The insurance industry is one of the fastest growing sectors in the country. Statistics show that the annual market of this sector is likely to reach over 250 Billion Dollars by the year 2020. In terms of penetration among the masses, however, the existing percentage is only 3.49 percent.
The key determinant here is that most salaried individuals and investors in India believe that purchasing a life insurance plan doesn’t have an attractive rate of return. This misconception is mainly due to the usage of jargons and difficult to understand underwriting procedures.
In this post, we look at some of the common jargon used in insurance plans:
- Nominee Vs. Beneficiary
A nominee is an individual who will receive the insurance proceeds when the policyholder dies. Whereas, the beneficiary can be a number of people or an entity who will receive the proceeds. The main difference between these two is that a nominee is not the owner of the insurance proceeds. A nominee’s role is to manage the death proceeds and hand it over to the beneficiary who is the default owner of policy proceeds.
The beneficiary can be spouse, parents, children or siblings. The nominee can be a person close enough and trustworthy who will pass the proceeds to the legal heir.
- Maturity Vs. Death Benefit
Maturity benefit is the amount that the insurer pays to the policyholder when he/she outlives the policy term. Whereas, the death benefit is the amount that an insurance company pays to the nominee in case of policyholder’s demise during the policy term.
Many times, people confuse death benefit with the sum assured; however, it is not true. The death benefit can be higher than the sum assured in case the policyholder purchased additional riders.
- Sum Insured Vs. Sum Assured
Sum assured is the pre-decided amount that is paid in case of any eventuality by the insurance company to the insured. For example, if the assured sum is Rs. 10 lakhs and the policyholder suffers an eventuality, disability or death, the beneficiary receives a lump sum amount of Rs. 10 lakhs.
In case of sum insured, it is the upper limit of the amount that an insurer is liable to pay to the policyholder in case of an eventuality. For instance, a policyholder purchases a policy with a sum insured of Rs. 3 lakhs. After some time, he/she meets an accident and bears a financial loss of Rs. 1 lakh. In such a case, the insurer is liable to pay him/her only Rs. 1 lakh. However, if the losses incurred are more than Rs. 3 lakhs, the insured will have to pay the extra amount out of his own pockets.
- Free Look Period Vs. Grace Period
Free-look period is a time period during which an insured can return a policy, if he/she is not comfortable with the proceedings. The insurance company refunds the premium after deducting expenses incurred during medical exam, stamp duty charges and other charges. According to IRDAI, the free look period of a Term insurance plans in India is 15-30 days after receiving the policy document.
The grace period, on the other hand, is the extension that the insured is provided to pay his/her premium dues. Leading insurers like Future Generali offer their customers a grace period of 30 days in case of late premiums payments.
- Surrender Value Vs. Paid Up Value
Surrender value is the sum paid out by the insurer in case the policyholder decides to discontinue the plan before maturity. If the policyholder decides to surrender the policy during the early years, the surrender value roughly amounts to 30 percent of the premiums paid till date of surrender (can vary from insurer to insurer).
If the insured discontinues to pay premiums on time, the insurance company will offer him/her to convert the policy in a reduced paid-up policy. Under this, the sum insured will be reduced, and the benefits that were payable before will be related to the reduced sum insured or the paid-up value. This option is mainly available in ULIP plans and endowment plans.
‘Bottom Line’
Life insurance is a complex product,and so are the terminologies related to it. While going through the policy documents, you will often come across terms that might confuse you. So, do read the insurance documents properly and differentiate between these jargons. It will help you in making the right decision and secure the future of your near and dear ones.
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