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Back to Basics: 20 Life Insurance terms you ought to know [Part 1 of 2]

Posted 5 October, 2017 by Clearly
in Technical Smechnical

 

We’ve been writing about Life Insurance for quite some time now (over 2 years!) and covered a wide range of topics on this subject. From price hikes to stories to philosophy to humour to products, you name it, we’ve got it. Call it a side effect of being obsessed passionate (got difference one, hor!) about education.

But sparing a thought for our newer readers, who may have not been exposed to that much insurance jargon, we’ve decided to dedicate some effort to keep them up to speed. After all, everyone starts out as a beginner.

For our regular blog visitors, this may be a good chance to kick back and refresh your knowledge on these phrases that we keep bandying about, but never had the chance to properly introduce.

Once you are ready, put on your learning cap/fedora/beret/beanie and lets head to the classroom!

 

1. Premiums

 

Premium

 

Quite simply, price. In Life Insurance, we refer to the money that you have to pay, as premiums. The formal dictionary definition for premium is: The amount to be paid for a contract of insurance.

There is another connotation of the word, which means a price above and extra that one pays for (perceived) quality or service. But we don’t mean that when talking about Insurance.

Interestingly, this term is used mainly when it comes to financial contracts (as opposed to regular goods and services). For example, option premiums.

Use it like a pro: Wow, the premiums for Shield Plans have been increasing ever since insurers have been reporting consistent losses.

Use it like a klutz: Wow, the premiums on Mao Shan Wang has been increasing like mad ever since the dry season hit.

 

2. Sum Assured

 

The dollar amount of protection you receive. 100k, 200k, 500k etc. It is what you get if you claim from an insurance policy. The Sum Assured just refers to the financial compensation you will receive, but it is worthy to note that it can differ for different events, even within the same plan.

For example, a policy could cover death to the tune of 100k, and early critical illness to the tune of 20k. The Sum Assured for both types of cover are 100k and 20k respectively.

AKA: Cover, Benefit

Use it like a pro: After careful comparison between these 2 plans, I realized that though the premiums are similar, their Sum Assureds differ by more than 20%.

Use it like a klutz: I made up my mind to be a millionaire by buying Toto. The Sum Assured for this week is over a million dollars. Huat ah!

 

3. Term

 

Term

 

Length of time. Within Insurance, Term can mean either a set period of time, or it could refer to a specific class of product (which we will introduce later).

Some oft heard applications would be: Premium Term (the length of time you have to pay for a policy), Coverage Term (the length of time that coverage for a specific condition is provided).

A close English substitute for this word would be tenure, but it is not commonly used in the financial/insurance context.

Use it like a pro: This plan has a premium term of 5 years, which means I have to pay premiums for 5 years after it starts – but no more after that.

Use it like a klutz: Wah this sushi place is really the best. I’ve been waiting for such a long term, but my California Maki still haben arrive.

 

4. Critical Illness

 

CI

 

A set of illnesses that are commonly recognized as potentially life threatening or above average in seriousness.The Life Insurance Association of Singapore (LIA) provides and updates a list of these illnesses that Insurers use as a standard when providing Critical Illness cover.

The list was last refreshed in 2014 and you can view the details here. (A potential cure for insomnia. You’ve been warned)

AKA Dread Disease.

Fun Fact: The older agents used to refer to the trio of most basic covers as Triple D: Death, Disability (Total), and Dread Disease. However fun to think about,  it has nothing to do with cup size (hee hee).

Use it like a pro: I will look into refreshing my policies that provide Critical Illness cover. The number of standard definitions have been increasing over the years, and it would be good if I took the chance to enhance my cover to 37 illnesses. Never say never.

Use it like a klutz: Did you hear? Jenny is on MC again for fever. Boss buay tahan already, going to cut her bonus for this year. You can say its really a critical illness for her.

 

5. Life Assured

 

Life Assured

 

The person whose Life/Health condition that the policy covers. The Life Assured may or may not be the Policy Holder (which is the person who owns the policy).

For example, Linda buys a Term plan for her pre-teen son Andrew. The policy is directly linked to Andrew’s Life or Health condition, and will pay out if it deteriorates past a certain stage. Linda is the Policy Holder, which means she owns the policy, but her life or health condition does not affect the policy at all.

If Linda purchases a Term plan for herself, then she would be both the Life Assured and the Policy Holder.

Use it like a pro: I have been contemplating of buying a Whole Life Plan for my infant daughter Elizabeth. Upon her 21st birthday, I will transfer full ownership of the plan to her, making her both the Life Assured and the Policy Holder.

Use it like a klutz: I am feeling quite Life Assured because I bought 10 Insurance policies. Kiasu right? But it is the right thing to do as I need to be covered for every imaginable scenario.

 

6. Limited Pay

 

Refers to a policy where the premium term is shorter than the policy term. The general idea is, you pay premiums for X year, but enjoy the cover and benefits of the plan for more than X years.

Typically used for Whole Life Plans, where a policy holder had to pay premiums for a pretty long time (usually up till a ripe old age, say 85 or even 99). With Limited Pay Whole Life plans, the premium term can be as short as 5, 10, or 15 years. (But the quantum of premium also increases)

Use it like a pro: This Limited Pay plan seems attractive to me. I only need to handle the premiums for 10 years, then I get to enjoy the cover for life.

Use it like a klutz: Limited pay? For sure! My salary is so low, because my pay is limited what. By the time month end comes around, I bo lui already. Buy what insurance, sia?

 

7. Underwriting

 

Risk Meter

 

The risk evaluation of a potential customer by the insurer. Yes, the insurers choose us as much as we choose them. Underwriting can take 2 main forms for Life Insurance: medical underwriting and financial underwriting.

It is the screening of medical risks or financial risks before the insurer decides to accept us as a customer. The person that does this job is called an underwriter.

Fun Fact: In the early days of sea trade and exploration, ships were often lost due to bad weather and sailing conditions – but had a good chance to return with valuable goods. Ship owners spread the risk by inviting people who were interested in insuring the safe return of their goods by signing their names below the cargo manifest, hence the term “Underwrite”. Pretty cool.

Use it like a pro: Since I have a prior history of high blood pressure, each policy I apply to now has to undergo a stringent underwriting process. It’s a hassle but it protects the interests of all the other policy holders.

Use it like a klutz: Every email I draft will not be underwritten. I will only use big, strong fonts to make my points very clear.

 

8. Benefit Illustration

 

A document that shows the payout of every policy across the years, i.e. A clear illustration of the benefits of the policy. The short form for this is BI, and mainly displays numerical data.

We wrote an in depth post on how to read and understand your Benefit Illustration here.

The BI concerns itself mainly with figures like death benefit, surrender benefit, distribution costs etc. Its close cousin is the Product Summary, which explains more qualitatively the inner workings of the policy.

Use it like a pro: I took a look at the Benefit Illustration and was not impressed. The projected surrender value after 15 years is simply abysmal. I can surely do better elsewhere!

Use it like a klutz: (I can’t think of anything. Really. You have to be a total klutz to use this phrase out of context. There is no way i can give you the benefit of an illustration)

See what I just did there?

 

9. Participating Plans

 

A policy that shares in the investment gains or losses of an insurer. There are usually different pools of money set up (called funds) for different plans.. A participating plan can increase in value when the fund performance is good, and vice versa.

On the flip side, a non-participating plan does not have any investment performance tagged to it.

AKA: Par Plans (the opposite will be Non-Par plans)

Use it like a pro: Since my primary concern is pure coverage and not returns, I decided not to buy a Participating Plan this time, when a simple Term plan will suffice.

Use it like a klutz: I will be training hard for the SCB marathon this year, since I have participating plans to run a sub 3.

 

10. Bonus

 

Bonus

 

The extra amount of benefit that an insurer will pay, due to the good performance of their par plan. There are 2 types of bonus: Reversionary and Terminal.

Reversionary bonuses are declared yearly (if any), while Terminal bonuses only apply when the policy matures or the Life Assured dies. Even though reversionary bonuses are declared yearly, they cannot be withdrawn prematurely (only upon surrender/maturity of the plan or death of the Life Assured).

Fun Fact: The word reversionary means something that does not commence until some future date.

Use it like a pro: Since my policy started a decade ago, the bonuses have been steadily piling up like clockwork year after year. I can look forward to a tidy sum of maturity benefits to fund my retirement.

Use it like a klutz: You really should buy this endowment plan, since they are giving you this toaster as a bonus. Imagine that! Saving your money and browning your bread at the same time… best lah!

 

These are the first 10 terms that we are covering in this article. Check out the next article here.

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.

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