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10 Insurance terms you need to know before buying a Policy

Posted 16 June, 2016 by Clearly
in Technical Smechnical

If you have never bought an insurance policy before, there could be some apprehension.

 

What did I just read?

What did I just read?

 

Lots of jargon out there.

Potentially a hefty financial commitment.

Uncertain if the plan is right for you.

Ultimately, a confident purchase boils down to understanding the plan, and how it relates to your financial goals. To help you understand the plan better, here are the top ten terms we feel are the most important to get familar with.

 

1. Policy Owner / Policy Holder

 

Look Ma, this policy has my name on it!

Look Ma, this policy has my name on it!

 

Unsurprisingly, it refers to the person that owns the policy and has the right to exercise all privileges associated with the policy.

For example, if Jason Lee were listed as the Policy Owner of a Whole Life Plan, he is the only one that decide if he wants to surrender the plan, change the beneficiaries listed under the plan, or even assign (give away) the policy to another person.

Surprisingly, the Policy Owner does not have to be the one that pays the premiums of the policy. He just has all the rights to the policy.

Applicable to: All Life Insurance Plans

 

2. Life Insured

 

A Life Insured under a plan is the person whose life (or death) determines if the Policy can continue to be active or needs to be paid out (upon his death, or other condition like Critical illness).

An important point to note is that the Life Insured and the Policy Owner need not be the same person. For example, if Mary decides to buy a Whole Life Plan for her 4 year old toddler Tom, then Mary is the Policy Holder and Tom is the Life Insured.

Mary can transfer or assign the ownership of the policy once Tom reaches adulthood, but Tom cannot transfer the “Life Insured” title to Mary under the policy.

Applicable to: All Life Insurance Plans

 

3. Beneficiary / Beneficiaries

 

This is the person or people that receive the payout, or cash value, or sum assured of the policy assuming the payout conditions are met (usually in event of death of the Life Insured, whom we can assume has no further need of the money anyway).

It is the policy holder that decides who the beneficiary (ies) are, what percentage of the claims they are entitled to. The policy holder can also change the beneficiaries at any time (while the policy is still active).

Applicable to: All Life Insurance Plans

 

4. Proposal Form

 

Before the start of every insurance policy, the client is required to fill this in. Essential it allows the insurer to know and understand the client’s health condition and whether he can be accepted for the policy at the given price.

Hence the word: Proposal (“Will you please accept me for this policy?” comes to mind)

It is a must to declare this portion truthfully and to the best of your knowledge, as any subsequent claims can be refuted if it is proven that this section is not filled in properly. For example, not disclosing pre-existing health conditions can lead to no claims being paid out, even if the premiums are dutifully paid all this while.

Applicable to: All Life Insurance Plans

 

5. Benefit Illustration

 

Its all about the numbers, darling

Its all about the numbers, darling

 

This set of papers are most often scrutinized by the prospective buyer of the policy because it contains all the relevant numbers (highlighting the benefits of owning the policy).

It contains the sum assured for various types of cover from year to year, the estimated cash value built up over time, and also the estimated surrender value. These numbers often indicate that it is financially unwise to surrender the policy earlier on, as the surrender value is far less than the amount of premium paid.

One often glossed over aspect of the benefit illustration is the Distribution Cost – it shows how much of the policy premium is actually spent on commissions, marketing, advertising so on. (But bulk of that money is actually commissions to the agent)

Applicable to: All Life Insurance Plans

 

6. Product Summary

 

Ah! Guess what? The Product Summary does what it says – giving a summary of the product. It is meant as a consise version of the policy benefits, highlighting the benefits payable and the conditions under which they are payable.

A product summary is always given in tandem with the benefit illustration, and serves to underscore also the risks involved with the plan, your rights and the fees and charges applicable to the plan.

Applicable to: All Life Insurance Plans

 

7. Sum Assured

 

Its all about the cover

Its all about the cover

 

The amount of money that the insurance contract is obliged to pay out to the beneficiaries if any of the stated conditions happen to the life insurered. Usually death, or critical ilness, depending on what the policy covers.

The sum assured can increase over time, as the policy grows more valuable or acquires more cash value.

Applicable to: All Life Insurance Plans

 

8. Participating Plan (Par Plan)

 

Participate? Like in a race? A marathon?

A participating plan is one that has some portion of its premium invested (on your behalf) by the Insurance company. Imagine hundreds and thousands of policies each with a certain amount being invested by the insurer on your behalf. That is one big pile of money!

What you actually participate in is the gain (or loss) of this gigantic portfolio of investment. Typically these investment portfolios are kept moderately safe to generate returns while ensuring safety of capital.

The estimated sum assured and cash value built up over time shown in the benefit illustration is actually dependent upon the performance of each insurer’s investment portfolio.

Applicable to: Endowment Plans, Whole Life Plans

Which leads us to our next term…

 

9. Bonus 

 

A growing pile of cash - one of the most beautiful sights to behold

A growing pile of cash – one of the most beautiful sights to behold

 

The proceeds of the Participating Plan is manifested in the bonuses associated with the policy. There are two type of bonuses applicable:

Reversionary and Terminal.

Reversionary bonuses are declared on a yearly basis, and once they are declared, the amount increases the guaranteed portion of the policy (and hence cash value). This means that the benefits of the reversionary bonuses (once declared) can be “cashed out” by surrendering the policy. (Although we don’t recommend an early surrender)

Terminal bonuses are also declared on a yearly basis, but they tend to have less fluccuation compared to reversionary bonuses. Also, terminal bonuses are only paid out upon termination of the policy. This can be surrender, death, or terminal illness. Unlike the reversionary bonus, it can only be paid out once (and hence only computed once), upon the policy termination.

Terminal bonus is expressed as a percentage of the attaching reversionary bonuses (bonuses that are already declared).

Applicable to: Endowment Plans, Whole Life Plans

 

10. Maturity Benefit

 

The lump sum of money that a policy holder receives upon maturity of the policy. Typical maturity periods include 5, 10, 15 or 25 years. This lump sum of money includes all the reversionary bonuses that have been declared throughout the policy lifetime.

Applicable to: Endowment Plans

 

So there you have it. Buying an insurance policy for the first time can be a daunting process, but with a bit of reading up, it need not be.

Want to know more about the nuts and bolts? Head on down to our educational resources or forum.

In the meantime, do let us know what other insurance jargon you would like to know about in the comments below!

 

www.ClearlySurely.com aims to eradicate the knowledge gap between consumers and Life Insurance. Our Vision is that one day, every Man, Woman, and Child will be properly insured.

  1. Katrina Karim

    Warm greetings clearlysurely. I was wondering if SingSaver.com.sg can contribute blog articles to your awesome site? Thank you so much, Kat.

    KATRINA KARIM
    VICE PRESIDENT, COMMUNICATIONS
    SingSaver.com.sg Ι Singapore’s #1 financial comparison platform
    A part of the CompareAsiaGroup Ι Asia’s #1 financial comparison platform
    Mobile +65 9844 6618 Ι Email katrina.karim@singsaver.com.sg Ι Skype katrinakarim1 Ι LinkedIn http://bit.ly/1nJ2Nxg

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