15 Insurance terms commonly misunderstood
Quotes, living benefits, annuities etc, – Terminologies like these make insurance seem foreign to many, and incomprehensible when discussing. Fortunately, there are insurance professionals who can help make a sense of it all.
In this article, we try to simplify and explain some of the most misunderstood and used insurance terms and their meanings.
15 Insurance Terminologies commonly misunderstood
- Accelerated Death benefit: An accelerated death benefit, is frequently added to a policy as a rider, it allows policy owners to use a portion of their life insurance death benefits before death occurs. If the owner is terminally ill, this is an option to explore. People usually use the accelerated lump sum to pay off debts, cover hospital expenses, or go on a special trip with their families or to carter for other financial needs they might have.
- Annuities are financial instruments offered by some insurance companies which allows policyholders to save money on a tax-favoured basis while also creating a lifetime income. Policyholders can select one that meets their requirements, such as how they intend to pay (immediately or periodically), and for how long they will accept payments. Annuities are popular among retirees because they provide guaranteed income for life.
- Claim: A document or request reported by a policyholder declaring that an insured incident happened and that coverage should be provided by the insurance company.
- Contestability period: A contestability period is a set period following the issuance of a policy by a life insurance company. During this time, the company reviews an application to ensure that nothing was misrepresented (using a form of due diligence). The contestability period begins the moment the policy is issued. Its purpose is to safeguard the insurer against fraud.
- Death benefit is the sum of money beneficiaries are to receive from a life insurance company should a policyholder dies. Generally, the death benefit is tax-free.
- Grace period: This is the length of time your policy will remain in effect if you do not pay your premium by the due date. The grace period is determined by the insurer, and it will vary according to different insurance companies.
- Living benefits: Parts of the benefits of life insurance includes catering for the owners’ living needs before facing the inevitable. Some life insurance products or policies payout benefits while the policyholder is alive. Accelerated death benefits, long-term care benefits, and policy loans are some of the most common living benefits. (Living benefits link from Capex blog)
- Long-term care insurance: Long-term care insurance steps in if you can no longer care for yourself for an extended period. It can cover nursing homes, adult day-care, or home health care costs. There are several different policy options for long-term care. Learn more about long-term care insurance.
- Premium is the payment required by an insurance company to keep an insurance policy in force (keeping your policy active to receive its benefits). Depending on the policy, owners may be obligated to pay premiums on an annual, quarterly, monthly, or on other basis.
- Quote – An estimate of the cost of insurance based on information provided by the applicant to the insurance company.
- Rider: A rider is an extra amount of coverage that can be added to a primary insurance policy. It provides additional coverage for a policy holder’s specific requirements.
- Reinsurance: A contract of indemnity against liability in which the insurance company obtains additional insurance to protect itself from loss or liability caused by the original insurance. This means insurance of all, or part of a risk accepted by one insurance company with another insurance company and agreeing to reimburse the insurance company for the portion of the claim reinsured.
- Surrender: The mutual agreement of parties to cancel a lease or other contract.
- Underwriting is the process an insurance company determines whether to offer a policy and at what rate. Underwriting is done by professionals known as underwriters.In regard to life insurance, the underwriter considers factors such as a person’s age, health, lifestyle, and other factors before deciding to cover an applicant.
- Waiver: A clause or rider that agrees to waive (forego) premium payments during a period of disability. It is the renunciation or surrender of a known right or privilege. It can be done orally or in writing by the agent, adjuster, or employee or official of the insurance company.
Here are a few insurance terminologies that are mostly used, there are several others which we would be talking about in subsequent publications.