Key Insurance Terms Simplified
Insurance can get confusing! Despite being one of the most important topics under financial literacy, there are often many terms that are difficult for us, laymen to understand. The biggest challenge we face today while looking at prospective insurance options is to decode the complex jargons used in the Life insurance industry. In fact, the Aviva Plan India Plan survey conducted in 2017, clearly indicated that though Indians are big dreamers, when it comes to financial planning, they lag behind by a considerable distance. One of the key reasons for this is that people get intimidated by complex insurance terms and thus are unable to take the right decision in terms of financial planning.
To help bridge this gap, we are here to help you understand the various complex terms and help demystify life insurance for you! We’ve therefore put together an exhaustive glossary of the most frequently used terms in insurance. Here it goes-
1.) What is an “Accident”?
An accident is an unexpected event that usually causes damage or injuries to someone. For example, a roof falling over someone is an accident.
2.) What is an “Accidental death benefit”?
An accidental death benefit is a payout made by an insurer, in case the death of the insured occurs due to an accident. It is generally an additional amount paid over and above the main policy benefit.
Synonyms: accidental benefit, accidental insurance, accidental death
3.) What is an “Act of God”?
An Act of God is an event over which individuals have no control, such as floods, earthquakes etc. Acts of God can be insurable.
4.) Who is an “Actuary”?
An actuary is a person who is skilled in calculating insurance risks and the pricing of policies.
Synonym: actuarian, actuarial
5.) What does “Age Limit” mean?
Age Limit is the required minimum and maximum ages, below and above which the insurance company will not accept applications, or may not renew policies.
6.) Who is an “Insurance Agent”?
An agent or advisor is a person licensed by the insurance regulator to sell insurance policies of a particular company.
Synonyms: insurance agent, advisor, insurance advisor, independent financial advisor, financial advisor.
7.) What does the “amount of Target Income” mean?
This is the amount of money you would like to receive as income on a regular basis.
8.) What does the term “Annuity” mean?
Annuity is a series of payments made to an individual in return for a lump sum payment. These are primarily opted to be used for a regular and guaranteed post-retirement income.
9.) What does “Annuity rate” mean?
The annuity rate is used to calculate the amount of income that will be paid to the insured against an investment. The rate is generally expressed as per lakh of premium paid.
10.) What does “Back Dating” mean?
An insurance policy can be back dated within the same financial year, with the payment of extra interest. For example, if the date of birth of a person is 16th April 1983, and the policy is purchased on 30th of August 2018. The policy, in this case, can be backdated to 14th April 2018. This process helps in reducing the policy premium amount.
11.) What is “Bancassurance”?
Bancassurance is the selling of life insurance, insurance services, and other related products by banks.
Synonym dating back
12.) What does “Bonus” mean?
Some insurance policies give returns which are declared out of the profits that the insurance company makes. The bonus may be declared every year, and once declared, must be paid to the policy holder.
Synonym: dividend, insurance bonus, insurance dividend
13.) What does “Bonus Rate” mean?
Bonus rate is the rate at which the bonus is declared in a policy. It is usually expressed as a percentage of the main policy cover amount.
14.) What is meant by the “Cancellation of Policy”?
Cancellation of policy is a process initiated by the customer, which results in the closure of the customer's policy.
Synonym: policy cancellation, a cancellation request, policy closure, request of cancellation
15.) What does ”Cash Bonus” mean?
Cash bonus is the bonus declared in a policy which may be paid to the insured every year.
16.) What does ”Child Plan” mean?
Child Plans provide an insurance cover to the parent with the child as beneficiary. These plans also safeguard the child’s financial future in case of an unfortunate demise of the parent.
17.) What does an ”Insurance Claim” mean?
Claim is a promise that the insurance company makes to the insured customer. This is the amount that is paid to the customer or the customer's family on the insured event, namely death or maturity of the policy. The insured customer promises to pay premiums to be eligible for the claim.
18.) What is meant by “Claim Settlement Ratio”?
Claim settlement ratio is the ratio of the number of claims paid by the insurance company, to the total claims received by them. For example, if the insurance claims received by a company is 100, and they have paid 94 of these, then the ratio is 94%.
Synonyms: claim ratio, claim settled, settlement ratio
19.) What does the term “Commission” mean?
Commission or remuneration is a fee that an insurance company pays to an intermediary when he sells the company's policy to a customer.
Synonyms: agent commission, agent remuneration, agent fees
20.) What does “Critical Illness Insurance” mean?
Critical illness insurance is a policy that can be claimed if the life insured is diagnosed with any of the medical conditions covered under the policy.
Synonyms: critical illness, dread disease, critical illness cover
21.) What is a ”Critical Illness Rider”?
Critical illness rider is a type of life insurance rider that pays if the policyholder is diagnosed with any of the specified medical conditions covered.
22.) What does ”Grace Period” mean?
Grace period is the additional time offered after the premium due date, in which the policyholder can pay the premium without the policy benefit being discontinued.
Synonyms: days of grace, grace days.
23.) What is meant by ”Death Benefit”?
A death benefit is the payout to the beneficiary of a life insurance policy, in case of the unfortunate death of the insured person during the policy term.
Synonyms: death claim
24.) Why are ”Debt Funds” invested in?
Debt funds are invested with an aim to generate ongoing returns with relatively lower investment risks.
25.) What is meant by ”Decreasing Term Insurance”?
Decreasing term is a term insurance policy where the insurance cover keeps decreasing over the period of the policy term. This is in keeping with the decreasing liabilities and is most suited for people with loans.
Synonyms: decreasing life insurance, decreasing cover, decreasing cover policy
26.) What does “Deferment Period” mean?
Deferment period is the time between the commencing date of an insurance cum pension policy, and the time when the first pension instalment is paid. It can also refer to the period between the dates of subscription and risk commencement date.
27.) What is meant by “Direct Debit”?
A Direct Debit authorizes a bank to collect payments from the insured's account when the said payments are due.
Synonyms: auto debit
28.) What is meant by an “Endowment Policy”?
An endowment policy is a plan with payable benefits in case the life insured survives the policy term, or in case of death. The payments may be paid in a lump sum, or as regular payouts.
29.) What do “Equity Funds” investments aim for?
Equity Funds aim to generate higher returns with investments in the stock market.
30.) What does “Exclusion” mean?
Exclusions in a policy mean that some benefits might not be paid in full.
31.) What does “Freelook Cancellation” mean?
Freelook cancellation is an option given to policyholders to review their policy documents and cancel their policies in case of a disconnect. The freelook cancellation period is 15 days (30 days in case of online policies).
32.) What do “Funds” mean?
A fund is a pool of investment in which the insurance company invests by combining the premiums of the policyholders. Funds are associated with a specific type of insurance policy, called Unit Linked Insurance Plans, or ULIPs.
33.) What is meant by “Fund Management Charge”?
Fund management charge is a charge levied by a company towards the management of an investment fund.
Synonyms: fmc, f.m.c.
34.) What does “Fund Value” mean?
Fund value is the total units held in a policy, multiplied by their NAV or Net Asset Value.
35.) What does “Group Life Insurance” mean?
Group life insurance is a type of life insurance in which a single contract covers an entire group of people. It is generally offered by companies to their employees, or members of specific groups, such as loan customers of a bank, members of an RWA etc.
36.) What do “Guaranteed Plans” mean?
A guaranteed plan is a traditional life insurance plan which is non participating, and returns a guaranteed amount on maturity.
Synonyms: guarantee policy, guaranteed policy
37.) What is meant by “Human Life Value”?
Human Life Assessment is the assessment done to evaluate the financial loss a family would incur in case of the untimely death of an earning member. The calculation that is done includes the present income, expenses, and earning years left.
38.) What is meant by an “Illustration”?
A life insurance policy benefit illustration is a set of projections that show how the policy will perform over a period of time.
Synonyms: benefit illustration
39.) What does the term “In Force” mean?
A policy is said to be in force if the premiums are being paid regularly, or all due premiums have been paid by the customer.
40.) What does “Inception Date” mean?
The inception date is the date on which the insurance coverage begins.
41.) What does “Income Protection Policy” mean?
Income Protection insurance provides a replacement income for the family in case the life insured is unable to work because of disease, disability, or death.
42.) What is meant by “Increasing Term Insurance”?
Increasing life insurance is a type of insurance cover that increases over time.
43.) What is meant by “Individual policy”?
Individual Policy is the insurance plan taken by an individual for his or her own life, or for the life of another person.
44.) What is meant by “Insurability”?
Insurability includes all conditions concerning the health and life expectancy of an individual; it is basically an individual's risk profile.
45.) What does having “Insurable Interest” mean?
One can have an insurable interest in any object or life, due to the loss of which, you can incur an economic loss. For example, in case of loss of a car, one suffers an economic loss. Hence one has an insurable interest in the car.
46.) What does “Insurance” mean?
Insurance is a means of transferring financial risk from an individual or group to the insurance company, against premiums paid.
47.) Who is an “Insurance Broker”?
An insurance broker is someone who advises people on their insurance needs and negotiates insurance contracts on their behalf with insurance companies, in return for a fee or commission.
48.) What does an “Insurance Certificate” mean?
An Insurance Certificate is a legal document showing details of policy, and all terms and conditions.
49.) What do “Insurance Companies” do?
Insurance companies are companies that provide insurance cover.
50.) What is meant by an “Insurance Endorsement”?
Life insurance endorsements are amendments or modifications to make some type of change to the original life insurance policy.
51.) What does being “Insured” mean?
Being insured means that a person is covered by an insurance policy.
52.) What is an “Investible Premium”?
Investible Premium is the amount left after deducting the allocation charges from the premium, and this is the amount that is invested by the insurance company.
53.) What does “IRDAI” stand for?
IRDAI stands for Insurance Regulatory and Development Authority of India and is the apex body overseeing the insurance business in India.
54.) What does “Joint Life Insurance” policy mean?
A Joint Life Insurance Policy is an insurance policy that insures two lives. Usually, the lives insured are married couples and the policy covers both lives, with a slightly higher premium than a single life insurance policy.
56.) What does “KYC” mean?
KYC stands for Know Your Customer. It is the process used by a business to verify the identity of their clients. Conducting KYC for customers buying a financial product is a mandatory process set by the government.
57.) What does “Policy Lapse” mean?
A life insurance policy can lapse if the due premium is not paid. Lapsed policies can be revived by paying the due premiums.
58.) What does “L.B.D” stand for?
The Last Birth Day is a term that defines your age, as on your last birthday. This is the age considered while buying a policy and is also used to calculate premiums in insurance policies.
59.) What is known as “Level Of Cover”?
Level of cover, is the amount of protection provided by an insurance policy. It could be expressed as 'x times the annual premium'.
60.) What is known as “Insured Life”?
Life Insured or Life Assured is a person who is covered by a life insurance policy.
61.) What is meant by “Life Insurance”?
Life Insurance is a contract between a person, (policy holder), and the insurance company, wherein the company promises to pay stated death or maturity benefits, against payment of defined premiums.
62.) What is meant by “Life Policy”?
Life Policy is a contract between a person, (policy holder), and the insurance company, wherein the policy holder agrees to pay premiums for an agreed period of time for the Sum Assured, which would be paid on the happening of the insured event.
63.) What does a “Linked Plan” mean?
A Unit linked insurance plan or ULIP, is an effective combination of insurance with the benefits of market-linked investments.
64.) What does “Maturity” mean?
Maturity is the date when an insurance policy comes to an end. There could be a sum of money receivable as a lump sum, or as regular payouts, or none at all.
65.) What is meant by “Maturity Benefit”?
Maturity benefits refer to the amount received by a policyholder or nominee, at the end of the policy term. This may be a lump sum or regular sums paid over a particular period of time
66.) What does “Maturity Claim” mean?
Maturity claim is the amount payable at the end of the maturity period if the life insured is still alive.
67.) What does a “Medical Report” mean?
A Medical Report is a report given by a medical professional, such as a doctor, to provide information about an individual's health and medical history. This is often used to support an insurance policy application or claim.
68.) What is meant by “Money Back” Plan?
A Money Back Policy is an insurance plan that allows part payment of the sum assured, through periodic installments during the term and the balance is paid at maturity. In case of customer's death, the full sum assured is payable.
69.) What does a “Moral Hazard” mean?
Moral Hazard is the intent of making a profit from the purchase of an insurance policy. There are basic checks available with the insurer to eliminate moral hazard.
70.) What does “Mortality Charge” mean?
Mortality Charge is the charge for providing Life Cover to the insured and is deducted on a monthly basis. The mortality charge changes every year, as per the age of the life insured.
71.) What does "NAV” mean?
N A V stands for Net asset value. It is the value of a unit and is derived by calculating the market value of investments, plus receivable, plus accrued income, minus accrued expenses, minus other liabilities, divided by number of units outstanding on the N A V date.
72.) What does “Nomination” mean?
Nomination is where the life insured proposes the name of the person to whom the sum assured should be paid by the insurance company, in case of the policy buyer's death
73.) Who is a “Nominee”?
A nominee is the person named to receive the policy benefits upon the death of the life insured.
74.) What is a “Non Linked Plan”?
A non linked, is where the policy investments are not linked to the stock market. These types of plans are also called 'Traditional Plans'.
75.) What does a “Non Participating Plan” mean?
Policies where no bonuses are paid to the policy holder are called non participating plan.
76.) What does “Partial Disability” mean?
Partial disability is an illness or injury that decreases an individual's ability to perform some of the major duties of his or her job, but does not cause complete cessation of employment.
77.) What is a “Participation Plan”?
A participating plan enables an individual as a policy holder to share the profits of the insurance company. These profits are shared in the form of bonuses or dividends. This is also known as a with-profit policy.
Synonyms: par plan, participating policy, par policy, with bonus policy, with profit policy
78.) What does “Payout” mean?
A payout is generally the sum of money paid by the insurance company when a claim is accepted. It can also refer to any payments scheduled within the policy term. For example, a money back or income benefit installments.
79.) What is meant by “Pension Plan”?
A Pension Plan is an insurance policy where regular premiums are paid for a number of years to accumulate a corpus. This corpus is used to buy annuity to provide pensions to the customer.
80.) What does “Permanent Total Disability” mean?
Permanent Total Disability means an individual's inability to work in their own or any occupation (based on their training, education, or experience) due to a sickness or injury.
81.) What is meant by “Policy Administration Charge”?
Policy Administration charge, refers to the fees for administration of the policy that an insurance company incurs. These charges are deducted on a monthly basis from the units.
82.) What does a “Policy Schedule” stand for?
A schedule is a part of the policy document, and shows the details of the policy, such as how much cover one has, how much one has to pay, till when one has to pay and how much, as well as how long is one insured for.
83.) What does a “Policy Term” mean?
Policy term is the duration for which the policy provides cover to the policy holder.
84.) Who is a “Policy Holder”?
The policy holder is the owner of the policy. In certain cases, the policy holder is different from the insured. For example, a husband may be the policy holder, but the insured maybe the wife of the individual.
85.) What does “Premium” mean?
Premium is an amount paid to the insurance company by the policy holder for covering risk throughout the policy.
86.) What does “Premium Allocation Charge” mean?
Premium Allocation Charge is a charge that a company deducts as a percentage of the premium. This is done to meet initial expenses related to a policy, such as distribution expenses, stamp duty, medical expenses etc.
87.) What is meant by “Premium Payment Term”?
Policy paying term is the duration for which the policy holder has to pay the premium. These could be single premium, or regular premium.
88.) What is meant by a “Proposal Form”?
A proposal form is an application that a customer fills for an insurance policy.
89.) What does a “Quote” stand for?
A quote is the price offered by insurer towards offering life cover. It is based on the details provided by the policyholder.
Synonyms: premium quote, premium quotation, quotation, premium illustration
90.) What does “Re-direction” mean?
Re-direction refers to the facility to change the allocation between the Funds by redirecting your future premiums.
Synonyms: premium redirection
91.) What does “Renewal” mean?
Renewal of a policy, is referred to as the process of renewing a lapsed insurance policy by paying the due premium within a stipulated time period. It is important to renew the policy within the specified time to ensure that the life cover continues.
92.) What does “Retirement Plan” mean?
Retirement Plans are primarily investment plans that let an individual allocate a part of their income over a period of time, and provide a corpus which is paid out as steady income after retirement.
93.) What does “Reversionary Bonus” mean?
A Reversionary Bonus is a bonus that is paid along with either the maturity benefit or the death benefit, whichever happens earlier.
94.) What does a “Rider” mean?
Riders are add-ons or additional benefits which you can opt for, along with a life insurance policy, at a nominal additional cost. Examples include accidental death benefit rider.
95.) What does “Risk Commencement Date” mean?
In certain insurance policies, the inception date could be different from the date the risk cover starts. The date on which the risk covers starts is called the risk commencement date.
96.) What are “Saving Plans”?
Saving Plans are financial products that build a habit of saving and creating wealth. The money saved regularly over time helps in creating a corpus, which can then be used to achieve future financial goals.
Synonyms saving policy, saving plans
97.) What does a “Settlement” mean?
A settlement is a claim that has been paid by the insurance company to the customer's family or beneficiary.
Synonyms: claim settlement
98.) What is meant by “Assured Sum”?
Sum assured is the amount that the insurance company pays to the policyholder when the insured event takes place.
99.) What does “Surrender” mean?
Surrender is an early termination of an insurance product by the policy holder.
100.) What does “Surrender Value” mean?
Surrender Value is the amount payable to the policy holder in case he or she has terminates the policy before the date of maturity.
101.) What does “Switching” mean?
Switching refers to the option that allows the policy holder to shift existing units from one fund to another in any policy year, provided the feature is available in the product.
102.) What is meant by “Term Insurance”?
Term insurance plans, or pure protection insurance plans, cover one's family against financial loss arising out of the policy holder's untimely death. Term plans get a high life cover at a nominal premium, and the earlier one buys, the lower the premium.
103.) What is meant by “Terminal Bonus”?
If a policy holder stays for a specific number of years, an added benefit called the terminal bonus or final bonus may be payable to them.
104.) What does a “Top Up” mean?
Top Up refers to the feature that allows one to invest an additional contribution, over and above the regular premiums as per their choice, subject to the feature being available in the product.
105.) What does “U.L.I.P” mean?
U.L.I.P stands for Unit linked insurance plan. It is an effective combination of insurance with the benefits of market linked investments.
106.) What does “Underwriting” mean?
Underwriting is the process of assessing risk, ensuring that the cost of the cover is proportionate to the risks faced by the individual concerned.
107.) What does “Unit” mean?
Unit is a measuring yardstick. The premium that the policy holder gives to the company, after deduction of charges, is converted into units, and a customer at any given point of time holds units in his account.
108.) What is known as “Vesting Age”?
Vesting Age is the age at which the policy holder starts receiving pension within a pension policy.
109.) What is meant by a “Waiver Of Premium”?
Waiver of Premium is a benefit available in some plans. For example, there are child insurance plans that waive off the need to pay due premiums in case of death of, disability, or disease afflicting the policy holder.
110.) What does “Whole Life Insurance” mean?
A Whole Life Insurance is a policy with no fixed term of cover, and where the death benefit may be paid till 100 years of age of the life assured.
111.) Define Will.
Will is the legal declaration of a person's intention which he wishes to be performed after his death. The term 'Will' is defined under 'Section 2(h)' of the 'Indian Succession Act 1925'. You can make your will with the Aviva Online Will Writing Service completely free of cost!
112.) What is meant by “Yearly Premium”?
Yearly Premium is the amount a policyholder pays for their insurance each year.
These were some of the key terms that you need on your fingertips, so that you’re better prepared while picking out insurance policies for yourself and your loved ones. If you have any questions at all about your current or prospective insurance plan, we’d say reach out to us right away!