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Terminologies to understand before buying Life Insurance

Planning to buy Life Insurance policies? Read this to understand the terminologies before buying life insurance

Tuesday September 14, 2021 3:56 PM, ummid.com News Network

Life Insurance Plans

Most of us get our first taste of personal financial decision-making when we buy life insurance plans. Life insurance stands out among financial instruments due to its features of protection, savings, investment, and tax benefits.

Knowledge of specific life insurance terms will help you better understand the various aspects of your policy and make more informed financial decisions. Some key life insurance terms in India to be aware of are as follows:

1. Policy

This contract between you and the insurer outlining the terms and conditions under which the insurer provides its services. A life insurance plans typically include the following information:

● Your personal information
● The sum assured
● The premium amount
● The policy number
● Policy issue and maturity date
● Attached rider(s)
● Name of the nominee/beneficiary
● Copy of the proposal form
● Copy of the documents submitted

2. Insured person

A person whose death is covered by the life insurance plans is referred to as an insured person. This person may or may not be the same person who purchases and owns life insurance in India.

 

A policy can also be purchased for a loved one, such as a child. In that case, the person who buys the policy is the policyholder, and the child is the insured. Some permanent children's policies require the child to take ownership of the policy when they reach a certain age, usually between 18 and 21.

3. Beneficiary

A life insurance beneficiary is simply the person (or people, if you have more than one) who will receive the death benefit if the insured person dies. This can be a family member or a charity, but it is not required. If you wanted to, you could name your neighbour’s child or your favourite restaurant.

If you live in a community property state, your options are limited. In those states, spouses are considered to own assets equally. If you want to name anyone other than your spouse, you'll need their permission.

4. Policyholder

The policyholder is the person who is the actual owner of the policy. They are in charge of making payments and determining the policy's specifics. A policyholder has complete control over life insurance plans unless there is an external agreement, such as an employment contract. That means they can make changes even if they are not the insured person.

5. Sum Assured

The sum assured is the amount of money that a nominee will receive if the life assured dies. For example, if you purchase a term life insurance in India with a sum assured of 50 lakh, your nominee will receive 50 lakh in the event of your untimely death during the policy term.

Policyholders frequently confuse the terms Sum Assured and Maturity Value. As a result, it is helpful to understand that when your policy period expires and you are still alive, the payout you receive is the maturity value. Maturity benefits are provided by life insurance plans such as endowment.

6. Premium

The premium is the amount of money you pay to the insurer in exchange for life insurance and other services. You pay the fixed amount each year to maintain the coverage and receive the policy's other benefits.

The cost of life insurance varies depending on the policy type. While term insurance plans have lower premiums, insurance plans with life insurance in India and savings/investment components have higher premiums. The premium is primarily determined by:

● Age of the life assured
● The type of policy
● Policy tenure
● Sum assured
● Your lifestyle habit (smoking/ drinking)

7. Premium Payment Term

The premium payment period is the length of time you must pay the premium. It should be noted that the term of the premium payment is not always the same as the policy term.

8. Premium Payment Frequency

It refers to the number of times you pay your life insurance premiums in a given year. Premiums can be paid annually, semi-annually, quarterly, or monthly. Some policies are also single-pay policies, meaning you only pay a premium once.

Annual premium payment results in slightly lower total premiums in most cases. It also saves you the trouble of remembering multiple deadlines.

9. Nominee

In the event that you are no longer present, the nominee receives the sum assured as specified in your policy. When purchasing the policy, you must declare the nominee(s). A nominee is usually one's spouse, child, or parents, or anyone else who is financially dependent on them.

You have the option of naming one or more people as your nominee. If the nominee is a child, a guardian must also be appointed. There are provisions in the policy that allow the nominee to be changed during the policy tenure.

10. Riders

Riders are optional features that allow you to tailor a life insurance policy to your specific needs. Riders provide additional benefits and will enable you to tailor your policy to your particular needs. You can add one or more of the following riders for a small additional fee:

● Accidental Death Disability and Dismemberment Rider
● Critical Illness Rider
● Term Rider
● Waiver of Premium Rider
● Guaranteed Insurability Rider

11. Claim

The claim is the process of informing the insurer about the policy’s maturity or the untimely death of the policyholder. You can make a maturity claim as a policyholder. In the unfortunate event of your death, your nominee, on the other hand, can make a claim.

12. Face value

A life insurance policy's face value is the death benefit that the policy will pay. The face value of a $100,000 life insurance policy is $100,000. As you borrow from the policy or increase the amount of coverage you have, the policy’s value policyholder’s untimely death can change over time.

Face value is not the same as cash value, which is the excess premiums you've paid plus interest earned that accumulates in the policy’s cash value account.

13. Cash value account

A cash value account is a permanent life insurance plan component that grows in value over time. Some policies treat this as a savings account, earning a fixed rate of interest. Others treat the account more like an investment account, allowing the policyholder to choose how the money is invested.

Your premium payments are used to fund the cash-value account. After deducting administrative and insurance costs from your premium, the remainder is deposited into the cash value account. Because you are less expensive to insure when you are younger, a more significant portion of your total premium will be deposited into the account. Cash value accounts are not available with term life insurance products.

14. Surrender value

The surrender value of your life insurance plans is the amount of money that the insurer will pay you for the policy at any time. Except in very rare cases, it is not the same as the policy's face value or death benefit. Term life insurance plans have no cash surrender value.

Permanent life insurance policies have a surrender value that is equal to a portion of the cash value account. Typically, this is the total cash value minus any loans and fees. Policies typically have a time period (sometimes up to 20 years) during which a policyholder will be charged a surrender fee for cashing in his or her policy.

Conclusion

Now that you understand the key terms in life insurance India, it's time to buy a policy to provide financial security to your dependents and build a corpus to cover the various comforts you want to provide them. Understanding the fundamentals of life insurance terminology aids us in comprehending the various benefits and features of a policy.


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