What Are Insurance Terms and Definitions Explained

The insurance sector is growing rapidly in India. The industry is projected to grow 7.1% annually over the next five years, surpassing global and emerging market growth rates. Currently, India has 26 life insurers, 27 general insurers, and 7 standalone health insurers. The sector is supported by approximately 71 lakh distribution points to make insurance more accessible to consumers nationwide.

With this rapid expansion, understanding insurance terms and definitions is crucial for policyholders to make informed decisions. Let’s explore the key terms used in insurance policies and their significance.

What are the Terms of Insurance?

Insurance terms are specific phrases used in insurance policy contracts that outline obligations of the policyholder and the insurer. Understanding these terms of insurance is essential as they influence the coverage, premium, and claim process. Different types of insurance feature unique terminology that policyholders should know to make informed decisions.

List of Insurance Terms and Definitions

Below are some standard insurance terms and definitions used across various insurance policies. These definitions help understand policy documents, claim settlements, and coverage details

Insurance

A contractual agreement where the insurer provides financial protection in case of specified losses or damages in exchange for periodic premium payments.

Insurer

The insurance company that agrees to compensate the insured for financial losses per the policy terms.

Insurable Risk

A risk that meets the criteria for insurance coverage. It typically involves measurable financial loss and uncertainty.

Policy

A legal contract issued by an insurance company that outlines the terms, conditions, coverage, exclusions, and benefits of an insurance agreement.

Policyholder

The individual whose name is registered for the insurance policy. The policyholder may or may not be the life insured under the policy.

Nominee

The person the policyholder chooses to receive the sum assured of the policy after the policyholder’s death. Alternatively, the nominee receives the maturity benefit upon the policy maturity in case of survival of the policyholder.

Beneficiary

A person or entity with a financial interest in the policyholder’s life. They could be a legal heir, a lender, or an organization owed money by the policyholder.

Premium

The amount the policyholder pays to maintain the policy benefits. The premium amount depends on factors like coverage level, policyholder’s age, riders, occupation and policy type.

Premium Loading

An extra charge added to the base premium due to higher risk factors such as pre-existing medical conditions, hazardous occupations, or advanced age. Insurers apply loading to compensate for increased liability.

Modal Factor

A multiplier used to calculate the total premium upon conversion of annual premium payments to monthly, quarterly, or semi-annual installments.

Policy Tenure

The duration for which the insurance policy remains active.

Premium Payment Term

The period for which the policyholder must pay the premium. The premium can be paid in two ways-

• Regular Premium Payment: The policyholder makes premium payments at fixed intervals (monthly, quarterly, half-yearly or annually) throughout the policy term.
• Limited Premium Payment: The policyholder pays premiums for a fixed number of years, as chosen, but the coverage continues for the policy term chosen by the policyholder.

Coverage

The level of protection offered by a policy which includes specified risks covered and the chosen riders.

Rider

An add-on benefit that can be attached to the primary insurance policy for additional coverage, such as accidental death, critical illness, waiver of premium riders, etc.

Claim

A request submitted by the policyholder, nominee, or beneficiary to the insurance company for policy benefits under the specified circumstances.

Exclusions

Specific circumstances under which an insurance policy does not provide coverage.

Peril

An event that causes a financial loss and may be covered (insured peril) or excluded (excluded peril) in an insurance policy.

Grace Period

A pre-specified period after the premium due date during which the policy remains active, allowing the policyholder to make overdue payments without the policy lapsing. For life insurance policies, this period is usually 30 days (subject to change based on the mode of payment selected) and begins on the premium due date. This period ranges from 15-30 days for health insurance. The policy ceases to exist if the premium is not paid during the grace period.

Free-Look Period

A specific period from the date of receipt of the insurance policy during which the policyholder can review the terms and return the policy if unsatisfied. Usually, the free-look period is 15 days from the date of policy receipt.

Deductible

The portion of the claim amount the policyholder must pay before the insurer covers the rest.

Maturity Benefit

The sum paid to the policyholder if they survive the policy term (in the case of life insurance). Some insurance policies do not offer a maturity benefit.

Reimbursement

The payment made by an insurer to cover actual loss incurred due to an accident, illness, or other covered events; subject to the limits specified in the policy.

Surrender Value

The amount paid by the insurer to the policyholder if they choose to terminate the life insurance policy before maturity. The surrender value is lower than the total premiums paid, as it accounts for administrative costs and other deductions by the insurer. Usually, the surrender value is paid if the policy is surrendered between 3 to 5 years (for different policy types).

Renewal

Extending an insurance policy beyond its initial term by making the renewal payment to maintain continuous coverage.

Claim Settlement Ratio (CSR)

The percentage of claims settled by the insurer compared to the total claims received. The higher the CSR, the better. A CSR of 95% and above is considered excellent, thus making the insurer a reliable choice.

Underwriting

The process insurers use to assess risk based on factors like occupation, age, etc. and determine premiums.

Lapse

When a policy becomes inactive due to non-payment of premiums.

Pure Risk

A type of risk in insurance where the outcome can either be no loss or an actual loss but never a financial gain (e.g., death, illness, or accident). Term insurance is a type of pure risk protection insurance plan.

Proof of Loss

Documentary evidence an insurer requires to validate a claim, typically including claim forms, medical reports, itemized bills, etc. Insurers have varied requirements for proofs of loss. 

Moral Hazard

The risk of dishonest or fraudulent behaviour by an insured individual, such as concealing risk-related information or filing false claims.

Negligence

Failure of the insured to exercise reasonable care, leading to damage, injury, or loss, which may impact liability claims in insurance.

Occupational Hazard

The risk associated with a specific profession, where the nature of work increases the likelihood of injury or disability (e.g., construction work or firefighting). The premium is often higher where the risk of occupational hazard is higher.

Loss

The event or damage for which an insurance claim is filed, leading to compensation from the insurer.

Indemnity

A principle stating that an insured should not profit from a loss but should be restored to their original financial position before the event.

Insurable Interest

A financial or legal interest in the subject matter of insurance, such as a person’s life, property, or liability, justifying the need for coverage.

Why is it Important to know the Insurance Terms?

Being familiar with the terms of insurance is key to making well-informed decisions when purchasing or managing a policy. Here’s why it matters:

• Helps Choose the Right Policy: Understanding insurance terms like sum assured, exclusions, and deductibles allows individuals to compare policies and select one that best suits their needs.
• Reduces the Risk of Claim Rejection: Many claims are denied due to a lack of awareness about exclusions, waiting periods, and required documentation, which can be avoided by knowing the policy terms.
• Ensures Sufficient Coverage: Familiarity with terms like rider, co-payment and deductible enables policyholders to customize their policies and ensure they have adequate financial protection.
• Prevents Unexpected Costs: Awareness of modal factor, premium loading, and grace period helps policyholders avoid hidden charges, premium hikes, and policy lapses.
• Simplifies the Claim Process: Knowing how terms like proof of loss, reimbursement, and claim settlement ratio work ensures that claims are filed correctly and payouts are received without unnecessary delays.
• Enhances Financial Planning: Awareness of tax benefits under Sections 80C, 80D and 10(10D) helps policyholders optimize their tax savings while maintaining necessary insurance coverage. 

Conclusion

Understanding insurance terms and definitions is essential for making informed decisions about purchasing, maintaining, and claiming insurance. Whether it’s life, health or motor insurance, knowing key insurance terms helps you choose the right coverage, avoid hidden costs, and ensure smooth claim settlements. A well-informed policyholder can maximize benefits, prevent policy lapses, and stay financially secure. By familiarizing yourself with insurance terms and definitions, you can confidently navigate the complexities of insurance and safeguard your financial future.