Life insurance in India is a sector which the common man has distanced themselves from. Most people have the perception that that it is a jargonised industry with a lot of complex terminologies. There are various terminologies used in life insurance which may be difficult for an average buyer to comprehend. Here are 9 life insurance terms explained as used in the life insurance sector.
Life Insurance in India: Life insurance terms explained
Premium: The amount that you pay for getting an insurance policy from the life insurance company is the premium. This can be paid regularly, in a periodic fashion or as a single amount.
Life Insured or Insured: The person whose life is insured by the life insurance contract. In most cases, the Life Insured is the breadwinner of the family. So, in case, the life insured meets with an untimely demise, the designated nominee is paid the full value of the Sum Assured.
Life Insurer or Insurer: The life insurance company that has insured the life of the customer. The life insurance company makes the payment of the Sum Assured to the designated nominees in case an event of death occurs to the Insured.
Sum Assured: This is one of the most significant terminologies used in life insurance. It is the guaranteed amount that you or your nominees will receive upon maturity or termination of the policy. This may be the minimum amount or the total amount that they receive, depending on the type of policy.
Riders: An additional benefit attached to the policy to enhance and make the cover more comprehensive. It offers financial protection over and above the Base Sum Assured. Some of the popular Riders like Waiver of premium provides you with the facility of continuously getting the benefits of the policy without having to pay the premium after a particular event.
Term: The tenure of the policy. The time till which the policy remains in force, provided you make timely premium payments.
Bonus: For participating life insurance plans, life insurance companies may announce a bonus or an additional payment that is given to the insured. Bonuses are accumulated and paid at the time of maturity.
Maturity/Survival Benefit: The amount payable by the life insurance company to the Insured on maturity of the policy. This is also called as survival benefit as it is paid to the Insured on his survival till the maturity of the policy. It includes the Sum Assured as well as bonus, if any.
Surrender Value: The amount paid by the life insurance company if you surrender or redeem your policy mid-way through the policy period. You are paid the surrender value and the policy is terminated.
Critical Illness: Critical illness is different than other common diseases. They refer to cancer, artery bypass surgeries, heart attack, stroke, kidney failure, heart valve replacement, organ transplant, paralysis, etc. Critical illness insurance plans are different from a regular mediclaim, and the coverage varies from policy to policy.
Traditional Plans: Traditional insurance plans cover term, endowment or whole life insurance plans. These plans are considered safer and risk-free as a specific pre-determined amount is paid upon the death of the policyholder or maturity of a term of the policy.
Non-Traditional Plans: Unlike traditional plans, these plans provide a window of investment in the market and pay out higher returns. It also presents an opportunity for the investor to partially withdraw funds and re-apportioned funds along with insurance coverage that can be increased or decreased as needed. However, these plans require the more active participation of policyholder as he is responsible for the investment. Unit Linked Insurance Plans (ULIPs) are the most common form of non-traditional insurance plans.
Section 80(C) Benefits: Section 80C of the Income Tax Act provides a deduction of the actual insurance premium paid by the policyholder in respect of his life insurance. This benefit is however restricted to Rs. 1,50,000/- per annum under current tax laws.
Section 80(D) Benefits: Section 80D of the Income Tax Act provides benefits of premium paid under medical policies up to Rs. 25,000/- as a deduction from total income of the policyholder.
Section 10(10D) Benefits: This section if Income Tax acts states that any sum received (including any bonus) by the policyholder or his/her nominee is exempt from tax unless:
- it is received under a keyman insurance policy
- it is received under section 80DD(3) or section 80DDA(3)
- The policy was issued after 31-Mar-2003 but before 01-Apr-2012 and premium paid during any of the years of policy exceeded 20% of Capital Sum Assured.
- The policy was issued after 31-Mar-2012 and premium paid during any of the years of policy exceeded 10% of Capital Sum Assured.
However, any sum received in the event of a death of policyholder is exempt from tax.
Understanding the various terminologies used in life insurance will help dispel any myths or doubts about life insurance in India, on the whole.