Below are Some Insurance Terminology for Insurance Industry
Before going for any Insurance related exam you must go through below mentioned insurance terminology. These Terminologes well researched and created by Insurane Professionals to make better understanding because without understand these important insurance terminology it is not easy to clear any insurance related exam.
“Insurance is a contract between an insurer and insured. In return for a consideration, the insurer promises to pay a specific amount on happening of a specific event.”
The insurance provider is known as the insurer and the person whose life in the policy is insured is known as insured. Premium paid/ being paid for the sum assured / risk cover (Specific amount) stands for consideration, specific amount (sum assured) is payable only on happening of event specified buyer of Policy is called Proposer
Insurance works on the mechanism of transfer of risk. When an individual transfers his risk to the insurer, insurance takes place. When an insurer transfers his risk beyond his bearing capacity to another insurer, Re-insurance takes place. An insurer is a customer in the activity of Re-insurance. (This is one the Most asked insurance terminology)
MARKETING OF INSURANCE
Insurance is marketed through a direct or indirect marketing system. When there is no middleman between the insurer and insured at the time of taking place of the insurance contract, it’s known as a direct marketing system Internet system is the latest development of direct marketing. When the person-like organization/ individual agent/corporate agent/ insurance broker is there, it’s known as indirect marketing. Insurance agents represent insurers whereas brokers represent a customer but remunerated both by the same i.e. insurer. Insurance Agent represents one insurer at one time whereas broker represents more than one, having a variety of products under one roof.
Uncertainty of happening or not happening of event likely to cause damage/loss is called risk. Risk common to all and beyond one’s control is pure risk and risk affecting specific individual locality, community, and circumstances are called particular risk.
Risk measurable in momentary value is known as financial risk. Pure, Particular, and financial risks are insurable risks. Speculative and certain risks are non-insurable risks. The best way to manage the risk is the transfer of risk i.e. insurance. (This is a Frequently asked insurance terminology)
POOLING OF RISK
With the pooling of risks, an insurance company pools the premium collected from individuals to insure. Similar risk can only be pooled in one’s pool i.e. for life and health insurance, two different sets of pools if maintained.
LAW OF LARGE NUMBERS
Helps the insurer to determine its premium table based on expected death claims.
PERIL AND HAZARDS
The specific event which might cause a loss is known as peril and hazards are factors that affect the happening of peril. Example: – smoking to lung cancer.
Moral hazards refer to habits and hobbies and state of mind i.e. smoking, drinking, car/horse race and fraud, etc. Physical hazards refer to physical illness/disability etc.
ESSENTIALS OF INSURANCE CONTRACTS: –
Acceptance should be voluntary without any influence. conditional acceptance is known as contra offer. Consideration is the price of insurance cover. Two special features of the insurance contract that make it a special contract are the principle of utmost good faith and the principle of insurable interest.
PRINCIPAL OF UTMOST GOOD FAITH
An insurance contract is based on data submitted by the proposer is supposed to provide correct information at the time of making the insurance contract wrong information by the proposer made the insurance contract void.
The principle of utmost good faith also applies at the time of reinstatement of policy lapsed whereas at the time of deposit of renewal premium no need of following the principle of utmost good faith as the contract stands already in force. (Most important insurance terminology)
PRINCIPAL OF INSURANCE INTEREST
To prevent the misuse of insurance, under the insurance act it’s a statutory requirement that the proposal should have interest in the person / subject to be insured. There is no written definition of insurable interest in the written acts. Only circumstances refer to its existence. A person has an infinite insurable interest in his own life .spouse, parents, children, the creditor-debtor, partners, employers – the employee has an insurable interest in one another to the extent of loss/damage likely to be occurred to one because of death of opponent policy procured by the employer on the life of its specific employee is known as a key man insurance policy and on the life of a large number of its employee is a group insurance policy. While underwriting group insurance policy, underwriters consider the average age of the group. Lack of insurable interest made the contract null & void. In a life insurable contract, Insurable Interest must be at the time of commencement, in mossing Insurable Contract the time of claim at both times in Non-Life Insurance contract.
PRINCIPAL OF INDISPUTIBILITY CLAUSE (SEC.45)
Because of the principle of utmost good faith insurer has the right to terminate the contract and even forfeit the premium deposited by the proposer in case of wrong information/facts found in the proposal form within the first 2 years of commencement of the insurance contract and the insurer has no right to raise a dispute. Facts not disclosed or concealed should be material facts.
Under a life insurance contract, the insurer is supposed to suffer loss or to pay claims on the death of the insured as such facts that have a direct impact on the death probability of the proposer are material facts for the insurer.
Age, height, weight, proposer’s self or family health history, etc are known as material facts. Facts of common knowledge, legal facts, and facts immaterial for underwritten have no impact on insurance contracts.
PRINCIPLE OF INDEMINITY
Stands for compensation only to extent of loss that occurred to the insured. Its primary motive is to prevent customers from making a profit from insurance activity. The principle of indemnity implies only to non-life insurance contracts i.e., non-life insurance contracts are known indemnity contracts. A life insurance contract carries its own value as such it is known as a value contract.
Before entering into a contract, the insurer wants to make an assessment of the risk likely to be occurred because of death claims of the insured. An official has known as an underwriter is appointed to assess the death probability of the insured/proposer. Medically used for making assessments is known as medical underwriting. Assessment of risk without medical is known as non-medical underwriting.
Proposer/ insured carrying normal risk charged with standard rate of premium otherwise extra premium is charged with the consent of proposer. A person who process of making a risk assessment is known as underwriting.
In case medical of proposer/ insured reveal risk but expected to decrease with the passage of time not more than thirty percent of the term of the policy proposed, underwriter keep lien but only with the consent of proposer.
Lien is specified in the schedule part of the policy document and runs for the part of the term of policy whereas the clause runs throughout the policy term.
An official with specified qualifications assigned to determine the premium table is known as an actuary.
RISK PREMIUM/NET PREMIUM
Premium based on mortality rate is known as a risk premium. It increases with the increasing age of the insured. Risk premium after adjusting interest expected to earned by the insurer on the amount of risk premium is known as net premium
Bonus is declared by the actuary after actuarial evaluation. Higher surplus, higher rate of bonus lower surplus, lower rate of bonus. Bonus is calculated on the amount of sum assured irrespective of the amount of annual premium and term of policy .bonus are of simple, revisionary, and compounded nature. Bonus is declared only for participating in with-profit policies.
Terminal bonus declared at the end of the term of policy bonus declared during the year before a final valuation is known as interim bonus stands valid till the declaration of final bonus.
TIME VALUE OF MONEY
Money changes its value with the passage of time because of inflation. It should be kept in mind while planning for retirement or other long-term plans and to access the actual return of investment expects in the future.
The term insurance plan provides only death claims on death during the term of the policy i.e. only for persons requiring protection without saving. It’s a special plan for insurance protection and home loan repayment needs.
Pure endowment insurance plan: –
Provides only maturity claim .no death claim. Only saving with no protection.
Endowment plan: –
Provides Death as well as maturity claim i.e. protection plus saving.
Money back plan: –
Periodical payout during the term without lodging claim and full sum assured with bonus on death.
Insurance cum investment plans premium is invested in the market by insurer according to choice of the proposer; proposer is responsible for upward or downward of its fund value whereas proposer has the choice to switch his fund from one fund to another fund. Frequent switching is not recommended as it enhances investment risk. To have a tax rebate under the income tax act 1961 proposer has to buy insurance cover at least 20 % (5 times) of the annual premium.
ANNUITY / PENSION PLANS: –
These plans are specially to insure income in non-earning age having feature of an immediate annuity, deferred annuity, and guarantee – annuity, etc. Specific amounts/premiums are paid during a pre-specified term known as the accumulation phase. Funds accumulated during accumulation phase is known as pension purchase fund. Maximum 1/3 rd part of the fund can be withdrawn as cash withdrawal called commutation of pension.
The pension amount is fixed on an annual basis that’s why it is known as an annuity whereas an annuity may be received on a monthly, quarterly, yearly, or half-yearly basis. The amount received on commutation of pension is tax-free but pension amount is taxable under income tax act 1961. Pension purchase fund may be raised with one insures and pension may be purchased from another insurer is known as an open market option. This facility enhances the range of benefits to the proposer.
The process of appointing person/persons to receive claims i.e. in the case of permanent absence i.e. death of insured is called nomination. Minor can also be nominated as nominee Appointee is must in case of the minor nominee. The appointee’s consent is a must. The nominee may be more than one i.e. no limit on the number of nominees without specifying their shares, Nominee may be changed anytime, Nominee stands only till the maturity date of the policy. A nominee has no ownership, right on the proceed received as the death claim. Ownership lies with the legal heir’s only life insured can nominate a nominee.
Insurance policy is considered as part of proposer’s property and like his other property proposer is free to get policy assigned to another one as collateral security of loan cases or otherwise. Right/ Titles of policy are transferred to the assignee. The assignment is of 2 types i.e. Absolute and Conditional.
Absolute assignment reverts only on re-assignment from the assignee’s end whereas conditional assignment reverts on happening of a conditional event.
Non-deposit of renewal premium within the time specified insurance policy/contract stands lapse & discontinuity of insurance policy lapse policy can be revived by paying pending premium and good health evidence.
Principle of utmost good faith applies at the time of revival as revival brings fresh contract between an insurer and insured under the natural law of justice to prevent insurers to put the proposer to financial was in case of non-deposit of premium because of financial hardship is policy goes into paid-up value. During paid-up, sum assured under the policy reduced to paid-up value. The policy is going on without premium installment without other benefits like bonus etc.
In case the proposer desire to get his fund value before the maturity dates the only way is to surrender the policy and get the contract terminated. Surrender value is based on paid-up value and duration of the term after which policy is surrendered Paid up or surrender is permissible. Only for policies paid and survived at least for three years.
The surrender value is to be paid within 30days. The minimum surrender value is 35% of the premium paid excluding the first-year premium. Fore-closure stands compulsory surrender by the insurer in case of non-repayment of the loan.
COOLING OF PERIOD
In case the proposer is not agreeing with the features of plans mentioned in the policy document has the right to get his amount/premium refunded within 15day from the receipt of the policy document. This period is known as the free look period. (This insurance terminology is also very important for Insurance related exams.)
A form used to make a proposal for entering into an insurance contract. The proposal form is the basis of the insurance contract. The underwriter is to convey his decision on the proposal form within 15 days of its receipt. On acceptance, the first premium recipe is issued that is evidence of commencement of insurance contract/ risk cover.
Except this insurance terminology you should learn “Propsed” also, because some time candidates get confuse in Proposer and Insured.
Evidence to the contract entered between the insurer and insured / proposer having different parts lien is specified in schedule part, Ombudsman’s in information part, declaration in preamble part, etc. An authorised officer from insurer attests the Policy Document.
DEATH CLAIM: – Within 30 days from receipt of the complete claim, any additional information or documents can be called for within 15 days Death claim within first three years of policy called early death claim, Authorise insurer with the right of investigation maximum within 180days. In case of delay of claim payment interest @ simple interest plus 2% extra is payable. In death certificate is a primary document, and for death certificate issuance, a dead body should have been seen by someone; otherwise insured is considered as missing, and only the court can declare him died after seven years. For natural calamities, air crashes, a war between two countries insured is presumed to die without a dead body on certification from the authority concerned.
MATURITY CLAIM: – Within 30 days from the maturity date of the policy term.
SURVIVAL CLAIM: – Survival claims are periodical claims without happening of death of insured or maturity of policy term irrespective of lodging formal claim. This insurance terminology is well know by general people also.
VOID CONTACTS / VOIDABLE CONTACTS
Insurance contacts lacking statutory requirements like the non-existence of insurable interest or fraud on the part of parties to the contract are void contracts. An insurance contract with misrepresentation is a voidable contract.
Riders attach additional benefits to base policy. Riders’ premium can never be more than 307 of the premium of the base policy. One the rider benefits taken all other basic benefits will remain the same. Riders’ sum assured can never be more than the sum assured of the base policy. (Most Common Important insurance terminology)
To Motivate the policyholder to stop the policy to sell him new policy is called Churing. Its unethical practice on the part of an advisor. Higher the sales targets, higher the churning rates. Churning is neither in the interest of the insurer or the proposer. Advisor goes for churning only with the motive of extra income.
Importatn insurance terminology
Means continuity of policies. It is opposite to Churning and in the interest of insurer, policyholder, and advisor. A higher rate of persistency means a higher rate of profit to the insurer, higher benefit to the policyholder, and higher amount commission to advisor. A higher rate of persistency shows customer satisfaction, good services to the policyholder from the insurer as well as advisor end lower rate of persistency means less lapsation of policies during the year. The lower rate shows the contra situation.
An illustration showing specific charges, commission to advisor under the plan, and expected growth of funds at the end of the policy term. It is compulsory for the sale of ULIP plans. Expected growth can be depicted only@ at 6% and 10 % only.
IRDA- Can be approached through toll-free number or e-mails
Ombudsman- Twelve in number sitting in different parts of the country having recommendatory authority, complainants are not bound to accept its recommendation but the insurer has no option. Ombudsman is not a judicial authority. A complainant can approach Ombudsman within 1 year of dispute happened, only up to the value of 20 lacs.
Ombudsman has to make his recommendation within 30 days, and award within 3 months and the insurer has to implement his awards within 15days.
CONSUMER FORUM: – District level- 20 lacs
State-level- 20 lacs – 1 crore
National level- More than 1 crore
The consumer forum has judicial authority.
Each & Every insurer is bound to develop a grievance redressal management system in his organization.
This insurance terminology recently came in the picture
To prevent the conversion of black money into white money, the AML act prevents deposits of cash payments of more than 50,000 in one day.
To have proper where about of investor his ID and residence proof is compulsory.
Child, young unmarried, young married, married with small children, married with old children, per-retirement and retirement age. The life stage determines the need and risks apatite of the person.
WITH CAPITAL / WITHOUT CAPITAL CUSTOMER
A person having inherited property is known as with capital customer and a person surviving with his routine earning is without capital customers. With capital, customer needs capital appreciation income protection and saving plan.
Income is available for saving after expenditure is known as disposable income. With the increase in age disposable income is slightly higher.
REAL NEED / PERCEIVED NEED
Actual needs are real need and needs based on desire and thought is perceived need. The real need is given priority while making financial planning.
Bank: – FDR / RD / Commutative deposits.
Post Office: TDR / RD
Insurance: – Term insurance for income protection and home loan Repayments etc.
Endowment plans for protection plus saving purpose
ULIP for high income and low liabilities people
Equity / Share market-High risk opposite to bank interest
Bonds – Lower risk, high liquidity.
Mutual funds– For risk diversification with higher liquidity.
Real Estate– For capital appreciation.
Conversion of physical gold to ETF enhance its liquidity
Health Insurance – Individual health insurance or family floater covering the health of
All family members rebate under the income tax act is permissible up to 15 K under Section 80D.
Daily hospitalisation plan provide fix amount on daily basis irrespective of actual expenditure.
Above all terms are not insurance terminology but its important to understand these terms also.
Minimum sum assured 5 K
Maximum sum assured 50 K for low-income group weekly premium facility
Standard age proof that carries age based on evidence i.e. Non-standard age proof that carries age based on verbal declaration i.e. certificate of village panchayat etc.
Domicile and sound mind is a primary qualification to become an insurance
Agent, restricted remuneration and considered as a primary underwriter.
FACT FINDING SESSION
To identity client needs. Identification quantification and prioritization of needs is the process of fact finding.
Advertisement in paper or indemnity bond at the time claim means the policy is lost. Advisors suggestion is professional if it is in the interest of the client. In case the customer does not agree with the advisor’s recommendation, the reason should be asked for not going with the recommendation. Shifting of physical gold to ETF enhance liquidity. The lowest priority of clients should be marriage and the top priority is income protection. The best place to keep emergency funds is a bank and M.F Client concentrating on health and estate/inheritance investing planning is in retirement age.
EMI can never be more than 40% of monthly salary to get a tax rebate, sum assured should be five-time or more of the annual premium. The first premium receipt represents the date of commencement of contract i.e. risk cover.
Maximum Rebate u/s 80-c one lac only Insurance claims are tax-free/ Exempted under IT ACT 1961 u/s 10(10)(D).