A basic understanding of insurance can help you in the long run, especially while choosing a coverage plan. In this article, we will explain some of the most commonly misunderstood terms in insurance.
One of the most basic yet commonly misunderstood terms in insurance is “Premium.” It is a vital part of any insurance policy and acts as a payment towards the selected coverage in order to keep it active. The premium amount for insurance policies depends upon various factors and it usually has to be paid on a periodic basis, which can either be monthly, quarterly or annually.
- Term life insurance
This one is the most commonly preferred type of life insurance due to its affordable nature. Term life insurance offers coverage for a specified term period, for example, 10, 20 or 30 years. If you pass away within this coverage term period, then your beneficiaries will receive a payout called a “death benefit.”
- Preferred rates
This is a less expensive rate for life insurance which is offered to certain candidates who have a lower mortality risk. The insurer will consider things like the individual’s gender, lifestyle, smoking habits, medical history, etc. when issuing preferred rates.
A rider works as an extra layer of protection that offers additional coverage options on top of the base plan. They are completely optional, however, most individuals prefer picking some in order to cover their specific needs. In simple terms, riders offer additional coverage in exchange for an increased cost.
- Grace period
If a policyholder misses a premium payment for their insurance within the stipulated time, then their plan can lapse. However, insurance companies offer a duration that works as an extension beyond this stipulated time, under which the policyholder can pay the premium, without causing their plan to lapse.
A beneficiary is a person who is qualified to raise a claim and receive the death benefits of the life insurance policy after the demise of the benefactor. Depending on the preference made by the policyholder, a beneficiary can either be a single individual, multiple persons or a big group of people.
- Death benefit
The monetary amount that the insurance company pays out to your beneficiaries in the unfortunate event of your passing is called a “death benefit.” It is only applicable if the policyholder dies while the life insurance policy is still active. The recipients of this death benefit don’t usually have to pay taxes on the received funds.
This is a type of agreement between an individual and the insurance company where the individual either makes a lump sum payment or goes with a series of payments and in return, receives periodical income or disbursements, starting immediately or sometime in the future.
- Contestability period
A contestability period is a standard clause found within life insurance policies. It starts from the date of the policy issue and may last for 1 or 2 years in total. During this time, the insurance company has the right to dispute (contest) the validity of the policy against misrepresentation and to deny paying death benefits if the insured individual dies within this period. This is a step that insurance companies take to protect themselves against fraud.
- Living benefits
Some life insurance plans can offer benefits while the insured is still alive. This usually includes perks like long-term care benefits, accelerated death benefits, policy loans and so on.
It is important that you have a clear understanding of the common insurance terms in order to get the best out of your coverage plan. This way, you can carefully curate the things that you need and avoid making mistakes while choosing insurance coverage.