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Important Terminologies in Term Insurance Explained
Buying a life insurance plan is ideal if your family and loved ones depend on your earnings. With this, you can stay at peace since it ensures the financial protection of your loved ones in case of your unforeseen demise. Term insurance has been popular among different types of insurance plans because it offers a considerable sum of life coverage.
However, certain technical terms in a policy may seem confusing while buying it. Keep reading this article to learn the terms used in insurance and what they mean.
Table of Contents
List of Important Terms in a Term Insurance
1. Policyholder
A policyholder is an individual who buys a life insurance policy and pays its premium. The policyholder does not need to be the one being insured. If you buy the insurance for someone else, you will be the policyholder for the other person being insured.2. Life Assured
The term "life assured" refers to an insured person or for whom a term insurance plan is bought. Usually, the earning member of any family is life assured. This way, on their unforeseen demise, the other members are not financially strained by the sudden loss of income.3. Nominee
A nominee is a beneficiary or an individual who receives the sum assured in the event of the insured person's demise within the 'term' of the policy. Typically, the policyholder chooses their nominee, and a family member or close relative is a common choice.4. Sum Assured
Sum assured is a basic terminology of insurance, which refers to an amount that the insurance company agrees to pay the nominee on the insured person's demise. For instance, you have bought a term life insurance for yourself while nominating your spouse as its beneficiary. In this case, your wife will receive the sum assured in the unfortunate event of your untimely demise.
While buying a policy, a policyholder has to decide the sum assured. Let us assume this amount is ₹2 crores. In case of the policyholder's death, before the term is over, your beneficiary will get ₹2 crores from the insurer. This sum is also referred to as the cover.
5. Policy Term
Also known as policy duration or policy tenure, policy term refers to the time span for which this plan remains valid. However, this period varies from one policy to another. For instance, the policy term of your insurance plan can be 50 years.
This means that in case of the life-assured person’s demise within this period, the insurance company will compensate the entire sum assured amount to the nominee mentioned in this policy.
6. Premium
The premium amount refers to the fixed sum a policyholder must pay to their insurance company at regular intervals to continue the policy. Since plenty of insurance plans are available, you can pick payment intervals like monthly, quarterly, yearly, etc.7. Payment Mode/Term
Payment mode or term refers to methods by which policyholders pay the premium to their insurance company. In general, payment modes are classified into three categories. They are:
- Regular Pay: In the regular pay method, the policyholder has to pay premiums throughout the policy term.
- Limited Pay: In this method, a policyholder can select a period in which they will pay the premium to the insurance company. For instance, if you select a period of 6 years, you have to pay premiums for only that much period while the insurance plan will remain active for the whole term you choose.
- Single Pay: In the single pay method, a policyholder will clear the premium payment in one go. Usually, this payment is made during the purchase of an insurance policy.
8. Death Benefits
Death benefit refers to the total amount which the nominee gets from an insurance company in case of the insured person’s death within the policy term. This amount is normally equal to the sum assured. However, if there are riders in an insurance policy, the death benefit amount may be higher than the sum assured amount.9. Riders
Riders refer to the add-ons to your prevailing term life insurance plan. In other words, they provide additional coverage against risks. These add-ons may be accidental death benefits, critical illness, etc. The policyholder has to pay more for riders while purchasing the insurance policy.
The Accidental Death Rider provides enhanced financial protection by offering a higher payout if the insured's death results from an accident. This ensures greater support for the family during challenging times. These add-ons, such as critical illness and accidental death benefits, increase coverage but are covered by increasing the cost of the policy.
10. Claim
An insurance claim refers to an official request made to an insurer to reimburse against losses covered under an insurance policy. When a policyholder dies within the policy term, their nominee will not get the sum assured instantly. They will have to file this claim with the insurance company to get the amount.11. Free Look Period
Generally, every insurance policy has a free look period of 30 days, which refers to the duration within which you can dismiss the insurance plan without paying penalties.12. Grace Period
The grace period refers to the time extension that an insurance company provides if you cannot pay the premium for the renewal of your insurance plan on the due date. This 'Grace Period' is usually 15 days if it is a monthly premium payment mode. Additionally, when it comes to the annual premium payment mode, a 30-day grace period is given. Even after the grace period, your policy will lapse if you fail to clear the premiums.13. Paid-up Value
If you stop paying the premiums subsequent to a particular period of time, the insurer will give you the option to convert your insurance plan into a reduced paid-up plan. In this option, the amount of sum assured is reduced according to the number of paid-up premiums.
If a policyholder stops paying premiums after 3 years, they may get this opportunity as long as the policy has collected substantial policy value.
14. Policy Lapse
This happens when the policyholder fails to make a payment even within the grace period, making the policy invalid. As a result, coverage ends, and any benefits tied to the policy are no longer available.
Sometimes, the insurer may offer to reinstate the policy to its original terms by paying the delinquent premiums with applicable fees before the specified deadline. Reinstatement usually requires proof of the policyholder's good health status, which must be acceptable for coverage.
Knowing the terms used in insurance will help you make a well-informed decision when buying term life insurance. If there is any confusion, you should talk to an insurance agent or consultant without fail.
FAQs about Term Insurance Terminologies
Can two term insurance policies be purchased together?
Does the insurance premium change after a specified time period?
What are the five forms of term insurance?
The five major types of term insurance include level term, increasing term, decreasing term, return of premium, and convertible term.
What is the difference between life insurance and term insurance policy?
What does the term 'sum assured' mean in term insurance?
Who is considered the policyholder in a term insurance policy?
What is the difference between 'life assured' and 'policyholder'?
What is a term insurance policy nominee, and how can I change my nominee?
How is the premium amount determined for term insurance?
What does the policy term mean in term insurance?
What is the 'free look period' in term insurance?
What happens if I miss a premium payment?
What is the grace period?
Can I add riders to my term insurance policy? What are common rider options?
What is the claim process for term insurance?
What is a 'maturity benefit,' and does term insurance offer it?
What is a 'surrender value' in term insurance? Can I get it if I cancel the policy?
What does 'policy lapse' mean, and how can I avoid it?
How does the 'paid-up value' work in term insurance?
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Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.
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