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Important Life Insurance Terms You Must Know

Understanding the insurance terminology is essential whether you are a policyholder or an insurance professional. Learn the important life insurance terms with this comprehensive blog.

  • 5,178 Views | Updated on: Feb 27, 2024

A life insurance policy offers financial support and helps any individual to prepare for an unforeseen future. It comes with its own set of crucial terms and concepts. To navigate this essential aspect of financial well-being effectively, it is imperative to familiarize yourself with the key life insurance terms.

Buying a life insurance policy is a part of preparing for a financially safe future. Before you decide to buy a policy, it is essential to grasp some key life insurance terms and ideas. Knowing these terms can help you avoid unnecessary confusion and protect yourself from any kind of fraud. But first, take a quick look at what a life insurance policy is and what are its basic types.

What is a Life Insurance Policy?

Life insurance is not just another financial product; it is like a safety blanket for your loved ones when you are no longer with them. You make a deal with an insurance company whereby you pay them regular amounts (called premiums). In return, they promise to provide a lump sum of money to your family if something happens to you. This cash can be a huge help for your family to handle things like funeral expenses, bills, and other costs that might come up in your absence.

There are different types of life insurance policies, but the two main ones are term life and whole life.

Term Life Insurance

It is like renting coverage for a particular period. If you pass away during that time, your beneficiaries get the payout. If not, the policy ends, and you do not get any money back.

Whole Life Insurance

Whole life insurance is a permanent plan that offers protection for the duration of your life. Although the premiums for this insurance are typically higher than those for a term plan, getting it may be worthwhile in the long run.

Common Life Insurance Terminology

When seeking to purchase a life plan, one must navigate through a multitude of technical terms. These confusing terminologies often act as a barrier for many individuals, leading them to shy away from acquiring insurance coverage. Understanding this insurance terminology can help anyone looking for an insurance plan without getting confused with this insurance jargon.

Annual Premium

The amount of money an individual or entity pays annually to an insurance company to maintain an insurance policy.

Accident

An accident is an unforeseen and unplanned event or incident that occurs suddenly, typically resulting in unintended and often harmful consequences.

Agent

They act as the representatives of the insurance company to sell its products and are an intermediary between you and the insurer.

Beneficiary

The person or entity specified to receive the proceeds of an insurance policy or financial account in the event of the policyholder’s death or another qualifying event.

Cash Value

The savings or investment component of a permanent life insurance policy that stockpiles over time and can be accessed by the policyholder under certain conditions.

Death Benefit

This is one of the most common insurance-related terms; it is the amount that the insurer pays to your nominees in case of an unfortunate event during the policy term.

Exclusion

These are the specific conditions or circumstances that are not covered by an insurance policy and for which benefits will not be paid.

Face Amount

The initial amount of coverage specified in a life insurance policy represents the death benefit payable to the beneficiary.

Free-Look Period

This is one of the essentials of a life insurance contract and is the time during which you may return the policy if you are uncomfortable with the terms and conditions.

Grace Period

A defined period after a premium payment due date during which the insured or policyholder can make the payment without the policy lapsing.

Health Examination

A medical assessment is conducted by an insurer to evaluate an applicant’s health for insurance coverage. Some policies require you to take a health examination before approval. It is like a check-up for your policy.

Incontestability Clause

A provision in an insurance policy that determines the insurer’s ability to question the validity of the policy after a certain period. A typical incontestability clause stipulates that a contract won’t be voidable due to a misstatement after two or three years.

Joint Life Insurance

A type of policy that covers two or more individuals, with the death benefit payable upon the first insured person’s death.

Key Person Insurance

It is a policy taken by a business to protect against the financial impact of the demise or disability of a key employee or owner.

Lapse

The termination of an insurance plan due to non-payment of premiums or other specified reasons.

Limited premium

It is the premium that is payable only for a limited pre-determined period.

Maturity Date

It is when a life insurance policy ends and the policyholder receives the policy’s cash value or other agreed-upon benefits.

Over-insured

When the amount of insurance coverage exceeds the actual financial needs or insurable interest of the policyholder.

Premium

The periodic payment made by the policyholder to the insurance company to maintain insurance coverage.

Proposal Form

The insurance proposal form is an essential document that includes information about the proposer and the life assured. It serves as a foundation for determining whether or not a person is insurable.

Premium Payment Mode/Frequency/Term

The insurers offer multiple options, such as regular, limited, and singular, to ensure you make timely payment of the premium.

Quote

It is an estimate provided by an insurer detailing the cost of insurance coverage based on the applicant’s information.

Rider

A supplementary document or provision attached to an insurance policy to modify or add coverage options or conditions.

Suicide Clause

A provision in an insurance policy that limits or excludes coverage for suicide during the policy’s initial period, typically two years.

Sum Assured

This is the maximum amount the insurer agrees to pay in case of the demise of the life assured or on the occurrence of any insured event.

Surrender Value

One of the other important insurance terminologies is the surrender value; it is the amount that you will receive if you discontinue the policy before its maturity.

Survival Benefit

The insurance companies pay this amount if you survive the policy duration; however, these benefits are not available with a term plan.

Underwriting

The process insurers use to evaluate your risk and determine your premium. It is like the insurance company’s interview with you.

Whole Life Insurance

A type of permanent life insurance that offers coverage for the entire duration of the insured’s life and includes a cash value element that grows over time.

Zero-Coupon Life Insurance

A type of life insurance policy in which the policyholder pays a single premium upfront, and the policy gradually accumulates cash value over time without the need for additional premium payments.

Final Thoughts

Knowing your insurance policy from top to bottom can be a game changer. These terms form the foundation of your policy, and a thorough understanding of them will enable you to make decisions that will protect your loved ones and your financial future. You are taking a big step towards ensuring a better and more financially secure future by taking the time to familiarize yourself with these crucial life insurance terms.

Key Takeaways

  • Life insurance is a protection tool where you pay premiums, and insurance companies offer death benefits to your beneficiaries in case of your demise
  • Term life insurance provides coverage for a specific period of time, while whole life insurance provides coverage for your entire life and includes a cash value component.
  • Knowing the key terms and concepts can help you choose the right policy for your needs, avoid confusion, and protect yourself from fraud.
  • Taking the time to learn about life insurance terminology can be a valuable investment for your financial future and the well-being of your family.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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