Common Terms and Provisions in a Life Insurance
In order to understand life insurance policy better, below is a summary of some of the common terms and provisions that customers come across.
• Premium -This is the money you pay to the life insurance company to purchase the life cover. The cover commences upon first premium payment.
• Sum assured- this is the amount the policy holder will receive from an insurance company if the insured event occurs or when the policy matures. In other words, this is the total amount for which an individual is insured. This amount does not include the bonuses to be paid.
• Claim- An insurance claim is a formal request to an insurance company asking for a payment based on the terms of the insurance policy. Insurance claims are first reviewed by the company for their validity and then paid out to the insured or requesting party (on behalf of the insured) once approved.
• With profits policy-This policy allows you to share in the profits of the life insurance company which is usually paid as dividends or bonus. For this privilege, the premium charged is usually higher than for a without profit policy.
• Bonus-This is the extra money paid with the final benefit for with profit policies. Bonuses are declared periodically e.g. every year, and once declared the bonus becomes a guaranteed addition to the final benefits payable.
• Cash / surrender value -When your life insurance policy has been in force for a certain period (normally 2 – 3 years), it acquires a cash value also known as a surrender value. This is the cash amount a life insurance company will pay you when you cancel your policy. Should you chose to cancel your policy before the specified period; you are likely to lose the money put in through premiums. You should endeavour to maintain your policy until maturity to get the full benefits.
• Policy loan- You can apply for a policy loan when your policy has acquired a cash value. Interest is charged on the policy loan. At maturity or in case of a death claim, any unpaid portion of the loan is deducted from the benefits payable.
• Grace Period -This is an additional period of time after the due date for the premium payment. The grace period for monthly premium payments is 30 days. If premium is still not paid within the grace period, your policy may lapse or be subjected to reduced paid up or automatic premium loans (as explained below).
• Reduced paid-up- For a policy that has acquired a cash value, you can choose to stop paying premiums but still have the policy in place. The policy will continue to remain in force until maturity but the sum assured will reduce. This is an alternative choice for individuals who no longer require a high sum assured but would still like to have some level of protection.
• Automatic premium loan (or non-forfeiture advance)- If you do not pay your premium within the grace period, and provided your policy has sufficient surrender value, the life insurance company will automatically advance to you the premium amount to keep the policy in force for a stated period. Interest will be charged on the amount of premium loan outstanding. An automatic premium loan will reduce your surrender value.
• Grace period for review of policy document- You may cancel your life insurance policy by returning the policy document to your insurance company within 15 days after you received it, if you feel it does not reflect the cover agreed upon at the time of purchase. The premium that you have paid (less any medical fees incurred) will be refunded to you.