Insurance Terms to Know
February 02 , 2013


In any insurance policy, we pay a premium to protect ourselves or our family financially against certain events (death, hospitalisation, fire damage, etc). A claim is when any of these feared events happens, and we request the insurance company to pay the agreed compensation for our loss.

The insurance company would have a list of documents to be submitted with the claim. This list depends on the type of insurance being claimed. Common documents include death certificate (in case of life insurance), bills and doctor's certificate (in case of medical insurance), police FIR (in case of theft), etc. If these documents are satisfactory, there is a time limit within which the company is supposed to pay the claim. Any disputes can be referred to an Ombudsman, who is appointed by the regulator to protect consumer interest.

Policy Term

Policy Term in an insurance policy refers to how long the policy is in force. Most general insurance products (like medical or motor insurance) have policy term of only a year or two. They need to be renewed regularly for every such period. Life insurance policies, on the other hand, often having much longer terms spanning a couple of decades or more.

The Policy Term may or may not be same as the duration for which premium is paid. Indeed, the benefits of the policy can extend long after premiums have been stopped. Of course there is no free lunch: the premium paid earlier is drawn down to provide the life cover and other benefits in keeping the policy in force.

Premium Paying Term

Premium Paying Term in an insurance policy is the duration for which premiums are paid. On one hand, there are some single premium policies, where the premium paying term is essentially zero. In other policies, the premium paying term can be as long as the duration of the policy itself. Typically, policy holders match the duration of the premium paying term to their expected earning careers.

Life Insured

The Life Insured in an insurance policy is the person whose life is covered. This is the person whose medical history is checked and who may be required to undergo medical tests before issuance of the policy. The Life Insured may be different from the person who pays the Premium. But Indian laws require that the two cannot be completely unrelated to one another - there needs to be what is called an 'insurable interest' between the payer and the insured. Most family members come under this clause, as do employer-employees.

It makes sense (though it is not legally required) that the Life Insured is a person who is an earning member for her family. After all, life insurance is supposed to cover the financial burden of losing an earning member. So beware of unscrupulous agents trying to make your child the life insured - it makes no sense whatsoever! The child should only be the nominee in a policy with life insured as the earning parent(s).


A top-up in an insurance policy is an amount paid over and above the regular premium. Earlier, top-ups could go purely to the investment fund attached to the policy, having no impact on the sum insured. In effect, this facilitated further the fraud of selling an insurance policy as an investment one.

However, from 1 September 2010, as per the new rules set by the regulator, top-ups too need to partly go towards proportionately increasing the life cover. The rest of the top-up would go into the investment fund that is bundled with the product. This elimination of an industry fraudulent practice is likely to see the concept of top-ups getting phased out from industry parlance.


A Premium is the payment you make towards a Life Insurance or Medical Insurance plan, to avail of its benefits. While plans may give a facility for paying premiums monthly or quarterly, it is the Annual Premium that is the important number to note. Most aspects of the policy - such as life cover, medical cover, fund value, charges, etc are a function of the Annual Premium.

In pure Term Life Insurance plans or Medical Insurance plans, the premium only goes towards the risk of giving you the life or medical cover. In that sense, these are 'pure' plans. In more complex products like Endowment Plans, Unit Linked Plans and Universal Life Plans, part of the premium goes towards giving life cover, while the remaining goes into an investment fund on your behalf.

Sum Assured

Sum Assured or Life Cover is the amount that a nominee in a Life Insurance Policy gets, in the unfortunate event of death of the policy holder. There are two useful thumb-rules to remember:

  1.  For every earning member in the family, a sum assured of 4-8 times annual income is a must - if yours is less, make sure you top it up to this amount through a good Term Insurance Plan
  2. If a policy has Sum Assured less than 50 times the annual premium, it is probably not worth taking. This usually happens because the policy tends to combine insurance with investment, and has extremely high charges otherwise.


Brokerage or Commission is what the agent or broker you deal with earns through the transaction. Usually, since he is paid by the mutual fund or insurance company, you do not get to see this number clearly. Yet, this number is very important since it is deducted straight from your investment, and affects your returns significantly.

A useful thumb-rule to keep in mind is that a brokerage of 1%-2% annually on your investment value is usually fine. Anything much above that should arouse your suspicions. There are two possible reasons:

  1. The product is bad (such as ULIPs), wherein the commissions can be as outrageous as 30% or more in initial years. You should avoid such products
  2. The broker is making you churn your portfolio. For example, if you pay a brokerage of 0.5% per trade in shares, and the broker makes you buy and sell 10 times a year (by giving a regular dose of 'tips'), you have paid him a 5% commission. This again is to be avoided if you want to make good returns

Policy Holder

A Policy Holder is the person who 'owns' the insurance policy and pays the premium. This person need not necessarily be the person whose life is insured. For instance, the husband may take a life insurance policy on his wife. In this case, the husband is the policy holder and pays the premiums, while the wife is the one whose life is insured. In case the two are different, regulations specify how the policy holder and life insured must be related. In India, tax benefits on premium payment are only available to the Policy Holder.

Family Floater

As you are probably aware, a Medical Insurance provides reimbursement of medical expenses in case of illness or accident. Instead of taking separate insurance schemes for different members of the family, the Family Floater is a useful type of medical insurance scheme to cover everyone under one umbrella scheme. Typically, it is the spouses with or without children, who can be covered in one scheme.

The biggest advantage of a family floater is that the total cover may be used by one or more members of the family through the year. For instance, if there is a Rs.3 lakh Family Floater taken by husband and wife. If the husband has a bypass surgery, the entire Rs.3 lakh could be used by him. On the other hand, if they had taken separate policies of Rs.1.5 lakh each, the husband would have had to cough up Rs.1.5 lakh from his pocket towards bypass surgery expenses.

Medical Test

If you take a worthwhile Life Insurance policy (i.e. with a insurance value equal to or greater than your annual income), you are likely to have a compulsory Medical Test. This is done so that the Insurance company is satisfied it is not taking undue risk in insuring your life. Nowadays, most medical tests are smooth 45 min processes that can be completed in the comfort of your own home. A doctor nominated by the Insurance Company visits you to take blood, urine and ECG tests, besides the routine blood pressure and weight / height measurements. You need to be in fasting to be ready for this test.

An unfortunate market practice seen occasionally is that of insurance agents advertising 'No Medical Test Needed' as if that were a big advantage for you in buying a policy. Instead, this means that the policy that you are taking has no or very low insurance cover. Such a policy isn't worth taking anyway! Remember, any life insurance policy worth its salt will name will have this painless medical test as a requirement. Medical insurance policies started by people over 45 years of age too will have this requirement.


Riders are accessories with insurance policies. Most of them are not to be taken seriously since they are superflous; they just offer to cover what is already covered or what does not really need cover. The ones that are worth being taken seriously are also available as stand-alone policies and should be rather bought as stand-alone policies. For instance critical illness cover and personal accident policy are essential policies offered as riders but buying them as stand-alone ones would give better cover.

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