Life insurance policies come loaded with technical terminology and industry-specific jargon that can make choosing the right coverage seem like learning a foreign language. Yet, having the right life insurance is critical to responsible financial planning. This comprehensive guide breaks down the most essential life insurance terms and demystifies the jargon in simple language. Whether you're considering buying your first policy or expanding your coverage, this primer will empower you to navigate the process with clarity and confidence. With critical terms explained and typical policies translated, you'll gain the understanding you need to make well-informed decisions about protecting your family's financial future.
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Life insurance is a contract between an insurance policyholder and an insurance company that offers financial protection for the policyholder's beneficiaries in the event of the policyholder's death. Here are some key points about life insurance in more detail:
The primary purpose is to provide financial support for dependents and family if the insured person passes away. The insurance company pays out a lump sum payment known as the "death benefit".
People buy life insurance to ensure their family's financial security if they die prematurely. The payout can cover final expenses, pay off debts, fund children's education, replace lost income, etc.
There are different life insurance policies - term life, whole life, variable life, universal life, etc. Term life is the most commonly purchased as it offers affordable, pure insurance protection for a set period.
Life insurance policies require the policyholder to pay regular premiums to keep the policy active. The insurance company calculates premiums based on age, health status, lifestyle risks, policy amount, etc.
The policy has a beneficiary - the person/people authorised to the death benefit. The policyholder gets to decide who they name as their beneficiary.
The policy has a "sum assured"—the guaranteed amount the insurance company will pay upon the insured's death.
Here are explanations of the most common terms associated with life insurance policies:
The policyholder is the individual who purchases the life insurance policy and is responsible for paying the premiums. As the policy owner, the policyholder can modify policy aspects, such as changing beneficiaries, adjusting coverage amounts, and adding or removing riders.
The life assured is the individual whose life is covered by the insurance policy. Upon the death of the life assured, the insurance company pays the death benefit to the nominee. It’s possible for the policyholder and the life assured to be different individuals, such as when a parent purchases a policy for a child or a spouse.
A nominee is the person designated by the policyholder to receive the death benefit in the event of the life assured’s death. The nominee does not have ownership rights over the policy but is the recipient of the policy's benefits. The policyholder can change the nominee at any time during the policy term.
The sum assured is the guaranteed amount that the insurance company pays out to the nominee upon the death of the life assured. The sum assured is typically calculated based on several factors, including the policyholder’s income, expenses, outstanding debts, and the financial goals of dependents.
Premiums are the policyholder's periodic payments to keep the insurance policy active. Premiums can be paid on various schedules, such as monthly, quarterly, semi-annually, or annually. The premium amount depends on factors like the sum assured, the age and health of the life assured, and any lifestyle conditions.
Riders are optional add-ons to the primary life insurance policy that provide additional coverage or benefits. Everyday riders include accidental death benefits, critical illness coverage, and permanent disability benefits. Adding riders to a policy typically increases the overall premium.
A claim is a formal request to the insurance company to process and pay out the death benefit. The nominee or legal beneficiary must submit necessary documents, such as the death certificate, hospital records, and policy documents.
The free look period is mandatory (usually 15-30 days) after the policy’s commencement. During this period, the policyholder can review the policy’s terms and conditions and return them if they are unsatisfied. The policyholder can also receive a refund of the premiums paid.
The surrender value refers to the amount of money the policyholder will receive if they choose to terminate or surrender the policy before its maturity or before any covered events occur.
The policy term is the duration for which the term life insurance policy remains active. Coverage is provided only for the specified term, which can range from 5 to 40 years.
Term life insurance solely covers the risk of death. There is no investment component, and the only payout is the sum assured in the event of the life assured’s death during the policy term.
The death benefit is the sum assured or riders payable by the insurance company upon the death of the life assured during the policy term. It can be paid out as a lump sum or as regular income to the nominee, as specified by the policyholder at the time of purchase.
While most term life insurance policies do not offer a maturity benefit, some policies provide a return of the premiums paid if the life assured survives the policy term. Maturity benefits are not expected in term life insurance. Still, they can be found in some policies like TROP, which return the premiums paid if the policyholder outlives the policy term.
This term refers to the duration the policyholder must pay premiums to maintain the policy. It can be equal to the policy term or shorter, such as with limited or single-pay options. Shorter payment terms typically result in higher annual premiums but lower total premiums.
Some term life insurance plans allow conversion to permanent life insurance within specified time frames without requiring new proof of health or further underwriting. This option provides flexibility for policyholders who want long-term coverage.
Renewability is the option to continue or renew the term policy without undergoing a new health evaluation. It's essential to check the policy’s fine print for specific renewability clauses. Renewable term life insurance policies offer the assurance of continued coverage without the need to reevaluate the policyholder’s health.
Premiums paid towards term life insurance are eligible for income tax deductions under Section 80C of the Income Tax Act, up to Rs 1.5 lakhs annually. Additionally, any claim proceeds are exempt from income tax under Section 10(10)D, providing financial relief to beneficiaries.
Traditional term plans offer fixed coverage and rigid terms that often don't address changing needs over time. The ACKO Life Flexi Term Plan offers a paradigm shift. It gives you unparalleled power to customise your policy according to your evolving responsibilities and priorities.
Financial needs and dependents increase with significant milestones like marriage, kids, home loans, etc. ACKO Life Flexi Term allows you to increase or decrease your coverage anytime to match your priorities perfectly.
Why pay premiums longer than needed or find new coverage when the existing one expires? ACKO Life Flexi Term allows you to extend or shorten your term. Increase the term when dependents are more. Lower it as they become independent. It adjusts to your life stages seamlessly.
You can select whether nominees should receive a lump sum payout to invest as they deem fit or a monthly income for steady finances.
The core life cover covers your family's financial needs. But you can enhance your coverage by adding optional riders for accidental death, disability, and critical illness at nominal costs. This will give you complete peace of mind.
Life insurance is essential to financial planning to secure your family's future. This comprehensive guide explains critical terminology related to life insurance policies in simple language to help you make informed decisions. Awareness of critical terms empowers you to choose suitable coverage per your needs and goals. It is critical to evaluate your specific requirements and identify an ideal insurance solution for the long-term financial safety of your loved ones.
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Reviewed by Vaibhav Kumar Kaushik 
Acko Technology & Services Private Limited
#36/5, Hustlehub One East, Somasandrapalya, 27th Main Rd, Sector 2, HSR Layout, Bengaluru, Karnataka 560102
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