Insurance is a technical concept which includes many technical terms and jargon. It becomes difficult for a layman to understand the different types of technical insurance terms which are mentioned in an insurance policy. As such, many individuals fail to understand the terms and conditions of their insurance policies and the benefits that the policy can offer. So, let’s look at some common insurance terms so that you understand your insurance plans better.
These insurance terms are common to all types of insurance policies. Following are some of the common insurance terms which you can find in different types of insurance plans.
A policyholder is the individual who buys an insurance policy and is the owner of the policy. The policyholder is liable to pay the premiums of the plan to continue the coverage and any plan benefit which would accrue would be paid to the policyholder.
Life assured/insured is the individual whose life is covered under the insurance policy. If an individual buys a policy for himself/herself, he/she would be the policyholder as well as the life insured. However, if an individual buys the policy in the name of his/her spouse and/or dependent children, the individual would be the policyholder but the spouse and/or children would be the life insured. Claim under the policy would occur when the life insured/assured faces the contingency which is covered under the insurance plan.
Sum assured/insured is the level of coverage that you choose in your insurance policy. This is the maximum amount of claim which the insurance company pays in case of a claim under the policy. Sum assured is a term used to denote the coverage level in a life insurance policy while sum insured represents the coverage level in a general insurance policy.
Policy tenure means the period for which the policy would provide coverage. Once the period is over, the coverage would stop.
Premium is the consideration which you pay to avail the insurance coverage. The insurance company undertakes to insure your risk and in exchange for this undertaking you pay a premium to the company to buy the policy.
Free-look period is the time allowed under insurance policies for you to cancel the policy if you are not satisfied with it. It is also called cooling off period and it is allowed after you buy a new policy. The period allowed is usually 15 days from the date of issue of the insurance policy and if you want you can cancel the coverage during this period. If the policy is cancelled during the free-look period, the premium is refunded back after deducting the administrative costs incurred by the company in issuing the policy.
Grace period is the additional period allowed to policyholders to pay the outstanding premium. Premiums should be paid within the due date of the policy. If the premiums are not paid within the due date, the policy allows a grace period after the due date for the payment of premiums. In life insurance policies, grace period is allowed for 30 days for annual, semi-annual and quarterly premiums and 15 days for monthly premiums. In general insurance policies, however, grace period is allowed for 30 days to 90 days depending on the plan.
Exclusions are instances under which the claim is not payable under the plan. Exclusions, therefore, refer to those instances of claims when the policy would not pay the benefit to the insured.
Every insurance policy is underwritten by the insurance company’s underwriters before it is issued. Underwriting means the assessment of risk in the policy. When you apply for an insurance policy, you fill up a proposal form stating the coverage details. These details are then used by the company to assess the risk which the company is insuring. If the risk is found to be insurable, the policy is issued. The process of assessment of risk is called underwriting and the individuals who carry out the process are called underwriters.
Claims are instances when the contingency covered under the insurance policy occurs and you can make a demand on the insurance company to compensate you for the loss suffered.
These are some of the insurance terms which are common to all types of insurance plans. Now let’s take a look at different insurance terms which are specific to different types of insurance plans –
Here are some common terms which are associated with a life insurance policy –
A nominee is the person who is appointed by the life insured to collect the death benefit in case of death of the insured.
Maturity age is the age at which the policy would mature. In other terms, maturity age is the age at which the chosen term of the policy comes to an end. Life insurance plans have a minimum and a maximum maturity age and the tenure should be chosen in such a manner that the policy matures within the minimum and maximum age bracket.
Under money back policies, a part of the sum assured is paid at regular intervals over the policy duration. This payment is called money back benefit and the amount which is paid is called the survival benefit.
If you do not pay the premiums within the due date, you get a grace period. If the premiums are not paid even within the grace period, the policy would lapse. In a lapsed policy, the coverage stops and the benefits are reduced.
When the policy lapses and if premiums have been paid for a minimum number of years (usually 3 years), the sum assured of the policy reduces. This reduced sum assured is called paid-up value. It is calculated using the following formula –
Paid-up value = (number of premiums paid / number of premiums payable) * sum assured
Any accrued bonus is added to this paid-up value and the aggregate amount is called the total paid-up value. This value is, then, paid on maturity or on death.
If the policyholder wants to exit from the policy before the completion of the plan tenure, he/she can do so by surrendering the policy. Surrendering a life insurance policy therefore means exiting from the policy before the stipulated term. When the policy is surrendered a surrender value is paid. This value is calculated using the following formula –
Surrender value = aggregate premiums paid * surrender value factor of premium
If bonus is also accrued under the policy, the surrender value of bonus is calculated in the same manner. The surrender value factor is calculated by the insurance company and it depends on the period of surrender. Then, the total surrender value is paid. Once the surrender value is paid, the policy terminates.
If a lapsed insurance policy is restarted, it is called revival. Revival of the policy also includes reinstatement of the sum assured to the original value from the existing paid-up value. To revive the policy you have to pay the outstanding premiums along with an interest. Moreover, a declaration of good health would also be required to prove your insurability based on which the company would revive the policy.
The benefit which is payable in case of death of the insured is called the death benefit.
The benefit which is payable when the life insurance policy matures is called the maturity benefit. The policy is said to mature when the chosen policy tenure comes to an end and the life insured is alive on such a date.
Riders are additional coverage benefits which are available with life insurance policies. These benefits are optional in nature and you can opt for one or more riders by paying an additional premium. When riders are chosen and if the contingency insured by the rider occurs, a rider sum assured is paid along with the benefits payable under the basic policy.
Given below are some common terms associated with health insurance plans –
Co-payment means compulsory payment of claim by the policyholder. Co-payment is usually applicable if the insured’s age is 60 years and above. In such cases, at every instance of claim, a part of the claim would have to be paid by the policyholder. This part is called the co-pay ratio which usually ranges from 5% to 50% depending on the plan selected.
Day care treatments are those treatments wherein 24 hour hospitalisation is not required because of advanced medical techniques. Day care treatments are covered under all health insurance plans up to the sum insured. In some plans, however, the list of covered treatments is specifically mentioned.
Domiciliary treatments are treatments which are taken at your home. These treatments are covered under health insurance plans if they are necessitated either because of lack of vacancy in the hospital or because of inability to move the insured to the hospital for treatment.
Pre-existing diseases are those medical conditions which the insured suffers at the time of buying a health insurance policy. Pre-existing diseases include diabetes, hypertension, heart related conditions, asthma, etc.
If the insured suffers from pre-existing diseases when buying a health insurance policy, such diseases are excluded from coverage for a specified period of time. This period of time is called the pre-existing waiting period and it ranges from 2 years to 4 years depending on the plan that you choose. Once the waiting period is over, the pre-existing illnesses are covered under the health insurance plan.
Health insurance policies are offered as annual plans. If, during the year, no claim is made under the policy, the policyholder is allowed a no claim bonus. This bonus is a reward for not making any claim under the policy. The bonus either allows you a discount in the renewal premium or it increases the sum insured by a specified percentage free of cost. In case the sum insured is increased, it is called cumulative bonus because the increase is allowed for each successive claim-free year
An existing health insurance policy can be switched to another similar health insurance policy offered by another company. This switching is called porting and porting is allowed in health insurance plans free of cost. When you port your policy you can retain the renewal benefits. Porting of health insurance policies is allowed only at the time of renewal and the request of porting should be submitted at least 45 days before the policy renewal date.
Indemnity health plans are those which cover the actual medical costs up to the sum insured of the policy. So, in case of a claim, the actual medical bills would be covered by such plans even if the sum insured is higher.
Now let us take a look at some of the terms associated with a motor insurance policy which you should know –
A third party insurance policy is one which covers only third party liabilities which you face in case of an accident involving your vehicle. Third party liabilities arise when a third party is injured or killed due to the vehicle or when a third party property is damaged. Third party insurance plans are mandatory as per the Motor Vehicles Act, 1988 and should be bought for each vehicle.
Own damage cover refers to the coverage granted for the damages suffered by the vehicle itself. If the vehicle is damaged and needs repairs, the cost of repairs would be covered under its own damage cover. Moreover the cover would also cover the financial loss suffered due to theft of the vehicle.
A comprehensive insurance policy is one which has two coverage benefits. One is the mandatory third party insurance cover and the other is the own damage cover. Thus, comprehensive motor insurance plans provide an all-round protection for the vehicle and covers the damages caused to third parties as well as the damages suffered by the vehicle itself.
Under comprehensive motor insurance policies, the sum insured is called Insured Declared Value. IDV is the value of the vehicle after deducting depreciation based on the age of the vehicle. The depreciation rates have been fixed by the IRDA (Insurance Regulatory and Development Authority) and they are as follows –
Age of the vehicle
Up to 6 months
More than 6 months but less than 1 year
More than a year but less than 2 years
More than 2 years but less than 3 years
More than 3 years but less than 4 years
More than 4 years but less than 5 years
This depreciation is deducted from the market value of the vehicle to arrive at the IDV of the policy.
Motor insurance policies are offered as annual policies. If you do not make any claim in the policy year, you become eligible to get a no claim bonus. This bonus is awarded in the form of premium discounts. This discount helps you reduce the renewal premium when you renew your policy.
Motor insurance policies allow you additional coverage benefits called add-ons. These add-ons are optional in nature and you can choose one or more add-ons by paying an additional premium for each. The add-ons increase the scope of coverage and promise additional benefits under your motor insurance policy.
Under all motor insurance plans, a part of the claim is to be borne by the policyholder. This part of the claim is called a compulsory deductible and it is fixed for different types of motor insurance policies. In case of a claim, you would have to pay the compulsory deductible amount and the insurance company would, then, settle the rest of the claim.
Just like compulsory deductible, voluntary deductible also represents the part of claim which the policyholder pays from his/her pockets. However, while compulsory deductible is mandatory under all motor insurance plans, voluntary deductible is not. It is your choice to opt for a voluntary deductible limit. If you choose voluntary deductible, you would have to pay the chosen portion of claim yourself, over and above the compulsory deductible applicable under the policy. However, by choosing a voluntary deductible, you can earn a premium discount under the policy.
So, these were some of the most common insurance terms which you should know when you buy any insurance policy. Understanding of these terms would ensure that you understand your policy better and you can enjoy the maximum benefits provided by the policy.