Traditional Life Insurance Terms - Simplified

In this article, let’s continue our quest to simplify another 4 complicated Life Insurance terminologies!

Policy Term

The “policy term” is the duration for which the insured person’s life is covered. Once the policy term finishes, the risk of loss of life of the insured person is automatically transferred back to the individual, and the maturity benefits due are paid out. The policy thus terminates.

Premium Payment Term

Many policies have a premium payment term that is different from the policy term. For instance, a policy may have a term of 20 years, but a premium paying term of 12 years. For the 8 years after the 12th payment, the insurance cover or death benefit stays intact despite no premiums being required to be paid. However, there are no free lunches in the world of Life Insurance – the quantum of annual premium will be higher for policies that have premium paying terms that are shorter than their policy terms.

Surrender Value

The “surrender value” of your traditional policy is the amount of money you’ll be getting back, should you change your mind along the way or require emergency funds. Bear in mind that most traditional plans have notoriously low surrender values, meaning that there’s a very heavy price to pay for terminating your policy before its stipulated term. Surrender values do go up year on year, but typically start gaining any sort of significance only in the second half of the policy term. The surrender value is clearly represented in the benefit illustrations that your agent is mandated to provide to you;  evaluate it carefully.

Riders

Riders are optional, additional risk transfer features that you can add on to your traditional plan; for a price, of course. Riders enhance plain vanilla policies by making them more comprehensive. For instance, an “Accidental Death” benefit rider may result in a higher pay out if the insured person dies in a car crash. A “Critical Illness” rider could allow you to commute part of the death benefit upon being diagnosed with a critical illness, and a “Partial or Total Disability” rider could entitle you to a pay out in case of a disability. Some riders are cosmetic and aimed at increasing premium quantum without adding any serious value, whereas some (such as the disability rider) make a lot of sense. Exercise your judgment and smarts while strapping on riders, after putting their costs into perspective.