What Are Some Life Insurance Key Terms One Should Know?
When you're on the lookout for life insurance, you’re bound to come across some unfamiliar terms. Insurance jargon can indeed be quite complex and difficult to comprehend no matter how you look at it. Understanding key insurance terms is extremely crucial when you're trying to narrow down on the best choice else you might end up buying whatever the agent recommends.Whether you’re starting your search for a policy or you just got approved for one, here are some basic terms that you must get a grasp on when you’re purchasing or researching life insurance online
1. Insured and Insurer
The individual in whose name the insurance policy has been takenis usually referred to as the life assured or the insured.Generally, the insured does own the policy,it must be mentioned that the insured need not always be the policyholder.The insured is the person on whose name the protection has been purchased and it can be purchased by anyone.For instance, if you have taken out an insurance policy in your name, you are the policyholder whilealso beingthe one who is insured.Additionally, the individual whom you name as the nominee is the one who will get the insured amount in the event something untoward were to happen to you during the policy period. The nominee is also referred to as the beneficiary.
On the other hand, the insurance company that offers the policy to the insured is referred to as the Insurer!
Premium is simply the amount the insured pays to the insurance company to buy a policyin exchange for the coverage. This payment can either be made in a lump-sum or in periodic amounts. A single premium policy requires that the policyholderpays just one lump-sum amount while an annual premium policy will require him/her to pay every year. Additionally, the policyholder can also choose to make premiumpayments semi-annually, quarterly or monthly. Premium payments usually go on for a fixed period of time and the exact number of years will be decided at the time of choosing the policy. Further, the cost of the premium generally depends on the risk assessment results of the underwriting process
3. Sum Assured and Maturity Value
Sum assured is the amount of money an insurance company guarantees to pay to the policyholder or the insured's beneficiary if the said conditions mentioned in the policy materialize. Sum Assured is basically the coverage and the total amount you are insured for.
Maturity value or benefits is the amount the insurance company gives to the insured or the policyholder at the end of the policy term. Basis the type of policy chosen, the maturity value can either be guaranteed or can vary basis the bonus or performance of funds.
Rider is an optional feature or a supplementary benefit that can be added to the primary policy. These riders are charged a nominal additional cost which is added to the premium. It can be taken with a policy and a different coverage i.e. accidental death, disability or critical illness can be covered.
An example of a common rider is the “critical illness rider,” which requires the insurance company to pay the insured a lump sum in case the policyholder is diagnosed with one of the critical illnesses specified in the insurance policy such as cancer, heart attack, brain tumour, stroke, kidney failure and others that are explicitly specified and covered under the rider's terms and conditions. The proceeds can be used to meet both medical and household expenses incurred by the policyholder.
An annuity is a contract which provides fixed or variable payments to a recipient,either immediately or at some point in the future. This is often done to supplement income after retirement and is used as part of a retirement portfolio.
6. Surrender Value & Paid-up value
- Surrender Value
The surrender value refers to the amount the policyholder will receive in case he/she wishes to terminate the policy before the maturity of the policy. Once this payment has been made to the insured, the policy ceases to exist.
- Paid-up value
Paid-up value, on the other hand, is the reduced amount of sum assured paid by the insurance company in case of discontinuation of the payment of premiums by the policyholder after paying the full premiums for the first three years. The sum assured is reduced proportionately, depending on when the policyholder stops it or when the policy lapses, following which the policyholder gets the paid-up value.
Paid-up value = [(Number of premiums paid / Total premiums payable * Sum assured)]
AN Apr 22/18