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Key Financial Terms That You Must Know (Part 2 - Insurance)

As I have often stated, managing money is really (really) SIMPLE. So much so that even a school kid can master it.

I guarantee that you will find it lot easier than trigonometry and calculus; chemical reactions and equations; Newton’s and Einstein’s laws; etc. that you studied in school.

Just remember one thing... financial jargon has been created just to confuse you, scare you and ultimately enslave you. Because, that's how the financial service providers and their agents can make TONS of money... at your expense.

So, to empower you against misguidance, misinformation and misselling, commonly used financial terms — in insurance — are explained in plain and simple terms.

a. Term Insurance
It is a pure risk cover policy. If you die during the policy term, your family gets the insurance amount. If you don't, you (or your family) gets nothing. It is the simplest, cheapest and the BEST way to buy life insurance cover.

b. Endowment Policy
It combines Risk + Savings. If you die during the policy term, your family gets the insurance amount. If you don't, you get the maturity value (= Sum Assured + Accumulated Bonus). For a given insurance cover, the premium herein is 10-20 times more than the Term Plan. And, the returns are mere 4-6%. In one word... Avoid.

c. Moneyback Policy
Similar to an endowment plan, with one exception. You also receive a payout at regular intervals. A certain percentage of the Sum Assured is paid after every few years; and the balance (+ bonus accumulated) when the policy matures. Again... very high premiums; very low returns. Again... Avoid.

d. Whole-life Policy
Similar to an endowment plan, with one exception. It provides insurance cover for the entire life. So the premium also is payable until death (or sometimes for a pre-defined period). There is simply no point of insurance cover after retirement. Hence, there is no need for a policy for whole life. Also, the problem of very high premiums and very low returns remains. Again... Avoid.

Unit Linked Insurance Plan (ULIP), like endowment policy, is again a mix of insurance and investment. The difference is flexibility. You decide your investment pattern from the given fund options. You can redeem part investment also during the policy tenure. Besides, the costs to be deducted, are known beforehand. Depending on the costs involved, ULIPs could be considered as a viable product.

f. Pension / Annuity Plan
Pension policy is a two-stage plan. First stage is 'accumulation' until retirement. During this period, you pay premiums and together with the returns it builds the corpus for your retirement. Second stage is 'annuity' i.e. when you retire and your pension starts. Avoid due to poor returns, poor tax efficiency, poor flexibility and poor liquidity.

g. Child insurance plan
Similar to an endowment policy, with two variants. One, where child is the insured person. Avoid, as insuring the child makes no sense. Two, where the parent is insured. But unlike normal plans, the policy continues as it is without any break, even if the parent dies during the policy term. Most importantly, no further premiums are to be paid by the child / family. Preferably avoidable, if the family is competent to handle the financial matters.

h. Riders
These are extra benefits attached to the basic insurance policy, of course at extra costs. Common riders include waiver of premium, accident benefit, critical illness, etc. These are limited in scope and may or may not always suit your purpose. So each rider requires a thorough evaluation, before you decide to opt in.

i. Individual Health Insurance Policy
This is the basic health insurance plan. It provides cover against the cost of medical treatment when the insured person is hospitalized (subject to the limits and other terms stipulated in the policy). It also covers related pre and post-hospitalization expenses.

j. Family floater policy
Same as the Individual Health Insurance Policy, with one exception. It covers the cost of medical treatment when any of the family member — your spouse, kids, parents or you — covered under the policy is hospitalized. A basic individual or family floater policy is a MUST.

k. Critical Illness
A policy that provides insurance cover against certain pre-specified serious ailments such as cancer, stroke, heart attack, etc. More importantly, it PAYS THE ENTIRE SUM ASSURED upon diagnosis, irrespective of the actual cost of medical treatment. A USEFUL ADD-ON to the basic health policy.

Has the insurance mumbo jumbo left you puzzled and clueless?

l. Top-up / Super Top-up Health Policy
Same as an Individual / Family floater policy, with one exception. You can make a claim under Top-up or Super Top-up policy ONLY IF the claim value exceeds a pre-decided amount (called deductible). So, the basic health policy takes care of the initial medical expenses. Additional costs, over and above the limit of the basic cover, is paid by these policies. Excellent option to increase total health insurance cover at much lower premiums!  

m. Hospital Cash Policy
Same as an Individual / Family floater policy, with one exception. It does not pay for the actual expenses incurred. Instead, it pays a pre-fixed amount for each day of stay at the hospital and a pre-fixed amount for each surgery. Avoid and stick to the basic health plan.

n. Bonus
It is the additional amount paid to the policyholder at maturity, apart from the Sum Assured. One such amount is the Reversionary Bonus, that is added to policy throughout the term. This can either be "with-profit" bonus (i.e. depending on the profits of the insurance company) or "guaranteed" bonus (i.e. irrespective of the profits of the insurer). Some policies also pay Loyalty Bonus or Terminal Bonus as a reward for persisting with the policy.

o. Free Look Period 
When you first buy the policy and are not satisfied with it, you can cancel the policy. You have 15 days — from the date of receipt of policy — to exercise this option. Your premium is refunded (after deducting stamp duty charges, medical examination fees and proportionate risk premium for the no. of days already covered). 

p. Days of Grace
Each insurance policy specifies a particular due date for the payment of premium. Days of grace is the extra 15-30 days period allowed by the insurance company to make the payment, immediately after which the policy lapses.

q. Reinstatement
Subject to certain conditions — e.g. payment of all past due premiums, no change in your health condition, etc. — insurance company may restore a lapsed policy. This renewal of a lapsed policy to 'in-force' status is called Reinstatement.

r. Co-pay (or co-payment)
Herein you agree to share a percentage of the claim with the insurance company. Accordingly, a pre-specified percentage (say 10%) of the claim amount has to be borne by you, while the balance is paid by the insurance company (of course, subject to a maximum of the Sum Insured). The benefit of co-pay is the reduction in the premium payable. Higher the co-pay percentage, lower the premium.

In Part 1 of this series, key financial terms on Loan Financing were covered. 

s. Deductible
This is similar to co-pay. The difference is that you have to first pay the portion of claim bill, equal to the deductible amount laid down in the policy. Unlike co-pay which is a given percentage, deductible is normally a fixed amount; and is applicable per year or per eventThe balance claim amount is paid by the insurance company. The benefit of deductible is the reduction in the premium payable. Higher the deductible amount, lower the premium.

t. Vesting Age
The age when the pension starts under a pension policy / annuity plan.

u. Indemnity
It is the legal principle stating that the policyholder should be compensated for his / her actual loss. For example, a basic health insurance policy is an indemnity-based policy, wherein you are reimbursed the actual expenses incurred on the medical treatment.

v. Exclusions / Waiting Period
"Exclusions" are specified diseases and services that are not covered under a health insurance plan. You won't get any claim for them. Certain ailments and illnesses are not covered for a specified period, typically 2-4 years. You can claim against them only after you have maintained the policy for this minimum prescribed "waiting period".

w. Surrender Value
Amount payable to the policyholder when s/he decides to close the policy before its maturity. It is normally a certain percentage of the sum assured plus accumulated bonus, based on the number of years completed; less surrender charges, if any.

x. TPA
Third Party Administrator (TPA) is the company authorized by the insurer to settle the claims. You have to approach the TPA and follow the required procedure for any claim settlement. TPAs also empanel the hospitals to their network for cashless claim settlement.  

y. Beneficiary
The person entitled to receive the insurance amount, if the policyholder dies during the policy term. 

z. Assignment
Assignment is when the right to receive the policy amount, is transferred to another person. For example, when you provide your insurance policy as a security for some loan, you have to assign the policy to the lender. In the event of your death, the lender has first right over the insurance amount. The beneficiary comes second.

This, in brief, are some of the commonly used key terms in insurance.

If any other financial mumbo jumbo has left you stumped, don’t hesitate to shoot an email to me at contact@wealtharchitects.in.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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