Important Terms Used in Insurance
2nd Feb 2021 | 5 min |
Life insurance is a contract between an insurance company and the insured person. When you buy a life insurance policy, the insurer agrees to pay a specific amount to your beneficiaries, if an unwanted event occurs. The beneficiaries refer to family members dependent on you for financial support. This contractual arrangement is in lieu of the timely payment of premium.
Thus, life insurance offers financial protection at times of adversities. Understanding its key features and the commonly used terminologies make the purchase decision and the claiming process easier. This article explains the basics of life insurance and 15 different terms used in insurance.
What are Insurance Risks?
Risk in insurance is the possibility of the occurrence of an unexpected or unpleasant event which the insurer agrees to indemnify. Human life cannot be quantified, but life insurance aims to provide a monetary sum based on the possible loss of income.
The types of risk in insurance include:
- Pure and Speculative Risk - Pure risk, also known as absolute risk, is not controllable, and its outcome is either loss or no loss. In other words, no opportunities for gains exist where pure risk is involved. The risk prevails in natural disasters and death.
Speculative risks exist where the outcome of an event could either be loss or gain, such as gambling. An insurer usually doesn’t cover this risk.
- Financial and Non-Financial Risk -When the outcome of an unwanted event can be measured in terms of money lost, it is a financial risk. An example is medical expenses due to injuries in an accident.
When the outcome is not measurable in monetary terms, it is a non-financial risk. Such risks cannot be valued and are non-insurable, hence not covered under insurance.
- Fundamental and Particular Risk - Fundamental risks are beyond the control of an ind&ividual, such as natural calamities. In contrast, particular risks are controllable and arise from direct human action, for example motor accidents caused by human negligence.
Buying insurance transfers the risks on to the insurer, who reimburses for the losses taking place during the policy term.
What is a Peril in Insurance?
Peril is the cause of damage or losses. It is an unfortunate event that causes loss or injury to property or human. For instance, there could be a loss of life in an accident. The accident here is the peril. You buy insurance to avail financial protection against the peril.
What is Exposure in Insurance?
Exposure is having the cause to undergo loss due to contingencies. For instance, if you are a frequent driver, you have a higher exposure to the risk of accidents. Thus, higher exposures are usually accompanied by higher premium rates.
Important Insurance Terms
Here are some common terms used in insurance policy documents:
- Policy Owner - The person buying the life insurance and paying the premiums, who may or may not be the life assured
- Life Assured - The person whose life the insurance plan covers
- Nominee - The individual entitled to receive the pay-outs on the life assured’s demise
- Policy Term - The duration for which the insurance policy provides protection
- Premium - The amount paid for keeping the insurance policy active
- Sum Assured - The agreed sum the insurer pays to the nominee in case of an unfortunate event
- Death Benefit - The amount, including policy riders and insurer-declared bonuses, if any, paid to the nominee on the loss of life assured (may be equal to or greater than the sum assured)
- Rider Benefit – The Optional benefits that expand the base coverage, available at additional premium rates
- Maturity Benefit –The amount received by the policyholder at the end of the policy period
- Policy Lapse – The termination of coverage on non-payment of due premiums even after the grace period
- Grace Period –The time-extension the insurer allows to make premium payments after the due date. This could be either 15 or 30 days depending on the policy terms and conditions.
- Revival Period - The time window allowed to reinstate a lapsed policy
- Free-look Period - The period in which a purchased policy can be altered/cancelled without losing the premium paid
- Claim – The request placed to receive the monetary benefits promised under the policy coverage, in case of loss event
- Exclusions - The situations for which the policy does not provide financial compensation
What Are the Types of Insurance?
There are two types of insurance.
General Insurance – It includes financial cover for loss or damage to assets such as house property, car, etc.
Life Insurance -This insurance consists of two variants.
- Term Insurance - This is the purest form of insurance where the nominees receive financial assistance during unfortunate times. It contains no investment component.
- Endowment insurance - These plans provide life cover and returns on the premiums paid. The returns can be guaranteed, or market-linked as in the case of Unit Linked Insurance Plans (ULIPs). Thus, apart from the death benefit, these insurance products also offer maturity/investment benefits.
Consider your financial and insurance needs when you buy an insurance plan. It is important to avail the coverage from a trustworthy insurance company. A creditable insurer advises on the type and extent of coverage needed and supports a seamless claim filing and settlement process. Hence you need not worry about the completion of the requisite formalities in your absence.
Buy Insurance Coverage that Suits Your Needs with Tata AIA
TATA AIA Life Insurance provides specially curated life insurance products divided into different categories addressing varying financial & protection goals.
- Protection Solutions - Pure form of life insurance through term plans
- Wealth Solutions - ULIPs offering a mix of insurance and market-linked investments
- Savings Solutions - Non-linked insurance plans independent of the stock market’ performance
- Retirement Solutions - Address to post-retirement income needs along with life coverage
- Insurance Riders – Extension of coverage for accidental death and disability and life-threatening diseases for a nominal extra premium, along with the option for waiver of premium in case of a contingency
Product knowledge aids in making informed decisions. Besides, understanding the commonly used jargons further simplifies the selection process.
Compare policies online and buy one that meets your financial needs best.