Insurance is a critical subject to understand for full financial literacy. There are many different kinds of insurance available to serve different purposes.
In this article, we will learn what is insurance and different terminologies of insurance. Insurance is highly in use in our day to day lives these days. Let’s get started with the basics understanding of insurance.
What is Insurance:
Insurance is an old term that was first used by Chinese and Babylonian traders. In simple terms insurance is a way of protection and security against financial losses. Insurance is necessary for financial losses from unforeseen circumstances in the future.
A group of people or individual invest their money and enters into a contract with an insurance entity. In the unforeseen events in the future, the insurance company will make payment or reimbursement as per terms and conditions.
It is important to understand that there is no visible product or instant service you will receive after buying an insurance policy. In other terms, it is to reduce your financial risk in any unfortunate event in your life.
Let us understand few terminologies used in insurance:
1. Insurer: Insurer is a company, organisation or a firm. It provides financial protection and security by selling insurance policies or products to customers.
2. Insured (Policyholder): Insured is the one who buys the insurance policy.
3. Insurance Policy or Contract: Policyholder and insurer enter into a contract it is called as insurance policy. The terms and conditions are set at the policy issuance stage.
4. Insurance Premium: Policyholder pays money towards issuance of policy. It is insurance premium. There may be extra premium charged on risk factors which is called as loading.
5. Underwriting: Insurer assesses the risk involved in the contract. The risk parameters are the insured’s age, income, occupation, family history, medical history, location, etc. Underwriting checks the risk factors to accept or reject policy. Medical Underwriting and Financial Underwriting are its main categories.
6. Sum Assured(face amount): Policyholder and insurance company can decide it at the issuance stage of the policy as per terms and conditions. The nominee or beneficiary gets the amount at the end of the contract as per terms and conditions.
7. Beneficiary(Nominee): The beneficiary gets communication under the policy and the sum assured. There can be two types:
- Primary Beneficiary: He/ she is the primary beneficiary.
- Contingent Beneficiary: Contingent beneficiaries are entitled to receive the amount if the primary beneficiary is no more. The nominee is appointed at the start of the policy. The nomination change is valid between the policy term. The nomination can be changed after the death of the policyholder.
8. Appointee: If the nominee is minor or no more, an appointee gets all the communications and the money under the policy.
9. Insurable Interest: Nominee should be the legal heir of the policyholder. Third-party like friends and distant relatives cannot be a nominee or beneficiaries. It means the nominee should be the legal heir of the insured to avail of the benefits under the policy.
10. Policy Servicing: Premium acceptance and maintenance of the policy happens at this level. Premium payment notice, premium payment certificate, revival of policy if any, happens at this stage.
11. Claims: After an unforeseen event like death of insured or hospitalization as per contract happens, the nominee or beneficiary can file a claim. Claim is to avail the policy sum assured as per contract.
12. Riders: Riders are the additional benefit along with the base policy. It is to enhance the benefits for the customer. Policyholder can buy riders at the inception of the policy with minimal premium increase. Basic riders are:
- Accidental Death Benefit Rider
- Accidental Death and Dismemberment Rider
- Term Rider
- Critical Illness Rider
- Waiver of Premium Rider
13. Reinstatement or Revival of Policy: Reinstatement or Revival of Policy happens in lapsed policies if non-payment of the renewal premium within the grace period. To reactivate the contract or policy one has to pay the interest amount with a premium amount. Terms and conditions of revival changes depending upon if the policy is revived within six months or after six months.
Reviving a life insurance policy after 6 months makes you fill the form called a Certificate of Insurability or Health Certificate. It is primarily to declare about your health condition which may have changed in 6 months span.
14. Grace Period: Grace period is the duration of around 30 days from the due date of renewal premium payment. It is offered by the insurer to the insured to pay the renewal premium if the due date of premium payment is missed. The period is of 30 days and differs from the type of products and insurers.
15. Free Look Period: It is the time frame of 15 days within which you can re-visit the decision of buying the insurance policy or certain product. It means one can cancel the policy within a free look period depending on the premium, tax, or charges, etc post which insurer will refund the premium after deducting the medical examination charges if any, stamp duty charges, and other charges if any.
16. Tax Benefits: The premiums paid towards the life insurance policy are eligible for deduction under Section 80 (C) of Income Tax, 1961. Maximum amount that one can claim as deductible is Rs. 1.5 Lacs.
17. Maturity Benefit: On completion of the policy term is over the policyholder can avail maturity amount. In terms of policies, there is no maturity benefit applicable.
18. IRDA: Insurance Regulatory and Development Authority of India is a body that governs the management of all the insurance companies. IRDA has set guidelines that insurance companies need to follow to maintain discipline in the functioning of the insurance companies and consumers do not face any hassle after entering a contract with the insurance company.
Hope this article has answered your queries related to insurance and you would be more willing to invest your money in insurance to protect yourself and your loved ones. We will bring you more informative concepts related to investment in upcoming blogs. For any query, you may drop a comment below.