How many of these insurance terms do you know?

f you are contemplating taking a life insurance policy, get ready for an overdose of jargon from your agent.

Let us help you understand what he is saying so you know what deal is being offered. Take a look at these terms.

1. The main players in the policy

i. Policy holder: The person who has taken the insurance policy and will have to pay the premiums.

ii. Beneficiary/ Nominee: The person who is entitled to receive the insured amount in case the policy holder dies.

iii. Insurer: The insurance company that offers the policy.

2. Premium

When you take a policy, you will have to pay the insurance company a fixed amount every year. This is the premium.

In some policies, this can be a one-time payment instead of an annual payment. These are referred to as single premium policies. Pay the premium once and for all and the policy will stay in force till the end of the coverage period.

3. Term

The term of the policy is the number of years for which the policy is bought. If you buy it for 10 years, the policy is described as one with a 10-year term.

4. Bonuses

i. 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, after the end of the term.

ii. Reversionary bonuses

Based on the performance of the company, the insurance company declares a bonus for policy holders every year.

You can get this amount after the end of the term. Reversionary bonuses are declared after the completion of the guaranteed bonus period.

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

5. Sum assured

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

6. Rider

It is an optional feature that can be added on to a policy.

You could compare it to a topping on a pizza. You have to pay an additional premium to avail this benefit.

For instance, you may take a life insurance policy and add on accident insurance as a rider.

7. 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.

8. Paid up value

If you discontinue to pay the premiums, but do not withdraw the money from your 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.

9. Maturity benefit

The amount that the insurance company has to pay you when the policy expires is known as the maturity benefit. It generally comprises the sum assured + bonuses.

Here is an example:

If you pass away

You are insured for 20 years (between the age of 30 and 50). If you pass away during this time, your spouse gets the maturity benefit. This will be Rs 2 lakh (Rs 200,000) along with the bonus (if any).

If you live to your 51st birthday

You are 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 company 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 is over. This amount is not guaranteed.

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, you will get back Rs 430,000.

10. Survival benefit

Some insurance policies make payments at specified intervals 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:

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

If you pass away

If you should die in the next 15 years, Rs 2 lakh (Rs 200,000) and bonuses (if any) will be paid to your spouse.

If you survive

This is what the insurance company will pay you:

After three years: Rs 20,000

After six years: Rs 30,000

After nine years: Rs 40,000

After twelve years: Rs 50,000

What you will get on maturity

You have been offered a sum assured of Rs 2 lakh (Rs 200,000).

But you have already been paid Rs 140,000 as can be seen above.

On maturity, the balance sum assured (Rs 60,000) + Guaranteed bonus + Reversionary bonus will be paid to you.

A tentative break-up

Sum assured: 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, you get back Rs 215,000.

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

The author is vice president, Derivium Capital & Securities Ltd.

Image: Rajesh Karkera