Life Insurance Jargons: Yet Another 10 Commonly Used Terminologies Explained Simply
Thank you for the fabulous response and the feedback to the previous article, which also happens to be the first part of this mini-series on demystifying life insurance jargons. The jargons that I simplify in this article are based on the feedback of the previous article. Apologies in case the terminology that you requested to be simplified doesn’t feature here, I would do another article to address them. Sooner than later!
1. Underwriting: This is a process by which a life insurance company assesses and classifies the risks. Based on the assessment they decide whether to insure a particular life and if so, on what basis. The intention here is to charge appropriate premiums
2. Benefit Illustration: This, as the name suggests, is a document that illustrates the benefits of a given plan. It is a customized document for the potential policyholder and mentions the expected benefits along with cost and charges associated with the plan.
Pro Tip: The Benefit Illustration (BI) is typically shared with the customer at the time the contract is being sold. However, in Singapore, whenever needed, the policyholders can request for an updated BI reflecting revised maturity benefit based on projected investment rate of returns
3. Projected Investment Rate of Returns: The projected invested rate of returns are investment returns that the participating fund is expected to earn after accounting for expenses. In Singapore, the insurers are prescribed to project the benefits at 3.25% per year and 4.75% per year.
Clearly, investment rate of returns are not guaranteed and hence the bonus, which contributes towards the non-guaranteed benefit could be different from those identified in the Benefit Illustration at the time of buying. While investment return is one of the main drivers for bonus declared each year in a participating endowment policy, the detailed mechanism behind the calculation of bonus rates can be found in this article.
4. Freelook Provision: Almost all life insurance contracts across the globe come with an option to cancel the policy in the first few days of the contract. In case the customer is unhappy with the policy terms, the customer can cancel the policy and only minor charges against medical fees are deducted. In Singapore, a customer can avail the option within 14 days after receiving the contract.
In simpler terms, it is an option to get the refund if you don’t like the contract terms!
5. Policy Loan: Typically, a life insurance policy with cash value come with an option to avail loan against the contract. Essentially, if you need money the life insurance contract can be used as collateral to take out a loan from the life insurer. The loan amount is typically capped at 80% of the surrender value.
While this is a great feature offered by life insurance firms, it might be a good idea to compare the interest rate offered with the prevailing market rates. And of course, one could always consider selling it to fidentiaX!
6. Maturity Date: This is agreed date when the life insurance contract matures and the insurance company pays the lump sum benefit.
For example, if an endowment contract was bought on 1-Jan-2000 with the policy term of 20 years, the policyholder can expect a lump sum pay-out on 31-Dec-2019
7. Life Expectancy: This, in simple terms, is an average lifespan of the individual. The life expectancy is calculated based on the mortality tables. Based on the recent studies life expectancy in Singapore is approximately 83 years.
8. Paid-up Option: It is an option that the insurance company offers to the policyholders when they are not in a position to pay premiums. This option lets the policyholder lower their sums assured and in return, they are relieved from the obligation to pay future premiums
9. Total and Permanent Disability: While the definition of Total and Permanent Disability (TPD) varies with the insurer, it refers to the condition when life insured is unable to earn living and the condition persists for at least 6 months. In such case, a payout is made if the life insured had opted for the TPD rider.
10. Living Benefit: Unlike Death Benefit, which is paid when the life insured dies, the living benefits are paid when the life insured suffers from Terminal Illness or TPD. These are also known as accelerated death benefits as the benefits are accelerated and paid before death.
With the hope that this article made life insurance simpler to understand, I am signing off. Please do leave your feedback — they mean a lot to us!
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. The article is not a substitute for financial advice and readers are recommended to consult their respective financial advisers.
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.