15 Important terms that you should know before buying Life Insurance
Here are 15 important terms you should be knowing before you purchase a Life Insurance:
Mr Rahul Verma, 35 years old IT professional, is a happily married man and the only earning member of a family of 5 members. He lives in Bangalore with his wife, aged parents and a five-year-old son. Being the only breadwinner puts a lot of responsibilities on his shoulders. He is worried about the financial loss that his family may face when he is not around them. To overcome this risk, he decided to purchase a life insurance plan to secure future of his loved ones. He does some research as to which plan he needs to buy, in the process, he comes across a whole lot of insurance jargons which leaves him confused.
This article simplifies important terminologies used in a life insurance prospectus and helps Mr Verma and many others like him to get acquainted with the terms to ease the insurance purchase process.
Proposer is an individual who intends to purchase an insurance policy. Accordingly, he fills the proposal form, pays the first instalment of premium and enters into a contract with the insurer so that the risk cover may begin. In the above case, Mr Verma is a proposer as he wants to buy an insurance policy.
2. Life Assured/Insured
The life assured is the subject matter of the insurance contract. He is an individual whose life is insured by the insurer and upon whose death; the nominee or the beneficiary receives the sum assured. The proposer and life assured may be same or different individuals. In this case, Mr Verma is taking a policy to insure his life; so he is the life assured. If he takes the policy on the life of any other family member say his son under a child plan, then he is a proposer & his son is the life assured.
3. Policy/Policy Document
It is a document issued by the insurer as an evidence of the contract between the insurer and the life assured. It contains the details of the life insurance plan purchased by the life assured along with the policy terms & conditions.
4. Sum Assured
Sum assured is a fixed amount that the insurer agrees to pay upon happening of the contingency (i.e. either death or maturity) as mentioned in the policy document. If the insurer promises under the policy to pay a sum of Rs. 5 Lakh to Mr Verma’s wife on his death, then Rs. 5 Lakh would be called the sum assured.
Premium is the price which the insured pays to the insurer either as a single instalment or on a regular basis to get his risk of death covered by the latter. Suppose Mr Verma chooses to pay an amount of Rs. 20000 every year for ten years under the policy, then the amount of Rs 20000 would be the premium. The insurer decides the premium amount based on the facts declared by Mr Verma in the proposal form.
6. Death Benefits
Death Benefit relates to the proceeds of the life insurance policy received by the nominee or the beneficiary upon the death of the life assured. It consists of the basic sum assured and accumulated bonus. In contrast to all the other categories of life insurance, only death benefit is available on term insurance.
7. Maturity Benefits
Maturity Benefit is the policy proceeds received by the life assured on the completion of the policy tenure. It consists of the basic sum assured and accumulated bonus.
8. Survival Benefits
Survival Benefits are the policy benefits that the life assured receives during the policy tenure.
The life insurance company shares profits of the business with the life assured in the form of Bonus. It is expressed as a percentage of the sum assured and paid along with the sum assured either on the death of the life assured or on maturity, whichever is earlier. Once declared, the insurer has to pay the bonus to the life assured.
Riders are add-on benefits like Critical Illness, Waiver of Premium, Accidental Death Benefit, etc. available in addition to the standardised benefits mentioned in the base policy. Riders can be attached to the base policy by payment of additional premium called Rider Premium over & above the premium paid to secure the death benefit. The benefit available under the rider becomes payable on the occurrence of the specified event covered by the rider.
Suppose Mr Verma got Accidental Death Benefit Rider added to the base term plan. If he dies in an accident, then his wife would receive the basic sum assured & additional sum assured on account of Accidental Death Benefit Rider.
11. Grace Period
A grace period is an extended duration; of 15 days for monthly premium payment mode & 30 days for other premium payment modes, from the premium due date given to the life assured to pay his due premium. During the grace period, the policy remains in force and the life assured continues to get the risk cover as per the policy terms without any interruption or penalty. Suppose Mr Verma forgets to pay his premium on the due date 1 June 2016. Now, he has to pay his premium by 1 July 2016 else the insurer will terminate his risk cover.
12. Free look Period
Suppose Mr Verma is not happy with the insurance policy that he purchased & wants to review his decision. He may do so within the period of 15 days from the date of receipt of policy document i.e. Free look Period. This period is of 30 days in case of purchase of policy through distance marketing. If he disagrees with the terms & conditions, then he may return the policy document. On returning the policy, the insurer returns the premium paid by him after deduction of stamp duty & medical examination expenses borne by it, and the contract comes to an end.
If Mr Verma fails to pay the due premium during the grace period, then the insurer may terminate his policy. He may revive or restore his policy within two years from the date of such termination by submission of proof of continued insurability & payment of all the due premiums along with the late fee.
14. Suicide Clause
If the life assured commits suicide within twelve months from the policy inception date then automatically the contract comes to an end. The insurer is liable to pay only 80% of the premiums paid and sum assured is not payable.
15. Nominee, Nomination & Endorsement
According to Section 39 of the Insurance Act, 1938, life assured is required to appoint a person as a nominee in the proposal form who will be entitled to receive the policy proceeds on the death of the former. When the insurer makes all the payments to the nominee under the policy, then the insurance contract comes to an end. If Mr Verma appoints his wife to get all the policy benefits upon his death, then his wife is called as a nominee.
The nomination made at the time of policy inception can be changed later using endorsement and by giving the notice of such modification to the office of the insurer.
Also read: Types of Life Insurance Policies in India