Simple Guide: Know These 20 Basic Life Insurance Terms
Are you thinking about purchasing a life insurance policy? But, you are worried that you do not know much about life insurance and are unaware of the basic terms related to life insurance!
Do not worry. Let us talk about some of the basic life insurance terms to make you understand more about life insurance.
A person who proposes the purchase of the life insurance policy is known as the policyholder. He would pay the premium for the policy. The policy could be taken in his name or someone else’s but the premium would be paid by him. The policyholder is the person who receives the tax benefit for the premium paid towards the life insurance as well.
2. Life Assured
The life assured is the person for whom the life insurance policy has been purchased. The life insurance policy would cover the untimely demise of the life assured or rather known as the insured person. Most often, the life assured and the policyholder is the one and the same person, if you have chosen to take a life insurance policy in your name. However, the life assured is not necessarily the policyholder.
For example: You can choose to buy a policy for someone in your family, like your spouse or child. In that case, you will be the ‘policyholder’, and your spouse or child, on whose life the policy has been taken, would be the ‘life assured’.
3. Sum Assured
In life insurance terminologies, sum assured means the coverage provided by the life insurance policy. Basically, it is the total amount of money that would be paid to the nominee as a death benefit in case the life assured dies within the policy duration or on policy maturity, depending on the type of the life insurance policy.
A nominee is a person who has been chosen by the policyholder to receive the sum assured and other benefits of the life insurance policy on behalf of the legal heirs. The nominee of a policyholder can be his spouse, children, parents, etc.
Thus, in the case of the unfortunate demise of the insured person, the nominees must claim the sum assured from the life insurance company. However, if the nominee details are not updated in the policy document, the claim process can be quite complicated.
Tip: Remember to update the details of your nominee in your life insurance plan, so that there are no issues in processing a claim in the future.
5. Maturity Age
Maturity age can be said as the age of the insured person at which the life insurance policy would terminate. It determines the period until when the life insurance policy would be active.
For example: You are purchasing a life insurance policy at the age of 30 years for a coverage period of 35 years, then the maturity age of your life insurance policy is 65 years.
Premium is the amount of money you need to pay to keep your life insurance policy active and to obtain the coverage benefits. There are different modes by which you can pay your insurance premium and avail the benefits.
7. Policy Tenure/Term
Policy Tenure or Term is the duration for which a life insurance policy would provide coverage to the policyholder. Based on the type of policy purchased by you, the policy tenure can be from 1 year to 100 years or even for the whole life.
8. Grace Period
In case a policyholder has not been able to pay his life insurance premium within the due date, the insurance provider would provide an extension in the number of days after the due date. The policyholder will have to pay his premium by the grace period, failing which his policy might lapse.
Tip: Thus, life insurance coverage continues during the grace period also. However, if the premium is not paid even within the grace period, the life insurance coverage would end.
9. Death Claim
If the life assured dies during the policy term, a death claim can be raised by the nominee for the coverage amount. The amount of money that is paid to the nominee by the insurance company, subject to a minimum amount of the sum assured, is called the Death Claim. The death claim amount varies from policy to policy.
10. Maturity Benefit
If the policyholder outlives the tenure of the life insurance policy, then the amount paid by the insurance provider is known as Maturity Benefit. The amount that is paid to the policyholder as maturity benefit varies from plan to plan.
Exclusions are those conditions that are not covered under a life insurance policy. If claims are made for the conditions which are exclusions, then the claim would be rejected.
Mainly, exclusions in a life insurance policy are conditions like death due to suicide within one year of the policy, death due to self-inflicted injuries or drug abuse, etc. Each policy document has its exhaustive list of exclusions mentioned and it varies from policy to policy.
12. Claim settlement procedure
In case of the untimely demise of the insured person, the nominee would have to register a claim with the insurance provider for obtaining the death benefit. The process starting from intimating the insurance company about the claim and filling all the necessary documents till the death benefit is disbursed to the nominee is known as the claim settlement procedure.
Each company has its own claim protocol which needs to be followed. Its best to educate your nominee about the claim settlement procedure so that there are no issues, if the situation arises.
13. Tax benefits
There are multiple tax benefits available under a life insurance policy.
1. Under Section 80C of the Income Tax Act, 1961 all premiums that a policyholder pays towards life insurance policy can be used to claim tax deductions. The maximum amount which can be claimed as a deductible is INR 1.5 lakhs per annum.
2. The benefits which are paid to a policyholder or nominee are tax-free under Section 10(10D) of the Income Tax Act, 1961, provided the sum assured is at least 10 times the annualized premium.
3. If a part of the life insurance policy is paid towards any health benefit, like critical illness or personal accidental coverage, then that part is eligible for a tax deduction under section 80D up to INR 25,000 every year.
14. Free-look period
The free look period is the period within which a policyholder can choose to return his purchased policy if he is not satisfied with the terms and conditions of the life insurance policy. According to the IRDAI guidelines, in life insurance free-look period is either 15 days or 30 days after the receipt of the policy document.
Riders are the additional features that can be added to your insurance policy to enhance the coverage provided by your base life insurance policy. Some of the common riders offered by the life insurance providers are Critical Illness cover, Hospital cash, Waiver of premium, etc.
16. Premium payment mode
You can pay your life insurance premium as per your convenience. This is known as premium payment mode and can be annual, semi-annual, quarterly or monthly.
17. Paid-up value
The insurance provider can offer the policyholder the option of converting his life insurance policy into a reduced paid-up policy. This would happen if the policyholder stops paying the premium after a specific period. By this, the sum assured would reduce proportionately with the number of premiums that have been paid but the coverage continues. Again, this benefit is offered only to a specific type of life insurance policies.
18. Surrender value
When the policyholder chooses to discontinue his life insurance plan before the maturity age, then the insurance provider would pay an amount to him known as Surrender Value. The surrender value would also depend on the type of the plan and the amount payable on surrendering the plan, i.e. closing the plan and withdrawing the amount, would vary from plan to plan.
19. Revival Period
After the grace period ends, if a policyholder has not paid his insurance premium then his life insurance policy would lapse. However, if the policyholder is interested in continuing the life insurance policy at a later point of time, the insurance company would give him an option to re-activate the policy known as the Revival period.
However, there is a specific period after the end of the grace period, to revive the policy and continue the insurance coverage.
Underwriters evaluate the risks that are involved in insurance. The entire process of risk evaluation begins from the issuing of the life insurance policy to the claim settlement. The policy is issued to the policyholder only after the approval from the underwriter.
So, now with this simple guide on all basic terms related to life insurance, it is quite easier to purchase a life insurance policy without much hassle.