Life Insurance Terminologies- Every Policyholder Must Know

Life insurance is one of the best investments of your life as it offers financial coverage to your loved ones in case of your unfortunate demise. However, people often need clarity about the meaning of life insurance terms. A clear understanding of life insurance terminologies helps you make smart and informed decisions.

This article provides you with a comprehensive understanding of the terminologies of life insurance so that you can make the right decisions related to your policy and prevent buying one that is inaccurate for you.

We are providing you with a life insurance policy purchase scenario to show you how some life insurance terms are used:

Mr. Sharma bought ICICI Prudential Signature Capital Guarantee || and made his son a nominee.

Let’s understand how ICICI Prudential Signature Capital Guarantee || Plan works for him with a premium illustration table.

On maturity, Mr. Sharma will receive total benefits of Rs 22.02 lakhs including guaranteed returns and additional benefits. In case of his demise, his son will receive death benefits.

Policy Owner/Policyholder

The policyholder is the person/entity who owns the policy. The policyholder proposes the policy. He pays the premium. The policyholder can be different from life insured in some plans such as child insurance plans.

In the above illustration, Mr. Sharma is the policyholder.

Life Insured

He is the person whose life is insured 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.

In the above illustration, Mr. Sharma is the life insured.

Nominee/Beneficiary

The nominee is the individual who will receive the benefits in case of the policyholder’s untimely demise during the policy tenure. 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.

An important point to note is that nomination is possible only in policies where policyholders and life insured are the same. In case the 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.

In the above illustration, Mr. Sharma’s son is the nominee.

Premium

Premium is the amount paid by the policyholder to enjoy the policy benefits and to keep the policy active. The premium amount for a policy is 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.

In the above illustration, Rs 1,20,000 is the annual premium paid by the policyholder.

Premium Payment Mode

The premium can be paid in various frequencies at your convenience. Some of the premium payment 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.

In the above illustration, the premium payment mode chosen by Mr. Sharma is annual.

Due Date

The due date is the date by which a policyholder should pay their due premiums. In case the policyholder fails to pay at the due date, the insurance company may charge them penalties or charges.

In the above illustration, the due date is March 15 every year.

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 grace period of 30 days from the due date. For the monthly mode, it is usually 15 days from the due date, and for quarterly, half-yearly, and yearly it is 30 days.

In the above illustration, the grace period offered is 30 days as payment is made annually.

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.

Limited 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 of 20 years. The premium payment has to be made for the entire tenure of the policy.

In the above illustration, the payment term is regular pay.

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, or 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 the case of a whole-life policy.

In the above illustration, the policy tenure is 20 years.

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.

In the above illustration, the maturity date is 20 years after March 24, 2024, which is March 24, 2044.

Maturity Benefits

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 the start of the policy plus any accrued bonuses and loyalty additions if any. In ULIPs, it is usually the policy fund value.

In the above illustration, the maturity benefit is Rs 22.07 lakhs.

Additional Benefits

Additional benefits are the amount payable to the policyholder along with the maturity. This amount is not guaranteed. It varies from plan to plan. The insurer pays these benefits in the form of loyalty additions, terminal bonuses, guaranteed additions, etc.

In the above illustration, the additional benefits are Rs 8.87 lakhs.

Survival Benefits

The survival benefits are the periodic payouts made at predefined intervals in the case of money-back policies. It can or cannot be the same as maturity benefits depending on the plan type.

In the above illustration, the survival benefits are Rs 22.07 lakhs.

Sum Assured

It is the amount of coverage provided under the policy. The thumb rule is to choose a sum assured which is 15-20 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.

In the above illustration, the sum assured is Rs 18 lakhs which is 150% of the premiums paid.

Death Benefit

The death benefit is the amount payable by the insurance company in case of the 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.

In the above illustration, the death benefit is Rs 22.07 lakhs.

Additional Riders

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:

Terminal Illness Rider,Accidental Death Benefit Rider,Waiver of Premium Rider,Critical Illness,Accidental Total & Permanent Disability Rider

In the above illustration, Mr. Sharma has not chosen any additional riders.

Paid-up Value

A paid-up value is paid to the policyholder when they stop paying their premiums which results in reduced sum assured. This value is defined by the premiums paid by the policyholder and the applicable terms and conditions of the policy.

For eg: In case the policy and premium payment term is 20 years and sum assured is Rs 10 lakhs 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.

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 the policy if he feels that the policy terms and conditions are not as per his expectations or for any other reason.

Exclusions

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.

Having a complete understanding of life insurance terminologies is important so that the policyholder can make smart and informed decisions. If the policyholder does not understand these terms then they can face difficulty in understanding the policy brochure. These life insurance terminologies are used several times in the policy brochure.

If you are still confused about how life insurance works or choosing the right life insurance plan then you can contact us at PolicyX.com. One of our insurance representatives will contact you shortly and help you choose a plan that best fits your requirements.