Solving the Insurance Enigma

The insurance industry looks like a complicated enigma and with the insurance jargons, we feel that its better if we just stay away from getting into it. However, insurance in an important product that protects us from various uncertainties of life, be it some health disease or accidents. It should be involved in every individuals’ financial portfolio. So, here I am making the complicated insurance world a little easy so that everyone can understand it while making their important financial decisions.

Insurance, in simple terms, is a contract (which is called as a policy) in which the policy buyer gets financial protection and reimbursement on losses from the insurer or the insurance company and in return, the buyer spends small amount on periodic payments.

In this transaction, the one who is paying the small periodic amounts is called the policyholder. Life assured is the one for whom the insurance is purchased. Life insured and policyholder may or may not be the same person. For example, if a father bought life insurance policy for his children, then the father is the policyholder whereas, his children are the life insured. Alternatively, if I bought a life insurance for myself, then I am the policyholder as well as the life insured for the insurance.

Going further, sum assured or coverage is the amount of money the insurer promises to pay to the policyholder if he/she incurred the loss for which he/she is buying an insurance. Death benefit is a common insurance jargon that you might hear which is almost same as the sum assured. The only difference in both is that death benefit can be sum assured or even higher than that, which may include rider benefit (if any), and/or other benefits. So, if you have a fire insurance and your house got burned in the fire, you incurred a loss and hence your insurer will pay you for the loss and that payment will be your policy’s sum assured or coverage. This sum assured and other benefits will go to your nominee (after the claim process) who is the legal heir nominated by the policyholder if something unfortunate happens to the policyholder.

Riders are additional features you can get apart from the basic policy by paying some extra amount (like an upgraded, premium version of the basic policy).

Also, policy tenure is basically the time period for which the insurance company will provide the policyholder financial protection or coverage (like duration for the insurance to be valid). However, be aware that maturity age is not same as policy tenure. Maturity age is the age of the life insured at which the policy ends. So, if you buy a life insurance when you are 30 years old with a maturity age of 60 years, then your policy maturity age is 60 years but your policy tenure will be 30 years.

Furthermore, the most important term, which affects our finances the most is premium. Remember, earlier I mentioned that the policy buyer, has to pay small amounts periodically against the protection they get? Well, that small payment is called as premium. It is important to keep paying the premiums as per their schedules (as per the premium payment term/mode/frequency) to keep the policy active.

Another point to consider is the free look period which is applicable to all new life insurance policies purchased. It is a time frame during which one may choose to return the purchased policy. So, if you have bought a wrong insurance policy or are not comfortable with its terms and conditions, you can return it during this time period and get back refund after deduction of some charges. Also, if you have bought a policy and for some reason cannot pay its premium on time, you can get what is called as a ‘grace period’ which is like an extension to the premium payment deadline by some days, but if you still cannot pay the premium, then the policy is terminated. However, if you want to continue the policy, then you can re-activate it during a specific period after the grace period which is known as a revival period. You can also get an option of paid-up value in which the sum insured is reduced to proportion of the premiums paid and the policy does not lapse.

If you want to discontinue your policy before the maturity age or tenure, then you get some amount in return which is called as surrender value. It is important to compare or have a clear understanding of this surrender value before entering into the insurance contract.

A very important thing to note is that all the premiums paid towards the life insurance plan are eligible for deductions under Section 80 (C) of Income Tax Act, 1961. The maximum amount that one can claim as deductible is Rs. 1.5 lakh. The benefits paid to the policyholder/nominee are tax-free under Section 10 (10D) of Income Tax Act, 1961. So, insurance policy does not only protect you from uncertain losses, but it also helps to reduce your tax liability.

Lastly, before you buy any life insurance, read ‘Exclusions’ carefully. These are things that are not covered under a life insurance policy, and against which if claimed, insurance company wouldn’t pay any benefit. For example, Suicide, is an exclusion in any life insurance plan.

To conclude, these are some important terms that everyone should know before they buy an insurance policy. I think, when you look at insurance as a product instead of a contract or policy, it becomes easier to understand it. That way, the jargons do not seem like a complicated puzzle and we don’t run away from insurance or related topics. With these terms in mind, and considering the insurance as a hedge, anyone can easily buy a policy that is best suited for them and their financial decisions are taken more confidently and accurately

MIT – WPU Scholl of Economics, BSc ( Honours – Economics)