Term Insurance Terminologies

Term insurance plans are specially designed to benefit in the event of the death of the insured. Term Insurance plans benefit only if the death of the policyholder occurs within the duration of the plan. The premium charged is relatively low as compared to the life insurance policies as the plan majorly covers only death risk without paying any other benefit until the plan expires.

Let's take a look at term insurance terminologies with examples below:

Common Terminologies Used Under Term Insurances

1.  Premium Payment Frequency
Premium is the sum paid by the policyholder to keep the insurance policy active either monthly, quarterly, half-yearly or annually. Premiums are liable to be paid at a due date given by the insurer. In some cases, a faulty payment leads to a grace period. 
There are also single pay policies where premiums are charged only once, and in some cases for the entire life of the insured. There are 3 basic types of premium payment frequency available in most plans:

1. Regular Pay: 
   Wherein the premium needs to be paid for the entire policy tenure. For example, the Birla Sun Life Term plan allows the policyholder to pay a premium for the entire duration of the plan.
2. Single Pay:
   Wherein the premium needs to be paid in a lump sum amount at the beginning of the policy
3. Limited Pay:
   Wherein the premium needs to be paid for a specific duration and not the entire policy tenure. For example, if the term life insurance plan is 20 years and limited pay option is 12 years, then premium needs to be paid only for the initial 12 years while the plan remains active for the entire duration of 20 years

In fact, premium can also be paid either in annual, half-yearly, quarterly or even monthly modes. However, you get a discount in premium if you opt for the annual mode of premium payment.

2. Sum Assured 
As term insurance policies allow to reap benefits upon the death of the insured, the sum assured is the amount guaranteed to the beneficiary of the life assured, in case of the death of the insured. The beneficiary receives the sum assured also known as the coverage or the insurance policy cover. So, basically sum assured is the coverage that you opt for.

Calculation of sum assured is usually done by human life value (HLV).  Factors of the sum assured include:

• The current and future expenses of the insured
• Present and future earnings
• Age of insured person
• Current inflation

The Edelweiss Tokio term insurance plan offers 8 different types of term insurances. Under each plan, the entry age, maturity age, term of the plan, the premium to be paid, and the sum assured is nested. 

For example, the Edelweiss Tokio life protection plan offers a sum assured of INR 15 lakh and above. The sum assured is paid to the nominee on the demise of the insured during the tenure of the plan.

3. Tax Benefits

Taxpayers are entitled to receive several deductions and exemptions under the Income Tax Act. One such tax saving instrument is term insurance. Besides the term insurance tax benefits, policyholders also avail the benefits of a secure life cover. 

a. Section 80C of the Income Tax Act 1961:
is a popular tax-saving tool used by taxpayers. Conditions include:

1. Maximum deduction extends up to INR 1,50,000 which is the total amount of listed investments and instruments of a taxpayer
2. Yearly premium paid should be less than 10% of the sum assured, varies case to case
3. If premiums exceed 10% of the sum assured, deductions are made proportionately.

Since term insurance plans are the cheapest form of life insurance plans, premium is usually less than 10% of the total coverage and hence qualifies for 80C coverage.

b. Section 80D of the Income Tax Act 1961:
Another benefit is offered by section 80D. Policyholders who opt for health riders such as surgical care, critical illness, and hospital care under term insurance avail deduction under section 80D. Conditions include:

1. Deductions up to INR 25000 can be availed if the policy has been taken for self, spouse, children
2. Additional deductions of INR 25000 can be availed if the policy has been taken for parents by the taxpayer
3. An additional benefit of INR 50000 can be availed for taxpayers whose parents fall under the category of senior citizens.
4. An additional benefit of INR75000 can be availed if both, policyholder as well as parents are senior citizens, i.e. above the age of 60 years

c. Section 10(10)D of the Income Tax Act 1961:
There are also benefits under section 10(10D) under the Income Tax Act, where the premium payable is less than 10% of the sum assured. In rare cases, if the payout exceeds Rs. 1,00,000 a TDS of 1% is applied. 
In Term Insurance Plans, Death benefit is tax free under section 10(10) D.

4. Claim Settlement Ratio
One of the metrics used for calculating the percentage of term insurance claims that are settled by your insurance company in any given financial year. Precisely the claim settlement ratio applies to insurance companies and is defined as the percentage of claims paid as compared to the aggregate claims received. 
For example, if the claim settlement ratio is 90%, the insurance company clears 90 out of a 100 claims received every year. 
The remaining 10 claims are rejected by the provider. A high percentage also indicates the risk management ability of the insurer. The higher the ratio, more is the confidence of the policy holders. 

5. Free Look Period 
This is a period of 15 days offered under an insurance plan, be it an indemnity cover, a death benefit. During this time, you can opt to cancel your policy if the same do not meet your requirements. The entire premium less basic charges would be refunded back. The basic charges would include the cost for medical examination, stamp duties paid, mortality risk for those 15 days of coverage. Some plans offer a 30-day tenure for freelook cancellation as well, especially if the same has been bought online or through a digital marketing channel. The period helps the insured analyze the benefits of the policy and decide whether to continue or not.

The free look period begins from the date of receiving the policy documents until 15 days. Precisely the free look period is a tenure for free cancellation of your policy offered by your insurance company to you. This can be initiated online or offline from any branch as well.
For example, PNB MetLife Mera Term Plan Plus offers a 15-day (30-day for Online Sales of the plan or Digital Marketing sale) tenure for freelook cancellation while LIC’s Tech Term Plan has a 30-day tenure for freelook cancellation from the date of receiving the policy document. 

6. Riders 
Riders under term insurance relate to an endorsement, attachment, or an amendment made under the term insurance policy that entitles you with enhanced or additional coverage. Riders provide strength to an insurance policy by offering additional benefits apart from the core benefits. 
The cost conditions of riders vary depending upon the plan. There are five most common riders that can be added to your term plan to enhance the coverage.

1. Accidental Death Benefit Rider:
   Which provides an additional sum assured for accidental death
2. Accidental Disability Benefit Rider:
   If you meet with any disability resulting from an accident, then there is nothing payable to you under a term insurance plan. However, if this rider has been taken, then an additional amount of sum assured would be paid out even on disability.
3. Critical Illness Benefit Rider:
   In case of a diagnosis of any of the listed critical illnesses after the term insurance plan has been taken, an additional amount of the sum assured would be paid out to you. This enhances the scope of the term insurance plan.
4. Waiver of Premium Rider:
   This rider comes handy if you are diagnosed with any critical or terminal illness. In such a case the insurance company waives off the premium for your policy and continues the plan as per schedule.
5. Income Benefit Rider:
   If you die within the policy tenure, instead of paying out the sum assured in a lump sum, this rider would pay it monthly so as to help your family meet their monthly household expenses without a hassle.

7. Exclusions 
Term insurances offer benefits with conditions and no coverage of certain claims. They are specifically designed to provide insurance coverage to the beneficiary of the insured person and a certain type of death is excluded. 
Exclusions relating to the type of coverage not covered under an insurance plan. In most cases, death by suicide does not cover the entire amount due to be paid by the insurer. 
For example, if the person insured commits suicide within 12 months from the date of the policy, the nominee would get only about 80% of the total premium paid in the beginning. 
However, it is best to go through the terms and conditions of the policy before purchasing. Other exclusions under term insurance policy include:

1. Self-inflicted injuries leading to death
2. HIV/ AIDS
3. Intoxication leading to death
4. Natural calamity
5. Homicide
6. Non-disclosure or misrepresentation of material truth or fraud

8. Nominee
The one who is your beneficiary to receive the sum assured or the death benefit if you happen to die during the policy tenure is called a Nominee. You can choose one or multiple nominees for your plan and can also opt to change it at a later point of time. However, it is a wise decision to mention a nominee’s name at the time of buying a term insurance plan so that the process is seamless if the need arises.
If your nominee is a minor, then you need to appoint someone as an Appointee to sign on his/her behalf till such time that he/she becomes an adult.

Conclusion

Term insurance terminologies help make a better purchase. There are various other aspects that you should know before opting for a term insurance plan. However, these 8 terminologies should help you understand your term insurance policy better.
Ensure financial security for your dependents, whilst creating a corpus to ensure benefits for your loved ones. Term insurances offer additional benefits, cheap premiums and long-term protection.