Glossary of Basic Insurance Terminology

Life is an exciting adventure, full of surprises at every turn. Now, think of insurance as your very own superhero cape, ready to protect you from the unexpected twists and turns in your life journey. It is like a shield for your savings and peace of mind. But does the world of insurance seem to be talking in some secret code language? Fret not; we are here to decode all the complex terms, from proposal to claim, from deductibles to premium, and from insurer to beneficiary.    

This chapter will help you understand insurance terminologies so that you can make informed choices and ask the right questions of your insurance provider. 

Common Insurance Terms That You Should Know

• Proposal Form

This is the form that you fill out to apply for the insurance cover. The proposal form includes personal details like name, age, address, communication information, etc. Moreover, it contains the details of the coverage you seek, i.e., the coverage amount, chosen tenure, etc. 

The insurance company assesses the risk using the information available in the proposal form. As such, the proposal form is said to be the basis of the insurance contract.

• Underwriting

After you apply for life insurance, an underwriter will be assigned to assess your risk and determine the appropriate coverage level and policy premium. This process is called "Life Insurance Underwriting." It also helps the insurance company understand how much risk they are taking by providing insurance to you. It involves considering various factors that might impact your cost of insurance, such as age, gender, medical history, lifestyle, interests, and financial stability. 

• Policy Document

After the insurance company underwrites the proposal form and grants the coverage, the insurance policy is said to be issued. The details of the issued policy are captured in the policy document, which is then sent to you. The policy document forms the evidence of insurance and can be issued in physical or digital format. 

• Premium

Premium is also called the consideration for insurance. Simply put, the premium is the money you pay for insurance coverage on an annual basis, quarterly, or however you have structured it with your insurance provider.

The amount you pay as a premium depends on risk factors that impact you as per insurance policy terms. For instance, in the case of life insurance policies, the premium depends on your age, health conditions, lifestyle habits, etc. In the case of motor insurance, the premium depends on the make, model, and variant of the vehicle, its age, insured value, etc. 

• Proposer

A proposer is an individual or entity that requests the insurance company to grant insurance coverage.

• Policyholder

The policyholder is the owner of the insurance policy and is responsible for paying the premium of the insurance policy.

• Life Insured/Assured

The life insured/assured is the individual covered under the policy, i.e., the individual whose life or health is insured under the insurance policy. 

The life insured/assured can be the same as the policyholder or someone different. For instance, if you buy a life insurance policy for yourself, you are the policyholder and the life insured. On the other hand, if you buy a life insurance policy for your spouse or children and pay the premium, you are the policyholder, while your spouse will be the life insured/assured.

• Coverage

The risks covered under the insurance policy fall under the head of coverage. If you suffer any of the covered risks, the insurance policy will compensate you for your financial loss. 

• Sum Assured and Sum Insured

The sum assured is a term that applies mostly to life insurance policies and guaranteed return insurance policies. Sum assured is the amount paid to you or your nominee should the insured event occur. It's the guaranteed sum you or your nominee get as the benefit of paying premiums. The sum assured is fixed at the time of purchasing the policy and remains unchanged throughout the policy term. This is why choosing the right sum assured is an important factor to consider when availing of insurance. Once the sum assured is paid out, the policy is considered terminated.  

Meantime, the sum insured is associated with non-life insurance policies such as health insurance, motor insurance, home insurance, etc. It is the money the insurance company gives to the policyholder as fair compensation when there is damage, loss, or injury during the policy period. It's meant to simply cover the costs you've had to pay, and it's not a fixed amount like the sum assured. 

• Riders

Riders are additional coverage clauses that enhance the coverage scope of the life insurance policy. Riders are optional coverage benefits you can add to your insurance policy at purchase or renewal.

Riders incur an additional premium added to the policy's basic premium if you add the rider to your basic insurance policy. 

• Exclusions 

Exclusions are a list of instances or losses which are not covered under the insurance policy. You will need to bear the costs yourself if you suffer from such losses. 

For example, health insurance plans do not cover cosmetic treatments. So, if you undergo cosmetic treatment, you must pay medical bills; the insurance company is not liable to pay you anything. Read the terms of your policy and scrutinise well for these exclusions before you sign up for the policy.

• Claim

An insurance claim is when you formally ask your insurance company to pay you for the losses you’ve incurred due to events that are covered by your insurance policy. It is a demand on the insurance company to fulfil its promise. 

However, note that a claim is only an application seeking compensation; it may be approved or rejected, paid in full, or partially paid. 

• Policy Tenure

Policy tenure is the period for which coverage under the insurance policy is undertaken. The tenure depends on the policy type you buy and how long you need the coverage. Life insurance plans allow policy tenures starting from 5 years and going up to 30 years and more. On the other hand, health and motor insurance plans usually have a policy tenure of 12 months, after which they are renewable.

• Premium Paying Tenure

Premium Paying Tenure is the period you undertake to pay the insurance policy premium. The premium paying tenure/term is applicable in the case of life insurance policies that run longer. Under such plans, you can choose from regular, limited, or single premiums and plan your payment tenure.

• Nominee

A nominee is an individual or entity entitled to collect the policy benefit from the insurance policy if the life insured dies. The nominee is entitled to withdraw the benefit but is not authorised to use it unless stated otherwise.

It is recommended to make a close family member, preferably your spouse, children, or parents, your nominee in your insurance and investment plans for hassle-free settlements in case of your premature demise.  

• Beneficiary

A beneficiary is an individual or entity entitled to use the policy benefits for their needs when you are not around. The beneficiary or nominee can be the same individual or different individuals.

For instance, if you nominate your spouse in an insurance policy and intend your spouse to use the policy money, the spouse will be the nominee and the beneficiary. However, you might nominate your spouse to receive the policy benefits but make your children the beneficiary. In this case, your spouse will receive the policy benefit, but your children will be the rightful owners of the money since they are the named beneficiaries.  

• Deductible

A deductible is an amount or limit up to which insurance claims are not paid. Deductibles form your out-of-pocket expense. If the claim exceeds the deductible, the insurance policy pays the excess claim. 

For example, a motor insurance policy has a deductible of ₹1,000. In this case, if you suffer a claim of ₹2,000, the insurance company will pay only ₹1,000 while you bear the rest of the claim of ₹1,000, which is the deductible limit. 

• Insurer

The insurer is the insurance company or insurance provider that offers the coverage. 

• Free-Look Period

After buying an insurance policy, if you are dissatisfied with the policy’s terms and conditions or if you have second thoughts and want to cancel the coverage, you can do so within the free-look period.

Also called the cooling-off period, the free-look period allows policyholders to cancel the coverage and get a premium refund. The free-look period depends on the type of insurance policy that you buy. 

• Grace Period

The grace period is the extended period allowed for premium payments if you miss the payment due date. Under life insurance plans, the coverage does not lapse or terminate during the grace period. You can pay the outstanding premium during the grace period and continue the coverage uninterrupted.

• Revival/Renewal

Revival is a term used in life insurance policies wherein you revive a lapsed policy, i.e., a policy wherein the coverage was suspended due to non-payment of premium.

Renewal is a term used in other general insurance policies wherein you renew or restart the coverage after the current coverage’s tenure has expired.  

• Claim Settlement Ratio (CSR)

The Claim Settlement Ratio (CSR) is a percentage that denotes the total claims paid by an insurance company against the total number of claims raised in a financial year. 

For instance, if an insurer gets 100 claims in a financial year and settles 95 of them, the CSR will be 95%.

A high CSR shows that the insurance company is trustworthy regarding claim settlements. It is an important parameter when comparing insurers to buy an insurance policy. 

Understanding these basic insurance terms is important as you can make an informed choice when buying the right type of insurance policy.