Common Terms to Know if You're Getting an Insurance Plan For the First Time

FYI, ladies.  IMAGE Shutterstock 

A glimpse at an insurance policy contract may sometimes seem like reading pages of a College Economics book, what with all the technical jargon that we can’t immediately grasp, but we need to. Here’s a quick “glossary” of some terms that you might encounter as you build your financial foundation with an insurance policy. 

Common Insurance Terms to Know

Insurer, insured, and policy owner 

The insurer is the insurance company while the insured is the person whose life is being protected by the policy. In case of an insured child, the policy owner (or policy applicant) would be the guardian. The policy owner (or policyholder) is the one who applies and pays for the insurance.

The beneficiary, meanwhile, is the one who will receive the proceeds when the insured dies. 

Premium

Paid monthly, quarterly, semi-annually, or annually, premium is the sum of money that the insured pays for the policy. 

Face amount 

Now, this is the amount that the insurance company will pay the beneficiary upon the insured’s death. 

Death benefit and maturity benefit

The death benefit is the amount payable upon death of the insured. Maturity benefit, meanwhile, is the amount payable if the insured outlives the protection period.

Cash values

This is the amount that the insured receives in case he terminates the plan. Therefore, it’s usually lower than the face amount. Upon death or policy maturity, cash values is added to the face amount. The good news is most traditional plans—not VUL—offer guaranteed cash values.

Dividends

Traditional insurance plans usually receive dividends. This is the return of excess premium paid annually to the policy owner. It is based on the insurer’s performance and experience over a given period, so this is not guaranteed and just considered a bonus. 

Limited payment period 

There was a time when getting an insurance policy meant paying throughout one’s lifetime. Now, there are options like 5, 10, 15, or 20 years, which is referred to as the limited payment period. 

Total disability benefit 

This rider—a term for additional insurance features—waives the payment in case the insured becomes disable and unable to pay for the policy. Other similar riders are accidental death benefit and waiver of premium on death of initial owner; the latter applies if the insured is a child and the policy owner (usually the parent) dies.

Hospital income benefit 

This rider replaces the insured’s income in case he gets hospitalized. Check with your financial advisor if your policy covers hospital income benefit for critical illnesses and cancer only, or for all diseases, like COVID-19. 

Palliative care benefit

Some health insurance plans protect the insured from diagnosis to recovery, thus including post-hospitalization and home recovery allowance. Despite all the positive hope, some patients get diagnosed to be terminally ill with a life expectancy of six months or less. Palliative care benefit provides lump sum, usually around 10% of the face amount.

Variable Universal Life 

Variable Universal Life—more commonly known as VUL—is a life insurance contract with benefits linked directly to the performance of funds. Depending on the insured’s risk profile, he can choose from different investment instruments, including shares, bonds, property, etc.

Unit pricing, offer price, and bid price

This is the process where the unit price is set. Offer price or selling price allocates units to a policy when premiums are paid while bid price or buying price is what the insurer will give for the units if the policyholder wants to cash in or claim under the policy.

Top–ups

Single premium injections or voluntary additional payments that can be used to buy additional units.

Premium holiday

This is when premium payments on a variable life insurance contract stops for a period, as long as the investment funds can cover the insurance part and other charges. Policyholders are still expected to continue paying the premiums later on. 

Some charges that you should be familiar with

Policy Fee covers administrative expenses. Mortality charges, from the name itself, covers mortality costs and are dependent on age. Fund management fee is imposed on each investment fund and is used to cover investment expenses. Change in fund allocation charge covers changes in fund allocation in the policy. Of course, insurance charge grows as the insured ages. These charges are disclosed in the insurance proposal.

READ MORE: 

Life Insurance and Health Insurance: Their Differences and Why You Need to Get Them

What Are VULs and Should You Invest in Them in Your 30s?

HMO vs. Health Insurance: Which One Do You Need?

The Basics of Insurance, Investments and Where to Put Your Money at Age 30

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Source: Female Network