Important Terminologies in Term Insurance Explained

Buying life insurance is ideal if your family and loved ones depend on your earnings. With this, you can stay at peace since it ensures the financial protection of your loved ones in case of your unforeseen demise. Term insurance has been popular among different types of insurance plans because it offers a considerable sum of life coverage.

However, certain technical terms in a policy may seem confusing while buying it. Keep reading this article to learn the terms used in insurance and what they mean.

1. Policyholder

2. Life Assured

3. Nominee

4. Sum Assured

Sum assured is a basic terminology of insurance, which refers to an amount that the insurance company agrees to pay the nominee on the insured person's demise. For instance, you have bought a term life insurance for yourself while nominating your spouse as its beneficiary. In this case, your wife will receive the sum assured in the unfortunate event of your untimely demise.

While buying a policy, a policyholder has to decide the sum assured. Let us assume this amount is ₹2 crores. In case of the policyholder's death, before the term is over, your beneficiary will get ₹2 crores from the insurer. This sum is also referred to as the cover.

5. Policy Term

Also known as policy duration or policy tenure, policy term refers to the time span for which this plan remains valid. However, this period varies from one policy to another. For instance, the policy term of your insurance plan can be 50 years.

This means that in case of the life-assured person’s demise within this period, the insurance company will compensate the entire sum assured amount to the nominee mentioned in this policy.

6. Premium

7. Payment Mode/Term

Payment mode or term refers to methods by which policyholders pay the premium to their insurance company. In general, payment modes are classified into three categories. They are:

• Regular Pay: In the regular pay method, the policyholder has to pay premiums throughout the policy term.
• Limited Pay: In this method, a policyholder can select a period in which they will pay the premium to the insurance company. For instance, if you select a period of 6 years, you have to pay premiums for only that much period while the insurance plan will remain active for the whole term you choose.
• Single Pay: In the single pay method, a policyholder will clear the premium payment in one go. Usually, this payment is made during the purchase of an insurance policy.

8. Death Benefits

9. Riders

Riders refer to the add-ons to your prevailing term life insurance plan. In other words, they provide additional coverage against risks. These add-ons may be accidental death benefits, critical illness, etc. The policyholder has to pay more for riders while purchasing the insurance policy. 

The Accidental Death Rider provides enhanced financial protection by offering a higher payout if the insured's death results from an accident. This ensures greater support for the family during challenging times. These add-ons, such as critical illness and accidental death benefits, increase coverage but are covered by increasing the cost of the policy.

10. Claim

11. Free Look Period

12. Grace Period

13. Surrender Value

If a policyholder plans to withdraw the insurance policy before the maturity period, the insurance provider pays them a specific amount known as the Surrender Value. Hence, before availing of an insurance policy, you should check its terms and conditions to see whether it provides a surrender value, as every insurance company does not give this facility. 

If they offer a surrender value, check how much its amount will be.

14. Paid-up Value

If you stop paying the premiums subsequent to a particular period of time, the insurer will give you the option to convert your insurance plan into a reduced paid-up plan. In this option, the amount of sum assured is reduced according to the number of paid-up premiums.

If a policyholder stops paying premiums after 3 years, they may get this opportunity as long as the policy has collected substantial policy value.

15. Policy Lapse

This happens when the policyholder fails to make a payment even within the grace period, making the policy invalid. As a result, coverage ends, and any benefits tied to the policy are no longer available.

Sometimes, the insurer may offer to reinstate the policy to its original terms by paying the delinquent premiums with applicable fees before the specified deadline. Reinstatement usually requires proof of the policyholder's good health status, which must be acceptable for coverage.

Knowing the terms used in insurance will help you make a well-informed decision when buying term life insurance. If there is any confusion, you should talk to an insurance agent or consultant without fail.