Insurance could be overwhelming for anyone who tries to decipher the legal maze of the industry. However, for common investors and taxpayers knowing a few commonly used terms is more useful than understanding the deeper concepts.
So, here are the seven most common life insurance terms with their meanings and use in life and unit-linked insurance plans.
1. Premium Payment Term
Each life insurance plan has a policy term and a premium payment term. While policy term defines the length of time the cover will continue, premium payment term or PPT defines the length of time you will need to continue paying the premiums.
For example, you can buy a 30 years life cover with a premium payment term of only 15 years. This will mean that in 15 years you will pay all the premiums for the 30 years’ life cover.
In general, the premium payment term is equal to the policy term, and this combination is called a regular pay policy. But you can choose to pay the premiums faster by choosing a limited pay option, which allows for a faster premium payment.
Paying premiums early provides you with two benefits - Savings on the total premium payable and stress-free life with a life cover without the worry of lapse
2. Premium Payment Mode
Life insurance policies use the term ‘mode’ to represent the frequency of payment. For example, the 'mode' is used as ‘premium payment mode’ or ‘the mode of benefit pay-out’. In both places, the meaning of the term ‘mode’ remains the same.
The mode of premium payment could be monthly, quarterly, or annually. In case of benefit amount payout modes can be a lump sum or one-time payment or monthly, which is also called regular payment mode.
The online term insurance plans like iSelect Star from Canara HSBC OBC Life Insurance offers the payout of death claim benefit to the family in a lump sum and regular income mode. Regular income payout is quite useful for the family which needs this regular income to run the household expenses and meet their regular needs.
3. Terminal Illness
Terminal illness is the term given to a rapidly progressing illness which is often incurable or at least does not yet has a definite cure. Some of these dreaded illnesses are the cancer of many types, renal failure, and heart attack to name a few.
Because these illnesses do not have a definitive cure and the treatment costs alone could ruin a family’s financial future, you can insure yourself against them using critical illness insurance.
Cover for these terminal illnesses are inbuilt with the term insurance plan by Canara HSBC OBC Life Insurance. However, you can also purchase a separate cover in case you already have term insurance and only need to protect against these illnesses.
4. Total & Permanent Disability
Disability is a broad term for an insurance contract which needs to define each situation with scientific accuracy. Thus, the term disability has been assigned a few prefixes, which help determine the type and severity of the disability.
For example, a fractured bone in the leg is also a disability, but it’s a temporary one and a partial disability as the person can still move around on his/her own. However, fracture in both legs would turn it a temporary total disability.
Similarly, insurance contracts define a total bodily inability to move as a total and permanent disability when it becomes incurable. Causes of such a disability could be an accident or a terminal illness.
Under life insurance total and permanent disability is treated severely enough for the policy to pay the entire benefit amount under claim.
In the case of less severe disabilities, the policy will pay a lower amount.
5. Paid-Up Value
Paid-up value is the value a policy acquires after you have paid a specific number of premiums. The number of premiums may vary from policy to policy. However, the general period is two to three years. Paid-up value is a reduced sum assured value.
For example, you purchase a policy with a sum assured of Rs. 20 lakhs, for 20 years, and were expected to pay the premiums for the next 10 years. If you stop paying the premiums after say three years, the policy will acquire paid-up value close to 30% of its original sum assured. That is, equal to the percentage of total premiums you have paid.
Different policies will treat this sum differently, however. For instance, a savings plan may use this value to estimate your surrender value of the policy.
On the other hand, a ULIP may work entirely differently. You may receive a minimum guaranteed interest rate on this amount until you either revive or surrender the policy.
6. Grace Period
You need to pay the premium on or before the due date for any life insurance policy. If the due premium is not paid for a policy, it is assumed to be in paid-up and the benefits are limited for the policy.
However, the policy will not acquire paid-up value, if you can deposit the premium within the grace period after the due date. If you are paying the premium in annual mode, the grace period for you will be 30 days after the premium due date. In any other mode, the grace period is limited to 15 days.
7. Lock-in Period
Lock-in period usually applies to Unit-Linked Insurance Plans and many investments other than life insurance as well. This period refers to the time when fund movement will be limited to inflows to the policy. So, you can invest in the policy within the lock-in period, but withdrawals are not allowed.
The lock-in period for ULIPs is five years. So, any partial withdrawal from the accumulated funds is possible only after the policy completes five years.
This lock-in period for ULIPs is also the minimum investment period offered in ULIPs. If you stop paying the premiums within the lock-in period, the policy will discontinue, and the funds moved to a discontinued policy fund.
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