PrimeInvestor Glossary of Life Insurance terms

  1. Annuity:  A financial product that pays out a fixed stream of payments to an individual on investment of a lump sum amount. The goal of an annuity is typically to provide a steady stream of income, usually during retirement. Many facets of an annuity can be tailored to the specific needs of the buyer.
  2. Benefit illustration: This is a year-by-year summary of the costs and benefits. With it, you can assess how costs impact your corpus every year. You pay a premium annually and your insurer deducts costs from this money on account of fund management, distributor incentives, insurance cover and other administrative expenses.  
  3. Claims settlement ratio: A measure of the percentage of claims settled by an insurer in a given financial year as opposed to the number of claims received. This can be measured in terms of number of claims settled as well as value of claims settled. This is a key metric to gauge the ability and efficiency of an insurer to settle claims and is used as a primary decision-making guide to choose an insurer.
  4. Death benefit:  It is most often the face value of the insurance contract. It is the money that is paid to the stated beneficiaries of the contract, on the death of the insured. The death benefit can be sum assured or even higher if there are rider benefits or other benefits that were added to the policy.
  5. Endowment: A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term or to the policy holder on maturity of the policy if he/she survives the term. This maturity amount can be used to meet various financial needs. It thus fulfils the dual need for a life cover and savings under a single plan.
  6. Final maturity bonus: Terminal bonus (final bonus) is a one-time bonus declared and added only for policies, which attain maturity. This bonus is offered to the policyholders for keeping the policy till its maturity date or when the policyholder dies.
  7. Free look period: If you are not satisfied with the terms and conditions of the insurance policy you have purchased, you can cancel and return the policy within a specified period after receiving it, and your premiums will be fully refunded. This is referred to as the free look period.  It often lasts 10 or more days (depending on the insurer).
  8. Fund value:  Fund value is a term that is exclusive to ULIP or Unit Linked Insurance plan. The fund value is the value of all the units that you hold in a ULIP after costs have been accounted for. (No of units * NAV of the unit).  The NAV is calculated by dividing the total value of the fund’s assets by the number of units.
  9. Grace period: If you did not renew your policy on time, you are given an extension to pay the premium after the due date. This grace period can be 15 days or even more depending on whether the premium is monthly or annual. The policy lapses if the premium is still not paid.
  10. Loyalty addition: Loyalty Addition is the extra amount you get added to your investment corpus if you stay the course with the policy. Since the idea of this benefit is to make sure you don’t surrender the policy midway, loyalty additions typically kick in during the latter half of the policy term, however the nuances vary from company to company.
  11. Market share:  The percentage of a market owned by an insurer – measured by either the market share in total premiums collected in the insurance industry or investment book. Market share confers disproportionate advantages in every financial business including the insurance space.
  12. Mortality charge: When you buy a life insurance policy, the insurer levies a charge for the insurance protection upon death and to cover certain other expenses. This is known as mortality charge. It is the actual cost of insurance by the life insurance company.
  13. Nominee:  The person nominated by the policyholder who will receive the sum assured and other benefits in the event of death of the life assured during the period of the policy.
  14. Paid up value: If you (policyholder) do not pay your premium after a period of time, you may have an option to retain the policy at a reduced value – without paying further premiums.  Typically, the sum insured is reduced in proportion to the number of premiums paid. Any other benefits will then be only on the reduced value – which is called the paid-up value.
  15. Persistency ratio: A ratio that measures the proportion of customers who chose to renew their policies at the end of the year. The ratio can be calculated with number of policies as well value (premium collected) of such policies. This is a good proxy to measure an insurer’s service standards and selling practices as it shows how much confidence customers have with the insurer.
  16. Policy document: Formal document that contains the details of the insured, policy schedule, key covers of the policy, as well as the extensions and exclusions of the insurance contract.
  17. Policyholder: The policyholder is the one who purchases the policy and is the owner of the policy. While the policy holder can be the same person whose life is assured, in some cases, the policy holder would be different from the life assured. A wife may buy a policy for the husband and pay the premium but the life assured may be that of the husband. In this case, the wife is the policy holder and the husband is the life assured.
  18. Policy Tenure: The period over which the insurer provides life insurance coverage. This can range from anywhere between 1-100 years or until the life assured is alive, depending on the policy type. It is also called policy term or policy duration.
  19. Premium: Insurance premium is the amount that you are required to pay periodically or as lumpsum to keep the coverage of your insurance alive. This amount is specified by the insurance company based on various factors such as age, gender, medical condition and so on. Such premium may be in instalments through life or for a specific period or as a single lumpsum. The premium can vary across years in the case of non-life insurance. For example, in motor insurance the premium may reduce after a no-claim year or increase after you make a claim.
  20. Premium allocation charge: This is deducted from the premium upfront. It is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge is levied to recover the initial expense incurred towards issuing the policy such as the distributor fee and the cost of underwriting.
  21. Regular premium: Money paid to buy insurance coverage in instalments at time intervals say monthly or annually.
  22. Reversionary bonus: Bonuses are extra payments made by an insurance company to its policyholders over and above the assured income out of its profits. However not all plans guarantee bonus payments.  Normally declared at the end of the financial year, they are payable at the time of claim.
  23. Revival period: If you did not renew your policy even after a grace period given, the policy lapses. However, you can still revive if the insurance company provides you with an option to re-activate lapses policies. This will once again have a time within which you would have to pay and revive.
  24. Riders: Riders are additional features that increases the scope of an insurance policy. They typically come for additional cost. Critical illness cover or accidental death benefit or waiver of premiums are all examples of common riders.
  25. Single premium: A single premium policy is a type of life insurance wherein a lump sum is paid as premium instead of the yearly, quarterly, or monthly form of premium payment or those paid in instalments.
  26. Solvency ratio: It is a measure of how much assets a company has as against its liabilities. It helps measure the financial soundness of an insurer and the firm’s ability to pay the claims due. IRDA specifies a minimum ratio of 1.5 times. A higher ratio is better, but new and small firms can sometimes show high solvency ratio because of the nascent stage of business.
  27. Sum assured:  The amount that is payable on the occurrence of an event that has been insured against under an insurance policy to the policyholder, such as the death of the insured. This is also known as the cover or coverage amount and is the total amount for which an individual is insured.
  28. Surrender value: If you (policyholder) discontinue your plan before the maturity, you may be eligible for an amount from the insurance company. This is called a surrender value. It is to be noted that you need to read a policy document to know if the plan offers a surrender value in the first place and under what conditions you will be eligible for the same.
  29. Survival/Maturity benefit: The amount that is paid by the insurer when the life assured crossed the policy tenure. The tenure is pre-defined and on crossing the same, an amount is paid by the insurer. Pure term plans do not have survival o maturity benefits.
  30. Term plan: Term insurance is a type of life insurance policy that provides coverage for a certain period or a specified “term” of years. If the insured dies during the time specified in the policy and the policy is active, or in force, a death benefit will be paid. If the term expires and the individual dies afterward, there would be no coverage or pay out.
  31. Whole life plan: Whole life insurance lasts for a policyholder’s lifetime, as opposed to term life insurance. It is paid out to beneficiaries upon the policyholder’s death, provided that the premium payments were maintained.  

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