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Insurance terms you must know
Larissa Fernand |
May 25, 2006
It's easy to get confused when opting for an insurance policy. The jargon can be quite overwhelming and you may end up getting baffled and going for whatever the agent recommends.
Here we explain the basic insurance lingo that you must get a grasp on.
This is the amount you pay to the insurance company to buy a policy.
A single premium policy will need you to pay just one lump-sum amount.
The annual premium policy will require you to pay every year. This will go on for a fixed period of time. The exact number of years will depend on the scheme in question.
2. Insurer and Insured
The person in whose name the insurance policy is made is referred to as the policy holder or the insured. So, if you have taken an insurance policy, you are the policy holder, the one who is insured.
The person whom you name as the nominee is the one who will get the insured amount if you die. The nominee is referred to as the beneficiary.
The insurer is the insurance company that offers the policy.
In India, these are the life insurance players. We have listed them in alphabetical order:
Aviva Life Insurance
Birla Sun Life Insurance
HDFC Standard Life Insurance
Kotak Life Insurance
Life Insurance Corporation of India
Max New York LifeReliance Life Insurance
Sahara India Life Insurance
SBI Life Insurance
Shriram Life Insurance Co Ltd.
Tata AIG Life
3. Sum Assured and Maturity Value
Sum assured is the amount of money an insurance policy guarantees to pay before any bonuses are added. In other words, sum assured is the guaranteed amount you will receive.
This is also known as the cover or the coverage and is the total amount you are insured for.
Maturity value is the amount the insurance company has to pay you when the policy matures. This would include the sum assured and the bonuses.
Let's take an example of an endowment policy.
Age of policy holder
If the policy holder passes away before the policy matures, the beneficiary gets Rs 2,00,000 along with the bonus too (if any).
If he is alive when the policy matures, he will get Rs 2,00,000 as well as any bonuses declared during the tenure of the policy.
Let's say the bonuses amounted to Rs 1,00,000. His maturity value would be Rs 3,00,000 (sum assured + bonuses).
This is the amount given in addition to the sum assured.
Reversionary bonus is a bonus that is added to policies throughout the term of the policy. It may or may not be declared every year. When it is declared, it will not be given to you immediately.
It will be payable as a guaranteed sum to the policyholder either at the end of the policy, or, if death occurs before that, to the nominee.
This bonus can either be a with-profit bonus or a guaranteed bonus.
A with-profit bonus is linked to the profit of the company. If the company makes a profit, it declares a bonus in accordance with the profits. The profits are added to your insurance policy and given to you either on maturity of the policy or to your nominee if death occurs before that.
This bonus will be flexible as it is dependent on the performance of the company. However, once it is declared, it becomes part of your sum assured.
This is offered purely at the discretion of the insurer and depends on the profits made that year.
As opposed to a with-profit bonus, there is a guaranteed bonus.
This is part of the sum assured. It will be paid to you irrespective of the profits of the company.
5. Term and Term insurance
The term is the number of years you bought the policy for. So, if your policy lasts for 10 years (the number of years is your choice), it is referred to as one with a 10-year term.
Term insurance, on the other hand, is a type of insurance policy.
It provides policyholder with protection only. If the policyholder dies within the specified number of years (the term), his nominee gets the sum insured. If he lives beyond the specified period, the policyholder gets nothing.
This is the cheapest and most basic type of life insurance.
6. Endowment Insurance
You are given a life cover just like term insurance. If you die during this period, your beneficary will get whatever amount you are insured for.
Unlike a term insurance cover, if you live, an amount will be paid to you on maturity of the plan.
This kind of policy combines saving (because money is given to you on maturity) with some protection (your nominee gets an amount if you die).
It is an optional feature that can be added to a policy.
For instance, you may take a life insurance policy and an add on accident insurance as a rider. You will have to pay an additional premium to avail this benefit.
Annuities refer to the regular payments the insurance company will guarantee at some future date. So, say, after you cross 55, the insurance company will start giving you a monthly or quarterly return. This is known as an annuity (premium is what you pay them).
This is often done to supplement income after retirement.
9. Surrender Value & Paid-up value
Halfway through the policy, you might want to discontinue it and take whatever money is due to you.
The amount the insurance company then pays is known as the surrender value. The policy ceases to exist after this payment has been made. Do remember, you will lose out on returns if you withdraw your policy before time.
Paid-up value is different. If you stop paying the premiums, but do not withdraw the money from your policy, the policy is referred to as paid up.
The sum assured is reduced proportionately, depending on when you stopped. You then get the amount at the end of the term.
10. Survival Benefit
This is the amount payable at the end of specified durations. These amounts are fixed and predetermined.
Let's take an example.
Age of policy holder
Now the policy promised to give back a portion of the sum assured (10%, 15%, 20%, 25%) every three years.
After 3 years: Rs 20,000
After 6 years: Rs 30,000
After 9 years: Rs 40,000
After 12 years: Rs 50,000
On maturity: Rs 60,000
Should you die during this tenure, your beneficiary will get the entire Rs 2,00,000. Irrespective of whether or not you have been paid any amount till date.