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Term Insurance Terminology: Basic Term Insurance Terms You Should Know!

Understanding the term insurance terminology is essential for making the right decisions about policy selection, maximizing benefits, and ensuring financial protection for loved ones.

  • 3,248 Views | Updated on: Jul 02, 2024

Term insurance provides coverage for a particular period, safeguarding your family financially in case of your untimely demise. Knowing the terminology of insurance will help you make well-informed choices.

Term insurance is a simple insurance plan that offers coverage in case of a policy owner’s demise during the policy term. It is an essential tool for individuals seeking affordable coverage to secure their family’s financial future against the risk of their untimely death.

If you are considering purchasing term insurance, understanding the terms related to term insurance should be your top priority. Knowledge of terminology used in insurance premiums will clarify doubts and help you select the best plans.

Understanding the Terminology of Term Insurance

Each term in insurance has specific implications for the policy’s coverage, benefits, and limitations. Understanding term insurance terms empowers you to choose the right policy, maximize its benefits, avoid misunderstandings, and ensure that your loved ones are financially protected. Let us take a quick look at some important term insurance terms:

Premium

The premium is the amount you pay the insurance company regularly (monthly, annually) to keep your policy active. Various factors, including your age, health, sum assured, and term length, determine the cost of the premium.

Policy Term

The policy term is the duration for which the insurance coverage remains active. It is crucial to select a policy term that aligns with your monetary goals and the needs of your beneficiaries.

Policyholder

The policyholder is the person or entity that owns the insurance policy. This individual or organization is responsible for paying the premiums and has the authority to make changes to the policy. They are the contractual party with the insurance company.

Sum Assured

The sum assured is the amount your beneficiaries will get from the insurance company if the policyholder passes away during the policy term. This financial safety net ensures your loved ones’ financial stability in your absence.

Life Assured

The person whose life is covered under the term or life insurance policy is called life assured. In the event of their death during the policy term, the insurance company will pay the death benefit to the nominated beneficiaries.

Nominee

A nominee is a person you designate to receive the death benefit in case of your demise. It could be a family member, spouse, child, or anyone you trust to manage the funds responsibly.

Death Benefit

The death benefit is given to the nominee upon the policyholder’s death. It serves to replace the policyholder’s income and cover financial obligations.

Riders

Riders are additional advantages that can be attached to your term insurance policy for extra coverage. Common riders include critical illness coverage, disability coverage and accidental death benefit.

Maturity Benefit

As the name suggests, the maturity benefit is the payout received by the policyholder if the life insurance policy matures, meaning it reaches the end of its term. This benefit is paid if the policyholder is still alive at the end of the life insurance term.

Underwriting

Underwriting is the procedure where the insurance company evaluates your risk profile based on factors like health, lifestyle, and medical history. This assessment determines your insurability and premium rate.

Convertible Policy

Some term insurance policies offer a conversion feature, allowing you to convert your term policy into a permanent life insurance policy without undergoing a new medical exam. It can be advantageous if your circumstances change and you want lifelong coverage.

Coinsurance

After your deductible has been met, you must pay coinsurance, which is the amount you pay to split the cost of covered services. Typically, a percentage represents the coinsurance rate. For instance, if the insurance provider pays 80% of the claim, you are responsible for 20%.

Coordination of Benefits

When you are covered by multiple group health plans, coordination of benefits is a system used to prevent benefit overlap. Benefits under the two plans are typically capped at a maximum of 100% of the claim.

Copayment

Copayment is one way that you contribute to the cost of your healthcare. You only have to pay a set amount (such as ₹300 per doctor visit) to cover some medical costs; the rest is covered by your insurance.

Waiting Period

A waiting period is the time you must wait before your health insurance policy covers certain benefits. The waiting period can vary depending on the type of benefit and the insurance company.

Free Look Period

The free look period is a specific time frame, usually 15 to 30 days, during which the policyholder can review the terms and conditions of the insurance policy. If they decide to cancel the policy within this period, they can do so without any penalties and receive a full refund of the premium paid, minus any expenses incurred by the insurer.

Critical Illness

Critical illness refers to a serious health condition such as cancer, heart attack, or stroke that is covered by an insurance policy. A critical illness policy provides a lump sum benefit if the insured is diagnosed with one of the specified critical illnesses during the policy term.

Claim Settlement Ratio

The percentage which represents the number of claims settled by an insurance company compared to the total number of claims received in a financial year is claim settlement ratio or CSR. It is an indicator of the insurer’s reliability and efficiency in handling claims.

Deferment Period

The deferment period, also known as the waiting period, is the time span between the start of the policy and the point when the insured can begin to receive benefits or coverage. This is commonly found in health and disability insurance policies.

HLV Calculator

The Human Life Value (HLV) calculator is a tool used to estimate the financial value of an individual’s life based on their income, expenses, and other financial factors. It helps in determining the adequate amount of life insurance coverage needed to protect the financial well-being of the insured’s dependents.

Insured

The insured is the person or entity covered by the insurance policy. In life insurance, this term is often synonymous with the life assured. For other types of insurance, such as health or property insurance, the insured is the person whose health or property is covered under the policy.

In-Network Provider

An in-network provider is a hospital, doctor, or pharmacy that is a part of the preferred provider network of a health plan. Because in-network providers have agreed to a reduced rate for their services in exchange for the insurance company sending them more patients, you will typically pay less for the services you receive from them.

Out-of-Network Provider

A healthcare professional, hospital, or pharmacy not part of the provider network for a health plan is known as an out-of-network provider. In general, out-of-network providers will cost more for your services.

Surrender Value

The amount the policyholder will receive from the insurance company if they decide to terminate the policy before its maturity date is known as surrender value. It is usually less than the total premiums paid and may include a penalty for early termination.

Survival Benefit

The survival benefit is a payout received by the life assured at specified intervals during the policy term, typically found in money-back or endowment life insurance policies. These benefits are paid if the life assured survives those intervals.

Beneficiary

The beneficiary is the person or entity designated by the policyholder to receive the policy benefits, such as the death benefit, upon the death of the life assured. The beneficiary can be a family member, a trust, or a designated party.

Key Takeaways

  • A term insurance plan provides a death benefit to beneficiaries if the policyholder passes away during the policy term, ensuring financial stability.
  • Knowing the term insurance terminology is crucial for making well-informed choices and selecting the best term plans.
  • Terms like claim settlement ratio, free look period, and surrender value highlight term insurance policies’ financial and legal protections.
  • Understanding these terms ensures policyholders can effectively manage their policies and claims.

Conclusion

Understanding term insurance terminology is your key to making informed decisions. By familiarizing yourself with these terms, you can navigate the world of term insurance with confidence. You can choose the right policy, maximize its benefits, and ensure your loved ones are financially protected in your absence.

- 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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