Terminologies of Life Insurance

Life insurance is the best way to build wealth and is a safety net that protects your family financially in case of your absence. It is an important financial tool that should be considered part of your finances in the long run. However, when it comes to buying life insurance, buyers get confused with the insurance terms associated with it. A policyholder should know the jargon to manage their life insurance meaning plans effectively. 

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Terminologies of Life Insurance

Life insurance is the best way to build wealth and is a safety net that protects your family financially in case of your absence. It is an important financial tool that should be considered part of your finances in the long run. However, when it comes to buying life insurance, buyers get confused with the insurance terms associated with it. A policyholder should know the jargon to manage their life insurance meaning plans effectively. 

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18 Life Insurance Terms to Know Before Buying a Life Insurance Plan

Let’s discuss the important life insurance definitions and terminologies:

A

Annualized premium equals to total regular premium paid in one policy year, considering premium factors for different premium payments. While calculating annualized premium, taxes, extra premiums, or rider premiums are not included.

The basic definition of an 'accident' is an unforeseen events caused by any external means.

Accidental Total Permanent Disability, as the name suggests, is a lifetime disability which has occurred by an accident (as per definition of accident) to the policyholder. It is excluded in some of the policies as per their policy document.

Accidental Total Permanent Disability, also commonly called ATPD

B

In an insurance policy, the amount received is subject to terms and conditions of the policy

A beneficiary, in common language, is a person who receives all the benefits of the policy. For instance, in a life insurance policy, a beneficiary is the nominee who receives the policy benefits after the demise of the policyholder.

C

If the life assured passes away during the policy term, the insurer doesn’t pay the sum assured directly to the nominee. You need to file a term insurance claim to the insurer; you will get the coverage after that.

Cover till age in term life insurance means the policy provides coverage for the assured individual up to a specific age, typically the age of maturity or the end of the term.
For example, If a plan covers the policyholder till the age of 60, the insurer will provide the benefits in case of an eventuality until the policyholder turns 60.

The claim settlement ratio is the ratio of the number of death claims settled by the insurer in one financial year to the number of term claims received by the company. The IRDAI releases the CSR of each company at the end of each year.

Policybazaar provides 100% Dedicated Claim Assistance for free. A personal claim handler from our team of experts will contact the family when the nominee applies for a claim on our website. It helps customers get their claims settled easily without worrying about the hassles of physically visiting the company’s office and submitting the required documents.

"Critical illness is the illness condition specified under the particular plan. In general, critical illness includes either The First diagnosis of illness (listed under critical illness) or, The First performance of any surgery (covered under critical illness) Critical illness offers exclusions if specified under the document of the policy"

Critical illness benefit or CI benefit is the benefit payable to the insured after the First diagnosis of illness (listed under critical illness) as per the policy document.

D

The deferment period is basically an extended-term period from maturity period to agreed time period. Deferment payment is applicable under insurance pension annuity plan

Also, called as life cover. The life cover also refers to the sum assured payable on the policyholder's death during the policy term.
For example, If the term insurance is for a 1 Crore sum assured, the life cover amount of 1 crore will be payable on the policyholder's death.

The period between the start date of policy and the time at which the first instalment of annuity is received, in an m-pension policy.

Surrender or discontinuance charges are the charges deducted from the account of the policyholder if they withdraw the policy before the maturity period.

Date of commencement is the date from which any policy comes into force

E

Exclusions are clauses that are not included under a life insurance plan, and the insurer would not pay any benefit if claimed.

F

Financial surrogates are the non-standard income proofs, which are used to fill the gap in the financial eligibility of a term insurance aspirant. Here is a list of acceptable documents that can work as financial surrogates:

  • Certificates of fixed deposits
  • Statements of Mutual Funds
  • Papers of property
  • Documents proving land ownership
  • Bank statement for past six months
  • Other investment proofs e.g. PPF, bonds, statement of Demat account, Kisan Vikas Patra, NSC certificates, etc.

Note: The aforementioned list may change as per the insurer. 

An insurance plan generally comes up with a free look period, the tenure within which you can terminate the plan without paying the penalties. This free look time can differ from plan to plan.

G

In case of non-payment of your plan's premiums on time, the company gives you an extension of some days after the due date of premium payment. This period can be 15 days monthly and 30 days in annual premium payment mode.

H

The HLV calculator is an online tool that helps calculate the life cover a customer is recommended to buy. It considers the age, income, assets, liabilities, expenses etc., for suggesting a life cover.

I

In force policy means a normal active policy for which all premiums are duly paid

Insured is a person whose life is covered under the insurance policy

Issuance in term life insurance refers to the formal approval and activation of the policy after underwriting, making it effective for the coverage period. After you submit all the relevant documents and medicals are done (if required), the insurer reviews the documents (underwriting) and approves the policy. Then, the policy is issued.

J
K
L

A lapsed policy is the policy that is not active anymore due to the non-payment of premiums

The limited premium pay option allows you to pay the premiums for a certain period of the policy term. This way, you can make all the premium payments early and enjoy coverage for a longer duration.
For example, if you purchased a plan to cover yourself for the next 30 years, you can choose to pay for a lesser duration, like 5 or 10 years. This is called Limited pay. Payment period in Limited pay vary with insurers

The life cover also refers to the sum assured that is payable on the death of the policyholder during the policy term.
For example: If the term insurance is for a 1 Crore sum assured, then the life cover amount of 1 crore will be payable on the death of the policyholder.

Lapse means terminated insurance policy due to non-payment of premiums

Life assured is a person for whom the term plan is purchased. This may or may not be a policyholder.

M

Maturity benefit is the sum that the insurer pays when the policyholder outlives the policy term. Survival benefit amount will be paid when the policyholder completes the pre-defined years under the plan.

Maturity date is the date mentioned on the policy of the document at which the benefits are payable to the policyholder or the nominee

N

The beneficiary/nominee is the person who receives the life cover in case life assured passes away during the policy term. This is selected by the policyholder at the time of buying the policy.

Non-participating plans are the plans in which the policyholder is not entitled to any kind of profit or surplus sharing with the insurance company

A nomination is an act in which the policyholder gives written authority to a person making them entitled to receive all the benefits and policy proceeds in case of the demise of the insured. The authorized person is called the nominee

O
P

Premium is a fixed money paid by the policyholder to the insurer in exchange for insurance.

Paid-up sum assured on death is the reduced amount of sum assured on death. The calculation formula of paid-up sum assured on death is [(Sum Assured on Death X Number of premiums paid) / Total number of regular premiums payable]

If the policyholder pays regular premiums for the first 3 years of the commencement of the policy and is not able to pay the regular premium for the subsequent years, then the policy is automatically converted into a paid-up policy. The amount is then paid as a paid-up sum assured on maturity after the expiration of the grace period as per the terms and conditions of the policy.

Paid-up sum assured is the reduced value of sum assured. The calculation formula of paid-up sum assured is [(Sum Assured X Number of premiums paid) / Total number of regular premiums payable]

Participating plans are the plans in which the policyholder is entitled to any kind of profit-sharing or bonus with the life insurance company

The policy term is the cover term for which the policy will cover the policyholder for. For example, if you purchased a plan to cover you till 60 and you are currently 20, the cover term would be 40 years.

The payment modes are how premiums can be paid to the insurer. There are 3 types of payment modes:

  • Regular Pay: The policyholder pays premium amounts throughout the policy tenure. 
  • Single Pay: Single pay option in term insurance allows the policyholder to pay the entire premium in a single lump sum. 
  • Limited Pay: The limited premium pay option allows you to pay the premiums for a certain period of the policy term. This way, you can make all the premium payments early and enjoy coverage for a longer duration.

For example, if you purchased a plan to cover yourself for the next 30 years, you can choose to pay for a lesser duration, like 5 or 10 years. This is called Limited pay. The payment period in Limited pay varies with insurers

The policyholder is also called a policy owner. The policyholder is a person who buys the insurance plan and pays the regular amount of premium.

Q
R

These are add-ons to your existing life insurance plan that strengthens your plan. They offer coverage for critical illness or accidental death benefits. The policyholder has to pay extra for riders at the time of purchasing the term plan.

Regular premium is the normal pre-decided premium to be paid by the policyholder to the insurance company at regular intervals during the policy premium tenure.

The regular premium fund value is calculated by multiplying the total number of regular or limited premium units in each fund by the relevant unit price.

Restoration of the life insurance policy after the policy lapse is called reinstatement

Generally, a policy lapses in case of unpaid premiums even after the completion of the grace period. After the termination of the policy, the insurance company still provides an option to the policyholder to revive their policy. This revival option is offered for a specific period of time after the completion of the grace period and this period is called the revival period.

Rider Life Assured is the extra benefit that adds up to the base policy when you opt for the rider option while buying an insurance plan. Each rider benefit has its own payout rules as per the policy documents.

Rider Sum Assured is an additional cover the adds up to your base policy when you select the rider option while purchasing your term insurance plan. Each rider benefit has its own rules as per the policy document.

Rider Premium Charge is the extra charge deducted from the policy to provide the additional rider benefits. Each rider benefit has its own payout rules as per the policy documents.

Rider term means the period from the commencement of the rider benefit till the period of its Maturity as pre-defined in the policy documents. Every policy has its own rider term period rules as mentioned in the policy.

Rider benefit is the additional benefits cover option under the insurance policy. Various additional options are offered under rider benefit as per the rules under the specific policy document.

Rider premium is the amount payable by the policyholder to the insurance company during the rider premium paying term. the amount is exclusive of taxes, if any. Rider premium is paid along with regular premium at a regular premium paying frequency pre-decided while buying the policy.

Rider premium paying term is the specified tenure of premium payment decided at the start of the policy tenure. Rider premium is paid along with regular premium at a regular premium paying frequency pre-decided while buying the policy.

S

This is the sum the insurer pays the nominee on the life assured’s death. Sum assured is also called a death benefit or life cover.

Suicide Exclusion means that no benefit as such will be payable if the life insured commits suicide within one year of commencement of policy or revival of the policy.

Single pay option in term insurance allows the policyholder to pay the entire premium in a single lump sum.

Survival benefit is the benefit amount payable to the policyholder if they outlive the policy period as mentioned in the policy document.

Generally, the survival period is the period of 30 days from date of diagnosis of critical illness as per the policy document.

If the life assured decides to discontinue the life insurance plan before the maturity age, the company pays money to the policyholder, called surrender value.

Surrender benefit is the benefit amount payable during the surrender of the policy. Surrendering benefit depends upon policy to policy. It is not generally offered under every policy and the individual needs to go through the policy documents carefully before buying the policy.

T

Policy term is the duration from the commencement of the policy to the maturity of the policy. Term duration varies from one policy to another.

U

Underwriting is the process in which the individual or the company takes financial risk and also ensures that the risk covered is proportionate to the risk faced.

V
W

WOP or Waiver of Premium Benefit is the benefit in which the future premium payments by the policyholder are waived off under certain conditions as per the policy document provided during the commencement of the policy.

X
Y
Z
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Wrapping It Up!

This simple guide to Terminologies of life insurance and life insurance meaning will help you simplify the understanding of insurance and its associated insurance terms.

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