Common terms to know if you’re getting insurance for the first time

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” to some terms that you might encounter as you build your financial foundation with an insurance policy.

Insurer, insured & policy owner

The insurer is the insurance company while the insured is the person whole 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. There are generous insurers like Sun Life who double the plan’s face amount for no additional premium.

Death benefit & 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 a period, so this is not guaranteed and just considered a bonus.

Limited payment period

There was a time when getting an insurance meant paying throughout one’s lifetime. Now, there are options like 5, 10, 15 or 20 years, which is referred to 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 6 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 & 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 cost and is dependent on age. Fund management fee is imposed on each investment fund and use 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.