To make an informed and hassle-free decision when you purchase your next life insurance policy, make sure to read through this glossary of life insurance definitions to better understand what the various terms mean.
A life insurance plan is a contract that is held between an insurance firm and the policy buyer. The insurance firm provides a risk cover against death on the life of the policyholder, for a certain fee that is called a premium, which is payable by the policyholder on a regular basis. Thus, if the policyholder passes away during the policy tenure, a death benefit will be paid out to the nominee, by the insurer. Thus, a life insurance policy can be instrumental in helping you provide financial security to your loved ones. Based on the terms and conditions of the life insurance policy, you may also be entitled to receive other payouts and benefits.
Some of the major types of life insurance plans that are offered by insurance companies include:
All life insurance policies come with a cooling-off or free-look period, during which time the policy buyer can review the terms and conditions of the policy and return it in case he/she finds the terms and conditions of the policy unsatisfactory. Thus, if you cancel the policy during the free-look period, the insurer is liable to provide you a refund of the premium paid. In most cases, the insurance provider might make a nominal deduction from the premium amount, if you cancel the policy during the free-look period.
A life insurance policy is meant to provide a risk cover to the policyholder. Thus, if the policyholder happens to meet with an untimely death while the policy is in force, the nominee will receive a death benefit from the insurer. The amount that the nominee receives as the death benefit will be based on how much is opted for as the sum assured, at the time of purchasing the policy. In addition, certain insurance policies will also provide your nominee guaranteed additions and bonuses along with the death benefit amount.
The persistency ratio, with respect to the life insurance industry, indicates the total business or number of insurance policies that an insurance company is able to retain in a fiscal year without losing business to other insurance companies or policies getting lapsed.This ratio is measured by insurance companies both in terms of the number of policies that remain in force and the total premiums collected.Insurance companies report their persistency ratios at the end of the first fiscal year (known as the 13th month persistency), second fiscal year (known as the 25th month persistency), third fiscal year ( known as the 37th month persistency), fourth fiscal year (known as the 49th month persistency), and the fifth fiscal year (known as the 61st month persistency). The persistency ratio that is reported by an insurance company is a good indicator of the insurer’s profitability and customer retention.
A representative of the insurance company who is licensed by the Insurance Regulatory and Development Authority of India (IRDAI) to sell policies and provide services to customers. They act as intermediaries and help customers identify the right insurance products suitable for them. In exchange for their services, they earn commissions from the insurer based on the monetary value of the policies they sell.
The person who receives regular income (annuity) under a pension plan. Typically, an annuitant is the policy owner who receives benefits from the policy.
An investment strategy that involves diversification of investments across various asset classes. It primarily focuses on balancing risk versus reward based on the types of assets chosen under an investment. Various factors such as investment goals, risk tolerance, timeline, etc., are taken into consideration while allocating assets under a policy. In ULIPs, customers are free to choose the assets based on their risk profile.
A person who is legally entitled to receive the benefits from a life insurance cover. In the case of term insurance proceeds, the beneficiaries are typically family members nominated by the insured. If the policyholder has not nominated a beneficiary, the proceeds will go to the policyholder’s legal heirs. In the case of maturity proceeds, the beneficiaries are mostly the policyholders themselves.
The additional amount that a policyholder will get at the end of the maturity period. Bonus payments are available only for with-profit plans. To qualify for these benefits, the policy must remain active with all the premium dues paid within the deadline. There are different types of bonuses offered by life insurers in India. Some of the common types include simple reversionary bonus, compound reversionary bonus, interim bonus, maturity bonus, etc.
This provides lump sum benefit to the policyholder upon the first diagnosis of any of the named critical illness. The number of critical illnesses covered may vary from one insurer to another. Some of the critical illnesses covered by these policies include cancer, stroke, coma, kidney ailments, cardiac ailments, paralysis, major organ transplant, etc. In life insurance, critical illness covers are typically offered as add-ons or riders along with a life insurance policy.
This refers to the period during which an insurance company may deny a claim on grounds of misrepresentations or fraud. The contestability period clause is typically valid for the first two years of the policy. Following this period, the policy becomes incontestable. In other words, the insurance company cannot deny any claims on grounds of misrepresentation after the exhaustion of this period.
This is a provision offered by certain life insurers on account of the accidental death of the insured. In case of accidental deaths, certain policies pay double the sum assured amount provided in the policy document. This will be beneficial for those who wish to secure their families against unexpected accidental deaths. Policyholders may also subscribe to a personal accident or disability rider to enhance the coverage offered for accidental deaths.
In pension plans, deferment period refers to the period between the date of purchase of the policy and the date of payment of the first annuity instalment. For deferred annuity plans, customers are free to choose the age from which their pension payment will start. This deferment period does not apply to immediate annuity plans where the pension payments start immediately after the purchase of the policy.
This refers to the payment mode in which premium payments are automatically withdrawn from the insured’s account. Most of the top insurers in the market have electronic fund transfer facilities. India’s largest insurer LIC now pays all the compensation amount through electronic transfer.
This refers to the additional period offered by an insurance company for the payment of premiums after the end of the renewal due date. In life insurance, the grace period typically varies from 15 days to 30 days depending upon the premium payment frequency chosen by the policyholder. In the case of monthly premium payment, the grace period is limited to 15 days. If the renewal premium is not paid within the grace period, the policy will lapse.
When members belonging to a common group are covered under one single policy, it is known as group life insurance. Group life insurance is commonly taken by employers to provide coverage for their employers. Most of the top insurance companies in the market provide group life insurance coverage. Here, the coverage for a particular member is valid only as long as the member is a part of the group. Group life covers cannot be customised according to the specific needs of individual members.
Activities that pose a major threat to the life of a person. Some of these activities include scuba diving, skydiving, mountain climbing, bungee jumping, paragliding, moto racing, combat sports, etc. The risk faced by a participant is extremely high in all these activities. Most insurance companies in the market do not provide any coverage for participation in these activities. If a policyholder dies due to participation in any of these activities, his/her dependents will not get the compensation amount mentioned in the policy schedule.
The life of a person has insurable interest if there is emotional or financial distress following the unexpected loss of his/her life. A life insurance contract is invalid if there is no insurable interest in the life of the policyholder.
The person covered under an insurance policy. In life insurance, the person covered under a policy may also be referred to as the life assured. A policyholder may also buy life coverage for other family members. In this case, the person buying the policy is the policyholder and the person covered by the policy is the insured.
When a life insurance policy terminates due to non-payment of premiums, it becomes a lapsed policy. Some companies offer ways to revive a lapsed policy through the payment of outstanding premiums. Typically, there is a maximum deadline within which a lapsed policy can be revived. When a lapsed policy is revived by a policyholder, the company may impose new terms and conditions for providing coverage.
The specific period of a policy term during which withdrawals are not allowed in a life insurance policy. As per the revised guidelines, ULIPs have a lock-in period of five years. During these five years, the policyholder cannot withdraw any money from the policy. If the policy is cancelled before the end of the lock-in period, the company will impose surrender charges on the policy. Also, the outstanding money can be withdrawn only at the end of the lock-in period.
A factually incorrect statement made by the policyholder or insured at the time of signing up for a policy. Material misrepresentation mostly refers to intentional false statements. It occurs in situations where the insurer may not have issued the policy if the truth was disclosed. Unintentional typos and misspellings in the policy document are not considered as material misrepresentations.
Net asset value refers to the present day value of the fund. Net asset value is typically represented as the per unit value of the fund. The total value of the holding is divided by the total number of units to derive the net asset value per unit.
A dependent family member who receives the compensation from the life cover in the case of the unexpected loss of the insured person. Nominees are typically named by the insured while purchasing the cover. If the insured has not named the nominee, the legal heir of the insured will receive the sum assured benefits from a life cover.
A policy becomes a paid-up policy if premiums have been paid for at least three years and subsequent premiums are not paid. Here, the policy continues to remain active until the end of the policy term with the revised sum assured amount. In this case, the outstanding surrender value of the policy becomes the new basic sum assured amount. It will continue to accrue benefits till the end of the policy term.
The periodic payment that must be paid to the insurance company in exchange for the life coverage. There are single premium life covers as well as regular premium life covers. In case of regular premium life covers, premiums must be paid within the due date for a policy to remain active. Most companies offer a lot of flexibility when it comes to choosing the premium payment interval (yearly, half-yearly, quarterly, or monthly) for a life cover.
This refers to the restoration of a lapsed life insurance policy. Companies allow policy revival upon satisfaction of certain conditions. Policy revival is normally allowed within two years from the date of nonpayment of premiums. To revive a lapsed policy, the policyholder must pay the outstanding dues as well as the penalty charges.
Riders are add-on covers that can be bought to enhance the overall coverage of a base life insurance policy. Some of the commonly available rider covers include personal accident death/disability rider, critical illness rider, waiver of premium rider, etc. The policyholder must pay additional premium charges to subscribe to rider covers.
This refers to the amount of coverage taken by a policyholder. In term covers, the agreed upon sum assured amount will be paid to the policyholder in case of his/her death within the policy term. In maturity plans, the total proceeds will include the basic sum assured amount along with the bonuses and profits.
This refers to the amount paid to the policyholder if a policy is terminated (surrendered) before the actual maturity date. Surrendering a policy before the maturity date attracts a lot of penalty charges from the company. These are called surrender charges.
If the policyholder commits suicide within the policy term, the compensation will be paid as per the suicide clause. In the case of suicide within one year of the commencement of the policy, the company will not pay any benefit to the dependents. Here, the premium amount paid by the policyholder will be returned to his/her dependents.
A term cover is the purest form of life insurance coverage. Here, the insured can avail life coverage for a predetermined policy term by paying the premiums regularly. If the policyholder dies during the policy term, the sum assured amount will be paid to his/her dependents as per the policy. If the policyholder outlives the policy term, there will not be any maturity benefits.
In life insurance, underwriting refers to the process of classifying policyholders according to their risk and determining the premium accordingly. If the risks are unacceptable to the company, the application will get rejected.
These are life insurance covers that invest a portion of the premium amount in the markets. Based on the risk profile of the policyholder, the investments can be equities, debts, or a combination of both. The proceeds that are obtained from the policy are based on the returns generated from market investments. Unlike other variants of life covers, ULIPs allow policyholders to choose the funds in which they wish to invest.
In pension plans, vesting age refers to the age at which the insured starts receiving the pension amount. In deferred annuity plans, policyholders can choose the vesting age by choosing the deferment period.
This is a form of life insurance cover that offers coverage throughout the life (maximum of 100 years of age) of the insured person. Typically, whole life policies have a specific premium payment term following which the cover will remain active till the death of the insured. Upon the death of the insured, the accrued maturity amount will be paid to the insured’s dependents.
While protection-oriented policies like term insurance plans only provide a death benefit to the nominee, certain other types of insurance policies also provide a maturity benefit at completion of the policy tenure. Thus, if the policyholder survives till the end of the policy tenure, he/she will be paid a certain maturity benefit by the insurer. In addition to the maturity sum assured, certain insurance plans also provide bonuses, loyalty additions, and/or guaranteed additions, as part of the payout. Thus, policies that provide a maturity benefit provide the policyholder both protection and savings features, under a single product.
Annuity, retirement, or pension plans are offered by life insurance providers to guarantee financial security to policyholders during their post-retirement years. In the case of annuity plans, the policy buyer makes a payment towards the policy at the time of purchasing it, and the policy provides annuity payments on a regular basis to the policyholder. Thus, these plans act an an income replacement by providing the policyholder regular payments.
Insurance providers usually set an eligibility criteria which will have to be met by the policy buyer if they wish to purchase the insurance plan. The eligibility criteria can be in terms of the policy buyer’s age, location, premium payment capacity, etc. Insurance providers usually set a minimum and maximum age at entry, which will vary for different plans, as per the insurer’s terms and conditions. Thus, as a policy buyer, you will need to meet the age limit set forth by the insurer.
Cancer insurance is a separate category of insurance that is offered by insurance providers. A cancer insurance policy will cover the expenses that you might have to incur as a result of the disease, such as the diagnosis of the disease, hospitalisation expenses, post-hospitalisation expenses, etc. The benefit payable by this plan will be paid during various stages, and the amount payable will be based on the stage of the disease. In most cases, the policyholder must survive a certain number of days post diagnosis of disease to avail the benefit payable by the policy.
Fiduciary responsibility or duty refers to the legal obligation between two parties to act in the best interest of the other party. Thus, the obligated party or the party that is entrusted with ensuring care for the other party’s property or money is called the fiduciary.
The coverage refers to the amount of liability or risk that the insurer undertakes for a policy buyer. Thus, post purchasing the policy, the policyholder is provided coverage by the insurance provider, up to certain pre-defined amounts. The coverage amount will vary from person to person and will be based on several factors, such as the policy buyer’s age, location, etc.
All insurance policies come with an exclusion criteria. Situations or conditions that fall within the insurer’s exclusion criteria are usually not covered by the insurance policy. Thus, exclusions narrow the coverage provided by the insurance policy. Exclusions are usually provided in the policy brochure, and policyholders are encouraged to familiarise themselves with the exclusion criteria to avoid facing hassles when raising a claim.
Insurance providers usually provide a free-look period to policy buyers when they purchase a new insurance plan. Thus, the policy buyer can review the policy during the free-look period and return it to the insurer if they are unsatisfied with the policy terms and conditions. The free-look period usually ranges between 15 days and 30 days. The free-look period can also be called cooling-off period. Usually, if policies are cancelled during the free-look period, the policyholder is eligible to receive the complete premium amount paid excluding a nominal deduction.