The life insurance penetration in India is low, and one of the primary reasons is that the jargon and terminologies associated with it can be overwhelming and deter many prospective policy buyers. However, life insurance is important, and knowing these terms can help you buy the best life insurance policy for you and your family.
In this article, we will decipher some of the most common life insurance terms. Once you understand that most of these terminologies have simple meanings behind them, you can make a well-informed decision to ensure complete financial protection for your loved ones.
Common Life Insurance Terms You Should Know
The life insured or insured refers to the individual whose life is covered by the life insurance policy. Typically, the life insured is the primary or one of the income earners in the family. However, if the life insured passes away unexpectedly, the designated nominee receives the entire value of the sum assured.
Sum assured is used in life insurance to represent the promised amount you or your beneficiaries will receive upon the policy’s termination or maturity. The sum assured could either be the minimum amount or the total amount received, depending on the type of policy.
Riders are add-on features that can be attached to a life insurance policy to expand and improve coverage. They provide extra financial protection on top of the base sum assured.
For instance, the Waiver of the Premium rider from Tata AIA life insurance allows continued policy benefits without paying the premium after a particular event, such as total and permanent disability of the life insured.
Survival benefit refers to the amount the life insurance company pays the policyholder upon the policy’s maturity. This benefit is also known as the “maturity benefit,” as it is given to the policyholder only if they survive until the policy matures. The benefit includes the sum assured along with any applicable bonus.
Surrender value means the amount the life insurance company will pay you if you stop your policy in the middle of its term. After receiving the surrender value, your policy will end, and you will not get any further benefits from it.
Terminal illness refers to a rapidly progressing illness that may not have a cure. Examples of such diseases include cancer, renal failure, and heart attack. Since treatment can be expensive and potentially drain a family’s finances, you can protect yourself by getting critical illness insurance.
Total & Permanent Disability
Total & permanent disability is a term used in insurance contracts that defines a severe and permanent disability, such as being unable to move due to a terminal illness or accident. If someone becomes totally and permanently disabled, they can receive the full benefit under a life insurance claim. However, if the disability is less severe, the policy will pay a lower amount.
If you decide to assess the value of your life insurance policy after paying premiums for part of the tenure, generally after two to three years, the insurance company will give you a reduced value known as the paid-up value.
For instance, if you stop paying your premiums after three years of purchasing a policy, you will receive a reduced sum assured value equal to about 30% of the original sum assured.
Different policies use this value in different ways. For example, a savings plan may use this value to calculate the policy’s surrender value. On the other hand, a ULIP may work differently and give you a minimum guaranteed interest rate on the amount until you revive or surrender the policy.
The lock-in period is when you can’t take your money out of an investment. This period is standard in ULIPs and applies to other investments. During the lock-in period, you can add money to your policy, but you can’t withdraw any money from it. For ULIPs, the lock-in period is five years. Therefore, you can only take out a portion of the accumulated funds after the policy completes five years.
Knowing about the common life insurance terms is vital to know your policy and choose the right one for your needs. Being fully aware and informed about your life cover allows you to reap complete benefits under the policy and ensure all-round protection.
So, if you are looking to buy the best life insurance policy for you and your family, make sure to understand the crucial life insurance terms.