Life Insurance Jargons: 10 Commonly Used Terminologies Explained Simply
Life Insurance is considered amongst the most complex business. I have heard many jokingly say that it is because of actuaries the business looks complicated. While I don’t agree with the statement, I can certainly make it simpler to understand. The series of articles that I have written over the past several weeks is an attempt to make life insurance easy to understand. Thank you for the wonderful feedback especially for the most recent article on the appropriate level of life cover. It makes writing more fun!
For this week, I am addressing the long pending request on demystifying life insurance jargons. The article makes 10 most commonly used life insurance terminologies easy to understand. Feel free to reach out in case you wish any particular terminology demystified!
1. Life Insured: The person on which life is insured by the insurance contract. The life insured would generally be the breadwinner of the family. In case of an unfortunate event of death during the policy term, the death benefit is paid to the beneficiary
In some countries, Life Assured is used for Life Insured.
2. Policy Holder: The person who owns the insurance contract. It could be the same as the Life Insured however it need not always be the Life Insured. For example, when person A sells his life insurance contract through fidentiaX Marketplace, person A remains the Life Insured but the buyer becomes the Policy Holder
In some countries, Policy Owner is used instead of Policy Holder
3. Beneficiary: The person named in the insurance contract to receive the death benefit.
The Beneficiary may not always be the same as the nominee who is nominated to receive or “administer” the proceeds from the contract
4. Sum Assured: This is the guaranteed (and hence the term assured) amount that the Policy Holder or his nominees will receive. However, the actual amount could be more than the Sum Assured depending the type of the contract.
The other commonly used terms for Sum Assured are Sum Insured and Face Amount
5. Riders: This is an additional benefit attached to the insurance contract to make the cover more comprehensive. For example, most life insurance contracts in Singapore have an option to attach additional covers like Total and Permanent Disability or Critical Illness.
6. Waiver of Premium: This essentially means that the policyholder is not required to pay premiums in certain circumstances. For example, the Waiver of Premium (WoP) gets triggered when the life insured loses limbs due to an accident.
7. Bonus: This term is typically applicable to only participating endowment plans wherein life insurance companies announce a bonus each year. The bonuses once declared become guaranteed.
The bonuses can further be classified into the following three categories
· Reversionary Bonus
· Special Reversionary Bonus
· Terminal Bonus
8. Grace Period: This is an additional time offered to pay premiums after the premium due date. In case the premium is paid during the grace period, no additional interest is charged. In Singapore, the grace period is usually 30 days.
9. Assignment: This is essentially legal transfer wherein policyholder transfers his interest to another party. Two types of assignments are possible
· Conditional Assignment — as the name suggests is the transfer of rights would happen if certain conditions are met. The option is usually availed when the insurance contract is used as a collateral
· Absolute Assignment — means the complete transfer of rights. For example, when the life insurance policy is sold to fidentiaX, it essentially is an absolute assignment
10. Surrender Value: This is the amount paid to the policyholder on voluntary termination of the contract. In most cases, this is less than total premiums paid as life insurers recoup the expenses incurred in acquiring the contract.
Before I sign off, I will leave the link to one of my previous article for the curious souls who want to understand why insurers are fair in paying lesser than total premiums paid and how fidentiaX can offer more!
Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct.
About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.