Term Insurance holds a pivotal role in financial planning, yet its importance often goes unnoticed. Safeguarding the journey and aspirations of a family, this insurance serves as a crucial shield in the face of unfortunate events befalling the breadwinner. (Featured image credits: Image by Tumisu, from Pixabay)
In this Blog…
Let’s try to understand the different jargon, terminologies, and features in Term Insurance. Understanding these is very crucial in comparing the various plans and policies in the marketplace and identifying a suitable product for us.
IMPORTANT NOTE
I have tried to define the various jargon or features. Where possible have used hypothetical examples. The exact specifics, definition, applicability or limits of these features are shared in the policy wording document. You need to refer to the policy wording documents of your prospective insurance policy to get the specific details.
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Jargon, terminologies and features in Term Insurance
Critical Illness
- Critical illnesses are more serious forms of illnesses that are more difficult to treat and require more time and money for treatment.
- Consequently, such situations entail relatively higher expenses and a longer period of absence from work for the affected person.
- Critical illness can be life-threatening or lifestyle-disabling.
- Therefore, individuals should take critical cover to protect themselves against these critical illnesses.
Exclusions
- Exclusions are aspects not covered in the policy.
- If a claim is made on these aspects, the insurance company will not pay any benefit.
- One of the exclusions in term insurance is death by suicide.
Prospective policyholders must carefully read the ‘Exclusions’ before buying insurance.
Free Look-up Period
- This feature is mandated by regulation, providing you with a valuable opportunity to review and understand your purchased policy.
- If you feel that you misunderstood or were mis-sold the plan, you have a second chance to return it within a 15-day window.
- During this period, you can assess the policy and request a refund of the premium, after deducting the cost of medical check-up, insurance cover for that period, and stamp duty charges.
- It’s essential to note that the free-look period applies to first-time purchase and not to renewals.
The policy will terminate upon payment of this amount. For more details on this regulation, you can refer to the policy document.
Grace Period
- The grace period is the number of days after the premium renewal date within which the policyholder must pay the premium to keep the policy active.
- If the policyholder does not pay the premiums before the end of the grace period, the policy gets lapsed.
- Normally, the ‘Grace Period’ can be 15 days in the case of monthly premium payment mode and 30 days in the case of annual premium payment mode.
IRDAI
- IRDAI is The Insurance Regulatory and Development Authority of India.
- The IRDAI regulates and promotes the insurance industry in India.
- All insurance companies, agents and brokers work in compliance with the IRDAI.
Insured
- The person whose life is insured is referred to as the insured.
- If the life being insured is different from the person who buys the insurance policy, such a person is called the proposer or policyholder.
Issuance
Policy issuance usually takes 7 working days after the medical test and successful submission of all documents. If the company cannot issue the policy due to ineligibility or any concerns, they take one of the following actions:
- Counter Offer: They propose a revised premium or revised policy term.
- Postpone: They inform the applicant that they are eligible to buy a policy after a few months.
- Decline: They state that the policy cannot be given.
Lapsed Policy
- If the premium due on a policy is not paid within the allowed grace period, it will lapse the policy.
- To revive a lapsed policy during the reinstatement period, the policyholder must pay the pending premium and penalty.
Married Women's Property Act
- This enables a married man to protect an insurance policy only for the benefit of his wife and/or children.
- In case of a death claim, the policy proceeds can only be claimed by trustees (wife and/or children) and cannot be claimed by creditors, relatives or form a part of the Will
- To avail this protection to your family, while buying the plan fill the policy holder needs to fill “YES” in the application form to the question: “I would like to buy this policy under Married Women’s Property Act (1874)”
- This is one way to secure the financial future of your spouse and children
- Without this option, the creditors will have the first claim on the policy proceeds before the policyholder dependents.
Read more of this here.
Nominee
- A nominee is a person chosen by the policyholder to whom the life insurance company will pay the sum assured and other benefits in case of an unfortunate eventuality.
- The nominee could be the wife, child, parents, or any other chosen individual.
- If the policyholder passes away, the nominee must claim the life insurance from the company by submitting the required documents within the time frame provided by the insurance company.
Nomination
Nomination of a life insurance policy will be governed by Section 39 of the Insurance Act, 1938 (and as amended from time to time.)
- It is the right of the policyholder to identify the person(s) entitled to receive the policy money in the event the policy becomes a claim by death
- The nomination can be made at the time of taking the policy or any time after that and can be changed any number of times
This is part of succession planning and a very crucial activity of information, as this decides “Who is the beneficiary” should a situation arise for the insurance company to make the pay-out?
Payment of Sum Assured
- The insurance company will make the payment of the sum assured on the occurrence of the specific event, i.e., death.
- The contract will specify the mode of payment, i.e., lump sum or as monthly pay-out, based on the type of policy opted by the policyholder.
Premium Payable
- Premium to be paid by the policyholder depends on:
- The sum assured
- Term of the policy
- Age of the insured
- Lifestyle i.e. Smoke/No smoke
- Medical conditions etc
- Additionally the policy holder can choose the frequency of premium payment i.e. monthly, quarterly and yearly.
- Some policies may involve payment of a single premium
Maturity / Survival Benefit
- Some policies provide the policyholder with an amount in case he/she survives the policy term.
- This is also called a survival benefit since it is paid to the insured on their survival until the maturity of the policy.
- The premium of such policies is higher than that of a plain term insurance policy.
Revival Period
- If premiums are not paid within the grace period, the policy lapses.
- After such termination, the insurance company still offers an option to the policyholder to revive the policy.
- This revival option is provided for a specific period after the completion of the grace period, and it is known as the revival period.
Riders
- These are optional add-ons to a term life insurance policy.
- They are additional paid features designed to widen the scope of the base life insurance policy.
- A few well-known riders include Critical illness cover or an accidental death benefit pack.
Sum Assured
- The policyholder decides the amount to be paid to the dependents in case of the occurrence of an event.
- Additionally, the insurance company may mention specific situations when the sum assured would change.
- For example, if a Term Insurance policy is taken to cover outstanding mortgage payments, the sum assured will decrease as the outstanding loan decreases.
Surrender Value
- The policyholder will receive the amount from the insurance company if they decide to exit the policy before maturity.
- However, this option is not available in many Term Insurance products.
- Even when it is present, there are severe restrictions, such as surrender value being applicable only for single premium policies, etc.
- To determine the availability of surrender value, its conditions, and the method of calculation, one needs to check with the respective insurance provider.
Term of the Contract
- This is the period for which insurance coverage is available to the insured.
- Insurance companies specify an upper age limit after which the term of the policy would end.
- However, recently, some companies have started offering policies up to the age of 85 and 99 as well!
Conclusion
Understanding the various jargons and terminologies associated with Term Insurance is paramount for anyone looking to make informed decisions when comparing and selecting policies. From the key components like the sum assured, premium, and policy term, to the more intricate details such as riders, exclusions, and surrender value, each aspect plays a crucial role in shaping the coverage and benefits offered by the policy. Familiarizing with these jargons not only empowers you to choose suitable coverage that aligns with your unique needs and circumstances but also helps in comprehending the terms and conditions of the policy comprehensively.
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