Life insurance can seem a bit confusing, especially because of the complicated terms. It comes in different forms – term insurance, Unit-Linked Insurance Plan (ULIP), endowment, and whole life. The offerings also vary on the basis of the type of of life insurance being purchased. For example, term insurance offers pure protection for a fixed period, and savings-based plans, such as endowment and whole life policies provide maturity benefits; ULIPs extend the benefits of life insurance with an added investment component.
Despite the different types of life insurance policies in the market, understanding insurance terminology doesn’t have to be difficult. This straightforward guide simplifies the terminology used in insurance, so you can compare policies easily and find the right coverage for your needs.
1. Life Assured
The life assured is the individual whose life is insured under the policy. If they pass away during the policy term, the insurance company pays the death benefit to the nominee or the beneficiary.
2. Policyholder
The policyholder is the person who owns the life insurance policy and pays the premiums. They have the authority to make changes to the policy, such as updating beneficiaries or adjusting coverage. The policyholder may be the same as the life assured or a different person.
For instance, if you buy a policy to get a life cover for your daughter, you are the policyholder, and your daughter is the life assured.
3. Premium**
The premium is the amount paid by the policyholder to the insurance provider keep the policy active. It can be paid monthly, quarterly, annually, or as a lump sum. If the premium is not paid on time, the policy may lapse, meaning coverage ends. In case of a policy lapse, no benefits will be paid. But did you know? Paying life insurance premiums can also help you avail life insurance tax benefits under Section 80C, helping policyholders save on taxes while securing their future. Use a life insurance calculator to compare different policies and premium amounts to find a plan that best suits your needs and budget.
4. Nominee
A nominee is the person designated by the policyholder to receive the policy benefits in case of the life assured’s passing. It’s important to keep nominee details updated to ensure a smooth claim process.
5. Sum Assured
The sum assured, also known as coverage, is the guaranteed amount that the insurer agrees to pay to the nominee in case of the life assured’s demise during the policy term. This is the core financial protection offered by the policy. Choosing the right sum assured depends on factors like income, expenses, and future goals. Once you decide on a sum assured, a life insurance calculator can help estimate the premium amount for your policy.
6. Death Benefit
The death benefit is the amount paid by the insurance company to the nominee if the life assured passes away during the policy term. It usually includes the sum assured, and in some cases, additional bonuses or rider benefits, depending on the policy terms. This payout provides financial security to the family of the life assured.
7. Policy Term
The policy term is the duration for which the insurance policy provides coverage. If the life assured passes away within this period, the insurer pays the death benefit. Policy terms can range from a few years to a few decades. Understanding this terminology used in insurance helps policyholders select the right term for their needs.
8. Maturity Benefit
Maturity benefit is the amount paid to the policyholder if the life assured survives the policy term. It applies to endowment plans and other policies that combine insurance with savings. Term insurance policies usually do not offer maturity benefits unless they include a return of premium feature.
9. Maturity Age
Maturity age is the age at which the life insurance ends. This is predetermined at the time of purchasing the policy and varies based on the type of policy chosen.
10. Surrender Value
Surrender value is the amount the policyholder receives if they terminate the policy before its maturity. Policies that accumulate surrender value typically require the policy to be active for a stipulated minimum period. However, surrendering a policy early can result in receiving less than the total premiums paid.
11. Riders
Riders are optional add-ons that enhance a life insurance policy’s coverage. They come at an additional cost and offer extra protection against specific risks. Common riders include:
Accidental Death Benefit Rider:
Provides an additional sum assured if the life assured dies due to an accident.
Critical Illness Rider:
Pays a lump sum if the life assured is diagnosed with a covered critical illness.
Waiver of Premium Rider:
Waives future premiums if the policyholder becomes permanently disabled or critically ill, keeping the policy active.
12. Grace Period
A grace period is the extra time given to the policyholder to pay their premium after the due date. If the premium is paid within this period, the policy remains active. Failure to pay within the grace period can result in policy lapse.
13. Survival Benefit
Survival benefit is a payout made to the policyholder at specific intervals or upon the completion of the policy term, provided that the life assured is still alive. This benefit is typically found in whole life and endowment policies.
Being familiar with life insurance terminology helps you choose the right policy, understand your coverage, and avoid unwanted surprises in the future. Whether you're buying term insurance, an endowment plan, or a policy with investment features, a clear grasp of these terminologies can ensure that you get the best financial protection for your loved ones. Beyond financial security, life insurance tax benefits make these policies a solid tool, offering long-term savings alongside protection. Always read the policy details carefully, compare options, and seek expert advice if needed.
**Tax exemptions are as per applicable tax laws from time to time.
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