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Basic Life Insurance Terms Everyone Must Know

When you go shopping, would you rather be knowledgeable or ignorant about some basic things that can help you make a smarter decision about buying the product? The answer is obvious. The same discipline and shopping habits should also be used when buying financial products such as Life Insurance. Here we share with you basic terms that everyone must be knowledgeable about, followed by an example to help you relate to these terms.

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1. Insured: The insured is the person who life is being insured.


2. Nominee / Beneficiary: This is the person who will receive the policy proceeds in case of death of the insured. The owner of the policy designates the nominee but the nominee is not a part of the insurance contract. The nominee is not required to pay any premium. The name of the nominee can be changed, unless the policy says otherwise.


3. Insurer:: The insurer is the Life Insurance Company that undertakes the responsibility to pay the policy amount to the nominee on the occurrence of the insured event. For example, LIC, Birla Sunlife, ICICI Prudential, HDFC Standard Life, SBI Life are all insurers.


4. Policy holder: This is the person who buys the policy or the one who owns the policy. The insured and the policy holder can be one and the same person, or they can be two different people.

   For example, if Rahul buys a policy on his own life, he is both the policy holder and the insured. But if Asha, his wife, buys a policy on Rahul's life, she is the owner and he is the insured. The policy owner is the person who undertakes the guarantee to pay the premiums. The insured is a part in the contract, but not legally bound to it to follow its terms.



5. Sum assured: This is the minimum amount of money that the policy will pay out to the nominee in case of the insured's death or the occurrence of the insured event.


6. Premium: A periodic or a single payment payment that a policy holder makes to the insurance company in exchange for the insurance company's obligation to pay out the sum assured.


7. Maturity: Some insurance policies are valid up to a certain period of time only. When this period expires, the policy is said to have reached maturity. At this date the policy holder receives a sum of money from the insurance company.


8. Lapse: When the policy holder is unable to or does not pay the premium any more, within the specified grace period, the policy is said to have lapsed. If certain conditions are met, a revival of a lapsed policy might be possible.


9. Free look period: Once you get an insurance policy, the rules offer you 15 days within which you can revisit your purchase decision. This gives you the time to go through the policy's fine print, understand how the policy is going to work and be convinced that you need such a policy before deciding to commit funds every year over the insurance plan's tenure.

Here are the above terms explained with a stylized example.

Raj and Sonali are a newly married couple. Raj is the sole breadwinner in the family. Raj plans to buy an insurance policy on his life so that in case of his untimely death Sonali's financial future can be secure. He decides to take a policy from LIC for a coverage of Rs 5 lakhs. He agrees to pay an annual premium of Rs 1,500 per annum for a period of 10 years. Going ahead with his plans, he applied for a policy and received the policy document on 15th December, 2009.

In this case study the following are the relevant details:

Insured: Raj
Policy holder: Raj
Nominee: Sonali
Insurer: LIC
Sum assured: Rs 5 lakhs
Premium: Rs 1,500 annually
Free look period: 15 days from 15th December, 2009

Comments

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Ashish Kelkar said : 22/12/2011	Good article, handy information on life insurance for a learner like me and people who are unaware about the terms used in life insurance. My company has insured all of us with the group insurance (http://www.futuregenerali.in/LifeInsurance/Group/GroupPlans/FutureGroupTermLifeInsurancePlan.aspx ) policy. I feel this is a very good step taken by our company. I just started with the research on this life insurance, group insurance and came across your article and thanks for the valuable information.
Amruta said : 04/09/2010	I like the way you have simplified the concepts.Good job.
Rajesh Chauhan said : 04/05/2010	Good Article