Does insurance terminology appear incomprehensible and confusing to you? We have simplified them to help you understand your insurance policy better.
By Dr Shyam Kumar
Uncertainties are a part of life. So, we need a safety cover to protect ourselves and our family from the many unforeseen perils and risks. An insurance policy acts as a bulwark against most dangers and risks we are exposed to. However, choosing and buying an insurance policy is a confusing process for many. This is especially so due to the use of legal and technical jargon in an insurance policy document. To make it easier for you to understand insurance vocabulary, we list some common insurance terms and explain what they mean.
Actual cash value (ACV): It is also called the 'fair market price' of any given item just prior to its loss or damage. To calculate ACV, the depreciation is subtracted from the replacement cost of the item.
Agent: An insurance agent is an individual who is authorised to negotiate and sell insurance policies on behalf of an insurance firm.
Beneficiary: An individual or entity named in an insurance policy to receive money and other benefits. So, it is important to choose a beneficiary carefully.
Claim: A claim is a request for compensation made to the insurer by a policyholder in the event of suffering a damage or loss. The claim is investigated and verified by the insurance company to ensure it is covered under the terms and conditions of the policy. If the claim is approved, payment is made to the insured.
Claim amount: It is the sum of money payable by the insurer in the event of an untoward happening such as loss of life, hospitalisation or damage to house or vehicle of the insured person. The claim amount is also paid out upon maturity of an insurance policy.
Co-payment: Also called ‘co-pay’, it is an option that is available in quite a few types of insurance policies. It refers to a certain percentage of the bill that the policyholder has to pay out of his own pocket, while the remaining amount is paid by the insurance company.
Coverage: It means the extent of protection an insurance company is willing to provide to an individual or entity. In other words, it is the amount of money paid to the insured in the event of death, accident, critical illness or loss of property.
Deductible: It is the amount that you are willing to pay out of your own pocket to meet expenses incurred after which insurance kicks in. This helps to bring down the insurance premium by a certain extent. A higher deductible amount results in a lower premium.
Exclusions: It is a list of specific conditions or events documented in the policy for which the insurance company does not offer any cover or benefits.
Indemnity: It is a contract which offers security for the insured protecting him against loss, damage, liability or financial risk with an obligation to pay for the insured. It stipulates that the insured should be compensated in proportion to the loss incurred only.
Insurer: It refers to the company which undertakes to provide financial protection to someone against loss from unexpected events in return for payment of a premium.
Insured: It denotes a person, property or an organisation that is covered against unforeseen events under the terms and conditions agreed upon in the insurance policy.
Lapse: Cessation of insurance coverage in case of missed premium payments by the policyholder. Usually a short grace period is available to the policyholder after one missed payment before the policy is considered to have been lapsed.
Maturity date: It is the date on which the cash value of the insurance policy is payable to the policyholder at the end of its term.
Money back policy: In a money back insurance scheme, a percentage of the sum assured is paid out to the policyholder periodically instead of a lump sum on reaching maturity.
Nomination: A person holding an insurance policy on his own life can designate any person to receive the policy proceeds in the event of his death. This process is termed as nomination and the appointed person is called the nominee.
Policy period: It is the intervening period between the date on which the policy becomes effective and the date on which all coverage ends.
Reinstatement: It is the provision where a policy that has lapsed due to failure of premium payments can be restored. Reinstatement of a policy is considered based on the policy conditions such as payment of an additional premium as compensation or providing proof of insurability.
Sum assured: It is a predetermined amount of money which the insured is guaranteed to receive from the insurance company on the occurrence of an insured event. This excludes any bonus amount.
Sum insured: The maximum amount your insurance company is liable to pay in the case of an eventuality. The sum insured may not be sufficient to cover the total extent of your loss in which case the person is said to be under insured.
Burglary insurance: This type of policy covers the homeowner from losses caused by theft or housebreaking.
Peril of nature: It refers to events that cause danger to life and property from acts of nature. The most common examples of nature’s perils are heavy rains, flood, infernos, lightning and earthquake. ‘Act of God’ is also a term used to refer to such natural calamities.
Coinsurance: Coinsurance refers to payment of a certain percentage of the medical expenses by the policyholder after the deductible has been met.
Cumulative bonus: For each claim free year in a health insurance policy, the insurance company adds 5 per cent to the sum assured as an added benefit. Some insurance companies also offer a 5 per cent discount in the subsequent premium as cumulative bonus. However the cumulative bonus amount can never be greater than 50 per cent of the capital sum assured.
Long-term care: Some patients require long-term assistance at home to perform their daily activities. It may be due to age-related disabilities, trauma, surgery or due to chronic illnesses. Long-term care policies cover the medical and non-medical expenses of such individuals.
Disability insurance: The beneficiary of a disability insurance is protected from loss of income and financial insecurity in the event of a short-term or long-term disability. The insurance company pays the insured person a percentage of his monthly income during the period of disability.
Network hospitals: A list of hospitals with which your health insurance provider has an agreement to provide cashless services. If you avail treatment in a non-network hospital, the policyholder has to meet the expenses on his own and can get the bills reimbursed later by the insurance provider.
Pre-existing condition: Any medical condition which existed prior to the purchase of the health insurance policy and which is not covered by the insurance provider under the pre-existing disease clause. Hospitalisation expenses due to pre-existing illnesses can be claimed after a certain waiting period or permanently excluded from coverage depending on the policy provider.
Third party administrator (TPA): TPAs are agencies licensed by the Insurance Regulatory Development Authority (IRDA) to primarily provide assistance with cashless claims to the policyholder. TPAs handle customer service, process paperwork, verify claims and carry out other administrative processes on behalf of the insurer.
Assignee: It is that person to whom a policyholder (assignor) legally transfers all his interests in the policy. In case of death of the assignor, all the benefits go to the assignee.
Death benefit: The purpose of a life insurance policy is to provide financial support to the beneficiary in the event of death of the policy owner. This payment made to the beneficiary by the policy provider is termed as death benefit.
Endowment policy: This policy functions as a long-term savings product in addition to providing life cover to the policyholder. On maturity, the surviving policy owner receives a lump sum amount which can then serve as a retirement fund or can be used to meet other financial needs.
Life assured: This term refers to the individual whose life is covered under the insurance policy.
Rider: A rider is a provision in a life insurance policy by which value of the base policy can be enhanced based on various options. It is also termed as add-on cover and can be purchased at an additional premium. Some common examples of riders added to life insurance are critical illness rider, permanent disability rider and accidental death benefit rider.
Term insurance: This type of policy ensures that your loved ones do not face financial hardships in case of your unexpected demise. It covers the life of the insured for a specific period of time. You can get maximum cover for the lowest premium in comparison to other types of life insurance policies.
No claim bonus (NCB): It is similar to cumulative bonus except that NCB is mostly associated with car insurance policy. It is a discounted premium that you can avail during renewal if you have not registered any claims during your previous policy term. The percentage of discount increases based on the number of consecutive claim free years which is capped to a limit of 50 per cent. In case you sell your vehicle and purchase a new one, your NCB can be transferred to the new vehicle.
Certificate of insurance: The certificate of insurance is issued by the insurer and is separate from the policy document. It is a document which is to be always carried in the vehicle.
Third party insurance: This type of insurance is commonly associated with motor vehicle insurance. Here, the policyholder is considered the first party and the insurance company is the second party. Insurance cover is provided as protection against claims made by a third party on account of loss of life, injury or damage to property caused by the policyholder’s vehicle. It is mandatory for all vehicles in India to hold third party insurance cover.
Travel insurance: It is a type of policy that covers any possible contingencies that may affect the policyholder’s travel plans. Flight delays, bad weather, medical emergencies and baggage loss are only a few examples that can put individuals at a serious financial risk.
When you buy an insurance policy, remember to read the terms of insurance carefully as well as the fine print mentioned in the document.
About the author:
Written by Dr Shyam Kumar on 9 July 2019
The author holds a degree in Homoeopathy with an MBA in Hospital Management and has worked across multiple disciplines including healthcare and technology. As a nature lover, he attended the world's first underwater CEO's conference to combat marine pollution.
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