Table of Contents
- What is Life Insurance?
- 15 Basic Terms in Life Insurance
- Benefits and Features of Life Insurance
- Why Life Insurance Important
- Who Needs Life Insurance
- Life Insurance FAQs
Buying life insurance is a very tough task and makes it even harder if you don’t know some basic terms in life insurance.
Good knowledge of terms in life insurance makes you confident and can be helpful in the selection of a perfect life insurance policy for you and your loved ones.
Today in this article, we will learn about some basic life insurance policy terms.
What is Life Insurance?
Life insurance is an agreement between a Policyholder1 and an Insurer2.
In a life insurance policy, the Insurer pays a lum-sum amount to the Nominee3 after the death of the Insured4 or after a fixed period.
In exchange for this life cover, the policyholder must pay policy Premium5 at regular intervals.
15 Basic Terms in Life Insurance
Understanding life insurance term for a beginner could be a difficult task. Here are the 15 basic terms in life insurance that a beginner can understand easily.
The policyholder is the person who owns a life insurance policy. He/she pays a premium for this policy which he buys from an insurer.
The insurer is the insurance company that provides insurance cover.
A nominee is one of the most important terms in life insurance on which everybody should pay attention.
The nominee is the person who receives money in the case of the demise of the insured.
A policyholder can choose more than one nominee by giving the percentage of your Sum Assured6.
An insured person is the person for whom a policyholder buys an insurance policy. An insured may or may not be a policyholder.
Let’s try to understand policyholder and life insured meaning with an example:
When my father buys a life insurance cover for himself. He is the policyholder and the insured.
But when my father buys a life insurance policy for me. Then, I am the insured and my father is the policyholder.
Premium is the amount, the policyholder pays to his insurer to keep his life insurance policy active.
If you keep paying your premium regularly, then your insurance policy also remains active. If you don’t pay your premium on time, then your insurance policy may be terminated.
It is advisable that you pay your premium on time. Premium can be paid on a monthly, quarterly, biannually, or yearly basis.
Your premium amount depends on several factors like your age, medical condition, type of insurance policy, etc.
6. Sum Assured
Sum Assured is the amount of money that is paid to the nominee in case of the death of the insured during the policy term.
The insurance company is bound to pay sum assured only if you have paid your premium regularly or as per the term and condition of life insurance.
7. Death Benfits
Death benefits are the amount of money that is paid to the nominee in case of the demise of the insured during an active policy.
If you are thinking that the sum assured and death benefits are the same, then don’t confuse. Because death benefits are the amount that could include the sum assured, bonuses, premiums paid, or any other benefits as per the life insurance policy term and condition.
8. Surrender Value
Surrender value is the lump-sum amount that is paid to the policyholder if he decides to discontinue the insurance policy before the Maturity Age9.
Please read life insurance terms and conditions carefully before taking a life insurance policy because some insurance plans don’t have a surrender value.
9. Maturity Age
The pre-decided age at which your life insurance policy will mature is called the maturity age of the life insurance policy.
Example: You are 20 years old and have taken a 35-year term life insurance. In this case, the maturity of your life insurance policy will be at 55 years.
10. Policy Tenure
The number of years for which a life insurance policy is active is called the policy term.
The policy tenure can range from 1 year to 100 years. It can be for the whole life depending upon the insurance type and the term and condition of a life insurance policy.
11. Grace Period
Life insurance companies give a fixed time period to the policyholder when he doesn’t pay his premium after the due date of the policy.
The grace period can vary from 15 to 30 days depending upon life insurance terms and conditions. If you don’t pay your premium even before the grace period your policy might Lapse12.
When a policyholder doesn’t pay his premium even after the grace period, then his insurance policy is closed/lapsed. You should know this life insurance policy term.
An annuity is like a pension that is paid at regular intervals to the policyholder until he dies.
A part of the insurance company’s profit is distributed to the policyholders of the company.
Riders are additional benefits that a policyholder can add to his policy at the time of buying or after the life insurance policy at additional cost.
Examples of some common riders:
- Return of Premium rider
- Critical illness cover
- Accidental death benefit rider
Thus you can easily understand the terms in life insurance.
Benefits and Features of Life Insurance
You have read terms in life insurance and their meaning from the above points and let’s look into the features and benefits of a Life Insurance Policy.
- Flexible-Premium Payment: You can choose your premium paying frequency such as monthly, quarterly, half-yearly, or annually.
- Loan: Some life insurance policies are designed as a saving instrument with insurance cover. You can take a loan against these savings at a nominal interest rate.
- Tax Benefits: You can avail of tax deductions up to Rs. 1.5 lakh under section 18C of the Income Tax Act, 1961.
- Tax Saver: A life insurance policy provides tax-free death and maturity benefits under section 10(10D) of the Income Tax Act, 1961.
Why Life Insurance Important
Here are 3 points about why life insurance is important for us and why do you need life insurance.
- Wealth Creation Over Time: You can accumulate wealth in the long run with insurance cover.
- Income Replacement: In the absence of a breadwinner, a life insurance policy can help to cater to your needs like household expenses, children’s education expenses, marriage expenses, loan repayment, etc.
- Leave a Legacy: You can give a lot of wealth to your children and grandchildren with the help of life insurance.
Who Needs Life Insurance
- Generally, anyone who earns for his family needs a life insurance cover.
- If you have dependents, then you should consider taking life insurance.
- Working women must buy life insurance cover.
Life Insurance FAQs
Life Insurance Policy is a contract between a policyholder and an insurance company.
In a life insurance policy, the insurance provider pays an amount of money to the nominee after the death of the insured or after a fixed period.
Life insured is the person for whom a policyholder buys an insurance cover.
Let’s try to understand “life insured meaning” with an easy example:
Ravi buys an SBI Life Insurance policy for his son Minku.
In this SBI Life Insurance policy, Minku is the life insured and his father Ravi is the policyholder.
Term insurance should be 10 to 15 times your annual income.
The cost of the insurance depends upon several factors. Here are the 5 points that make your life insurance more expensive.
- Age: If you buy insurance in the later stage of your life, you are going to pay a high premium.
- Medical History: If you have been suffering from any disease in the past, then you may have to pay more.
- Smoking and Tobacco: If you smoke and chew tobacco, then you are going to pay more than a non-smoker.
- Occupation Type: If you work in a high-risk job then your life insurance cost is going to be expensive.
Riders: Riders are additional benefits that a policyholder can add to his policy at the time of buying or after the life insurance policy at additional cost.
Riders also make insurance expensive.
Here are 4 points describing, why you need life insurance.
- To support your family in your absence.
- To fulfill your dreams after retirement.
- To finance your children’s education.
- To maintain the impact of loss during any accident or serious illness.
It is advisable that you buy a life insurance cover at an early age because the sooner you buy, the cheaper you will get.
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