Kalyani Narayanan, CEO and Principal Officer says

Just thought I would explain some life insurance buzz words to you!  These are terms that are common terms related to all life insurance (traditional) policies. I have NOT covered the terms specific to ULIP based plans.

Policy holder

Policy Holder is the person who is responsible for making the premium payment for the policy

Life Insured

This is the person whose life is insured in this policy.  Most of the times, the policy holder and the life insured are the same person, but this is not always the case.  For example, father can take life insurance on his son.  In such case, father is the policy holder, and the son is the person whose life is insured.

Beneficiary/ Nominee

This is the person who would receive the insurance money if the life insured dies.

Insurer

This is the insurance company that has issued the policy.

Premium

Premium is the amount you pay to the insurer for them to provide you insurance cover.  This premium is paid in different ways.

Regular payment

This means you make a payment periodically (either monthly, quarterly, semi-annually or annually) for the duration of the policy payment term.

Single Premium

There are policies where the premium can be made just once instead of every year.

Policy Term

Policy Term is the number of years for which the policy is bought for. For example, if the policy is purchased for 10 years, that means, the policy term is called 10 years.  This is, the insurance company agrees to pay the sum assured to the beneficiary if the policy holder dies any time in the 10 years.  Most of the times, the first 2 years death would be seriously investigated before money is paid.

Premium Payment Term

Many times the premium payment term (PPT) may be different from the Policy Term.  For example, you may pay premium for 10 years, but the policy period may be 15 years.  What this means is that you stop paying the premium at the end of 10th year but the policy continues to be valid for another 5 years.

Bonuses

Guaranteed bonuses

Insurance companies guarantee a return. Generally, it is not given for more than five years of the policy period.  By and large, it is a percentage of the sum assured. This amount is paid to you, the policy holder, at the end of the term.  If a policy comes with a guaranteed bonus, this would be mentioned in the brochure.

Reversionary bonuses

Based on the performance of the company, the insurance company declares a bonus for its policy holders every year. You can get this amount only at the end of the term. Reversionary bonuses are declared only after guaranteed bonus period is over.

This is offered purely at the discretion of the insurance company and depends on the profits made that year.

 

Sum assured

This is also known as the cover or coverage and is the total amount that you are insured for.  This is the amount the life is insured for.

Rider

It is an optional feature that can be added on to a policy.  You could compare it to additional toppings on a pizza.  When you add additional toppings you have to pay extra for them.  Similarly, you have to pay an additional premium to avail these benefits.  For instance, you may take a life insurance policy and add on accident insurance as a rider.  What this means is when you take accident insurance rider, if the death is due to an accident, you would get twice or thrice the amount of sum insured as mentioned in the insurer’s write up.    Some of the common riders that are available are to receive twice the amount of sum insured if the death is due to accident (this is called Double Accident Cover), or get the sum assured if the insured gets one of the dreaded diseases like cancer or stroke, etc. or if the insured losses a vital part of his body like limbs, eyes, etc. (called Partial dismemberment).

Surrender value

Halfway through the policy, you might want to discontinue the policy and take whatever money is due to you. The amount the insurance company then pays is known as surrender value. The policy ceases to exist after this payment has been made.  Not all policies have surrender value.

Paid up value

If you discontinue paying the premiums, but do not withdraw the money or surrender the policy, the policy is referred to as paid up. The sum assured is reduced proportionately, depending on when you exit from the policy. You then get the amount at the end of the term.

Maturity benefit

The amount that the insurance company has to pay you when the policy term comes to an end is known as the maturity benefit. It generally comprises the sum assured + bonuses (guaranteed + non guaranteed).

Here is an example:

Age of policy holder, John 30 years

Beneficiary Spouse

Cover Rs 2 lakh

Term 20 years

Premium (per annum) Rs 9,000

Type of policy Endowment

If John passes away

He is insured for 20 years (between the age of 30 and 50). If he passes away during this time, his spouse gets the death benefit. This will be Rs 2 lakh (Rs 200,000) along with the bonus (if any) until the death occurred.

If John lives till his 51st birthday

He is entitled to the maturity benefit. This will be:

i. Sum assured: Rs 2 lakh (Rs 200,000). This amount is guaranteed.

ii. Guaranteed bonus: Please check with your insurance policy document for the actual amount. This amount is guaranteed.

iii. Reversionary bonuses: This is the amount which will be declared by the company every year based on its performance. It is considered only after the guaranteed bonus period, if any, is over. This amount is not guaranteed.  Once declared however, it becomes a guaranteed amount.  The payment would be given only during maturity or death.

A tentative break-up

Sum assured: Rs 200,000 + Guaranteed bonus: Rs 30,000 + Reversionary bonus: Rs 200,000

So at the end of 20 years, John gets back Rs 430,000.

Survival benefit

Some insurance policies make payments at specified intervals (before the policy term is over) to the customer. Typically, they are called money back policies.

The amounts paid are generally fixed and predetermined. They are called survival benefits.

Here is an example:

Age of David 30 years

Beneficiary Spouse

Cover Rs 2 lakh

Term 15 years

Premium (per annum) Rs 18,000

Type of policy Moneyback

The policy promises to give back a portion of the sum assured (10%, 15%, 20%, 25%) every three years.  This means David would receive

After three years: Rs 20,000

After six years: Rs 30,000

After nine years: Rs 40,000

After twelve years: Rs 50,000

If David passes away anytime in the 15 years, Rs 2 lakh (Rs 200,000) and bonuses (if any till then) will be paid to the spouse as the death benefit regardless of if the company has already paid him some of the money as promised above. For example, if David dies at the end of 10th year, he would have already received Rs 90,000 by that time.  But, this amount would NOT be deducted from the Sum Insured.

If he survives the 15 years, then What would David get on maturity, that is, at the end of 15 years?

He already received Rs 140,000 as can be seen above.  On maturity, he would get the remaining balance on sum assured (Rs 2 lacs – Rs 1.4 lacs = Rs 60,000) + Guaranteed bonus + Reversionary bonus.

A tentative break-up

Maturity Amount: Rs 60,000 (since balance has been paid over the years)

Guaranteed bonus: Rs 30,000

Reversionary bonus: Rs 125,000

So at the end of 20 years, he could get Rs 215,000 back

In sum, you get back Rs 355,000 (Rs 140,000 as survival benefits + Rs 215,000 as maturity benefits).

 

Hope you have already done your TAX planning for 2012 – 13.  If you need help,write us at kalyani@easyinsuranceindia.com

 

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