you do not pay till the end of the policy term, but for a certain pre-fixed number of years. For example, 10 years, 15 years, 20 years, and so on.
Single Premium Payment – You can also choose to pay the premium for the entire duration of the plan as a lumpsum in one single go.
Riders are an additional paid-up feature to widen up the scope of the base life insurance policy. Riders are bought at the time of purchase or on policy anniversary. There are different types of riders that can be bought along with the base plan. However, number and type of riders will differ from insurer to insurer.
Plus, the terms and conditions may differ from one insurance to another. However, here’s the list of some well-known riders offered by life insurance companies.
- Accidental Death Benefit Rider
- Accidental Total and Permanent Disability Benefit Rider
- Critical illness Cover
- Hospital Cash
- Waiver of Premiums
For more in-depth guide read – life insurance riders and how to choose one.
10. Death Benefit:
You will come across ‘Death Benefit’ quite frequently whenever you are either planning to buy a life insurance plan or comparing different insurance plans online.
The ‘Death Benefit’ is what life insurance company pays to the nominee in case the life assured dies during the policy tenure.
If you are thinking whether the sum assured and death benefit are one and the same, then do not be confused. Because the death benefit can be sum assured or even higher than that, which may include rider benefit (if any), and/or other benefits. Except in the case of term insurance – where there is no accrued bonus or guaranteed additions.
11. Survival/Maturity Benefit:
Maturity benefit is the amount that the life insurance company pays when the life assured outlives the policy tenure. Survival benefit is paid when the life assured completes the pre-defined number of years under the policy.
There is no survival or maturity benefit in term plans. However, in other life insurance policies you may find survival benefit or the maturity benefit paid under the plan.
12. Free-look Period:
It is applicable to all new life insurance policies purchased. Free-look period is a time frame during which one may choose to return the purchased policy.
If you are not comfortable with the terms and conditions, you can return the policy within the Free-look period. The insurance company after deducting the expenses incurred on medical examination, stamp duty charges and other charges will refund the remaining premium.
IRDA specifies free-look period in life insurance is 15 or 30 days after receiving the policy document.
13. Grace Period:
If you couldn’t pay the renewal premium for your policy on time, life insurance company gives you an extension in the number of days after the premium payment due date. A ‘Grace Period’ can be period of 15 days in case of monthly premium payment mode, and 30 days in case of annual premium payment mode.
If the policyholder does not pay the premiums even before the end of grace period, the policy gets lapsed.
14. Surrender Value:
If the policyholder decides to discontinue the plan before the maturity age, the life insurance company pays an amount to the policyholder, this is called Surrender Value.
But you must clearly read the terms and conditions whether a plan offers any surrender value or not. And if there is a surrender value, how much it will be. Not all life insurance plans have surrender value.
15. Paid-up Value:
In case the policyholder discontinues to pay the premium after a specified period of time, Insurance companies will offer the policyholder an option to convert his policy into a reduced paid-up policy. Under this option the sum insured is reduced in proportion to the number of premiums paid. If other benefits related to the sum insured are payable, these benefits will now be related to the reduced sum insured, which is the paid-up value.
16. Revival Period:
If the policyholder does not pay the premium even during the grace period, the policy lapses.
However, if the policyholder still wants to continue, the insurance company provides an option of re-activating the lapsed policy. This must be done within a specific period of time after the grace period ends. This specified period is known as a revival period.
To reinstate the lapsed policy, the life insurance company will put forward the request to the team of Underwriters (see #17 Underwriters) for approval.
Underwriters evaluate the risk involved in insurance. The process of risk evaluation starts before the issuance of insurance policy, and ends with settlement of the claim (see #20 Claim Process).
Only with the approval of Underwriters, policy is issued to the policyholder. And only after clearance from the Underwriter, the company pays the claim benefit to the nominee.
18. Tax benefits:
All the premiums paid towards the life insurance plan are eligible for deductions under Section 80 (C) of Income Tax Act, 1961. The maximum amount that one can claim as deductible is Rs.1.5 lakh.
The benefits paid to the policyholder/nominee are tax-free under Section 10 (10D) of Income Tax Act, 1961.
Before you buy any life insurance, read ‘Exclusions’ carefully. These are things that are not covered under a life insurance policy, and against which if claimed, insurance company wouldn’t pay any benefit.
For instance, Suicide, is an exclusion in any life insurance plan.
20. Claim Process:
In case, the life assured passes away during the policy tenure, the nominee needs to lodge a claim to receive the death benefit as mentioned in the policy.
Read: How to File a Death Claim Under a Life Insurance Policy?
Life Insurance Terminologies - Over to you:
I hope this simple basic life insurance terminology guide will help you to simplify your understanding of insurance.
Got queries? Ask us in the comments section.