Life Insurance Glossary: 15 Key Terms You Must Know

Today, the average Indian has a home loan, a car loan, children to be educated and married off, rising medical expenses, and retirement to worry about. That’s a lot of financial responsibility. Ever thought, “Who will take care of my family if I die?” This is a tough question to ask, but it must be asked.

While your family can rely on other members and friends for emotional and social support, financial support is a significant challenge. That’s where life insurance comes in. If you have a solid life insurance policy that can take care of your family’s financial needs after paying off your liabilities and debt if you pass away, you can breathe easier.

Before you start hunting for life insurance policies, you should be aware of key life insurance terms. Here is a life insurance glossary with 15 key terminologies that everyone must know. In this article, we only focus on individual life insurance terminologies. We are not looking at businesses or companies that take out life insurance policies on key personnel.

1. Policyholder

• This is an essential life insurance term. A policyholder is the person who purchases the life insurance policy.
• This person’s name enters the insurance company’s records as the policy owner.
• Usually, the policyholder is the person insured by the life insurance policy.
• However, sometimes, an individual might purchase an insurance policy for someone else. For example, if a husband buys a life insurance policy for his wife, she is the person insured by the policy, and he is the policyholder.
• A policyholder is responsible for paying premiums regularly. The policyholder can also decide who the beneficiaries of the insurance policy are and make any changes they want to the policy.

2. Insured

• This is the core of life insurance. The “insured” refers to the person whose life is insured through the life insurance policy or whose life is covered in the insurance agreement.
• This is the individual whose death will trigger the insurance payout. For instance, if you buy life insurance in your name, you are the “Insured” person. If you pass away, your beneficiaries will get the sum assured from your insurance policy. If you purchase life insurance in your spouse’s name, your spouse is “Insured”.
• The “Insured’s” health, age, and lifestyle determine the policy’s premium, risk, and duration.

3. Beneficiary

• In life insurance terms, the “beneficiary” is the person or persons who will receive the “amount assured” and other benefits of the policy when the “insured” passes away.
• In most families, the “beneficiary” are the “insured’s” spouse, children or parents. Example: Ramitha purchases a life insurance policy for herself with a policy term of 20 years. She nominates her husband, Ramesh, as the beneficiary. She passed away after 15 years. The insurance company paid Ramesh the “amount assured” and other benefits.
• The “policyholder” must specify the “beneficiary.” Multiple beneficiaries could be included in an insurance account. In that case, the “policyholder” must specify the ratio in which the “amount assured” must be split.

4. Amount Assured

• The amount assured is the guaranteed amount that a life insurance company promises to pay beneficiaries if the “insured” passes away during the policy’s term.
• For instance, if you are the “insured” or the “policyholder” you must decide on this amount when you buy a policy.
• Decide this based on your family’s current and future financial needs, such as paying off a home loan, enough money for your spouse and children’s living expenses, and funding your children’s education.

5. Life Assured

• “Insured” and “Life Assured” are used interchangeably in life insurance. Both terms refer to the person covered by the policy.

6. Tenure of Policy

• In life insurance terminology, “tenure of policy” or “policy term” is the duration for which the policy is active.
• For instance, Dinesh, 35, purchases a life insurance policy for 20 years. In this case, 20 years is the “tenure of policy.” The policy will expire when Dinesh turns 55.
• The “tenure of policy” is important because it determines for how long the “insured” is covered. During this period, the “beneficiary” will receive the “amount assured” if the “insured” passes away.
• If you are purchasing an insurance policy, you should ensure the policy covers all your liabilities for that period. Example: If you have a 25-year home loan (since home loans are generally the longest and largest liabilities) and are purchasing a life insurance policy, you should opt for a tenure of at least 25 years.

7. Premium

• “Premium” or “insurance premium” is the amount that a “policyholder” pays to the insurance company to keep the life insurance policy active.
• The “premium” can be paid monthly, bi-annually, or annually. In some cases, policyholders can also pay the entire premium in a one-time payment.
• The “Premium” calculation depends on several factors, such as age (the younger you are, the lower the premium you pay and vice versa), medical conditions and history (if you have a family history of illness or previous illnesses, you will pay a higher premium), lifestyle (smokers and people who consume alcohol pay higher premiums), etc.
• You should choose your premiums based on your affordability. If you don’t pay a “premium,” your policy might lapse, and you will lose insurance coverage.

8. Nominee

• A “nominee” is the same as a “beneficiary” in life insurance. A “nominee” will receive the “amount assured” when the “insured” passes away.
• Generally, a nominee is a close family member like a spouse, child or parent. They are called beneficial nominees. You can choose multiple nominees (people do this when they have more than one child or want to distribute money to multiple relatives).
• You can choose a non-family member as a nominee. If you do so, your legal heirs may seek a claim on the death benefits that the non-family member receives.

9. Coverage

• Some people interchange “Coverage” and “amount assured” in life insurance. However, there are a few differences here.
• “Coverage” is a broader term that refers to the total financial protection the insurance company offers. It includes “amount assured”, “riders”, and maturity benefits. It also covers events like death, critical illness, etc.

ALSO READ: How to Decide Right Life Insurance Coverage Period?

10. Death Benefit

• The “Death Benefit” is the final amount the insurance company pays the “beneficiary” when the “insured” passes away. The “amount assured” is part of the “death benefit.”
• The “Death benefit” can include bonuses, “riders,” and other benefits in addition to the “amount assured.”
• If the insurance claim forms are filled out correctly, the “death benefit” should be paid in less than 30 days.

11. Grace Period

• “Grace Period” is the time given to the “policyholder” to pay the “premium” after the due date has passed.
• The grace period for monthly premium payments is generally 15 days. For quarterly, bi-annual, or annual payments, it is generally 30 days.
• For example, suppose Amit has to pay his monthly insurance premium on the 1st of every month. In that case, he has a “grace period” of 15 days to make his payment. These extra 15 days should not be taken advantage of, and policyholders should endeavour to make regular payments.
• The “grace period” prevents the policy from lapsing immediately after the due date.

12. Lapsed Policy

• A “Lapsed Policy” occurs when the “policyholder” has missed paying their insurance premium. This means that the “premium” hasn’t been paid during the “grace period” as well.
• A “lapsed policy” means the insurance contract/agreement between the insurance company and the “policyholder” is no longer active. If the “insured” passes away when a policy lapses, the “beneficiary” won’t receive any “death benefits”.

13. Revival Period

• In life insurance terms, a “revival period” is the time that the insurance company gives to a “policyholder” to revive their “lapsed policy.”
• For example, Amit’s policy lapsed in August 2024. Depending on his insurance company, he can restart or revive his policy within 3-5 years (the general time limit given by insurance companies to revive a “lapsed policy”).
• The “revival period” starts from the first unpaid “premium” date.

14. Riders

• “Riders” are extra benefits in a life insurance policy. They can be added to a basic policy to enhance coverage and protection.
• Common “riders” include Critical Illness Rider (payout if the “insured” is diagnosed with a specified serious illness), Accidental Death Rider (extra compensation if death occurs due to an accident), Disability Income Rider (monthly income if the “insured” becomes disabled), etc.
• These “riders” provide extra security to the “insured” and are cheaper than buying a second life insurance policy.

15. Surrender Value

• “Surrender Value” is the amount the insurance company pays to the “policyholder” when they choose to cancel or surrender their policy. This happens when the policyholder decides they don’t need insurance anymore or if they can’t pay their premiums.
• The amount is calculated after subtracting administrative and surrender charges. There are two types of “surrender values:” Guaranteed Surrender Value and Special Surrender Value.

Understanding life insurance terms is essential before you purchase a life insurance policy. The above life insurance glossary can help you decide the coverage amount you need, who your beneficiaries should be, what riders you need, and the premium you can afford to pay. You can use the above glossary to buy the proper protection plan for your loved ones and ensure a secure financial future.

Frequently Asked Questions

What is the most important life insurance term to know?

The most important life insurance term to know is “amount assured” or “sum assured”. This is the minimum amount that the insurance company will pay the “beneficiary” if the “insured” passes away during the policy tenure.

What are the three most essential insurance policies?

The three most essential insurance policies are Life Insurance, Health Insurance, and Auto Insurance (if you have a vehicle).

What is the difference between term life and whole life insurance?

A term life insurance policy is a pure protection policy, while a whole life insurance policy combines protection and investment. The term insurance premium is much lower than a whole insurance policy.

What is the difference between a policyholder and insured?

A “policyholder” is the one who owns the policy and pays premiums. This person can legally modify the policy, like adding and removing nominees. The “insured” is the person whose life is covered by the policy. If a husband buys a life insurance policy for his wife, the husband is the “policyholder,” and the wife is the “insured.”