Insurance terms you need to know

Insurance is very helpful to have, but you need to speak the language so you don’t trip up when making a claim. Here are some useful terms to know.

Insurance terms you need to know

Insurance can save you a lot of money at a time when you need it the most, but there’s a persistent belief that insurance payouts don’t always meet expectations. Often, this is because the subscriber is unfamiliar with insurance terminologyIn this article, we shall examine some insurance terms that everyone needs to know if they wish to understand insurance policies better – whether it is life insurance or motor insurance or any other type of insurance for that matter.

First, let’s look at some common terms relating to insurance:

  • Insurance policy. This is the document that spells out the terms and conditions of your insurance coverage. You will usually get a receipt upon payment, and copy of the policy is sent to you after the company judges you to be eligible. A PDF version of the policy is sent to your registered email ID. A physical copy of the policy is often an optional extra, so check with your insurance provider if you need it.
  • Premium. This is the fixed amount you pay to the insurance company to subscribe to the policy. Payments toward the policy can be monthly, quarterly, or yearlyOften, paying for a longer term (annually or bi-annually) can fetch you a discount. As per the law, you are entitled to get your premium back during the ‘free look’ period if you are not satisfied with your policy – after deduction of any expenses incurred by the insurance company, and the stamp duty.
  • Grace period is the time given by the insurance company for renewal of an insurance  policy after it expires. This is usually around 15 days, after which the continuity benefits like cumulative bonus or no-claim bonus will lapse.

These are terms common to all types of insurance. However, there are different types of insurance like health insurance, life insurance, motor insurance (both bike insurance as well as car insurance), travel insurance, home insurance, shop insurance (also called business insurance), insurance for personal items like mobile phones or laptops, and umbrella insurance. They have terms and conditions that are unique to them. Let us examine the different types of insurance available, and the terms and conditions that you will encounter with each.

Related: What do the proposed insurance colour codes by IRDAI mean?

Health insurance

Health insurance is probably the most important kind of insurance available to you. Its purpose is to help defray expenses incurred due to illness. It also counts towards tax relief. Some common terms you’ll encounter in a health insurance policy are:

  • Free look period. This starts as soon as you receive the policy. It is usually for 15 days, and allows you to cancel the policy and ask for a refund if you are not satisfied by the terms and conditions. The insurance company will refund the money to you, minus the stamp duty and any expenses incurred (such as a medical examination). This should not be confused with ‘waiting period’ or ‘grace period’.
  • Portability is a term that is not used much but is exceedingly important. A policy that allows portability allows the insured to carry over benefits from previous policies, such as exclusions due to a waiting period (see next section)A policy’s waiting period is portable in the sense that it can be carried over from one insurance provider to another, as long as there has been no gap between the expiry of the first policy and the beginning of the secondPortability depends upon the insurance company’s policies and the policy you’re looking to purchase, so check with your insurance provider before making your purchase.
  • Waiting period covers pre-existing conditions. During this period, pre-existing conditions will not be covered by the insurance policy, after which they will be included. For example, if you have had surgery on your shoulder, it will qualify as a pre-existing condition and will not be covered by the policy during the waiting period. Chronic illnesses like asthma are also included in the waiting period. Waiting periods range from 1 year to 3 years, but some policies offer you the option of shortening the waiting period for a small extra fee. 
  • Pre-existing conditions. These are ailments that the subscriber suffers from at the time of or before purchasing the policy. This term can include chronic illnesses like asthma, or a part of the insured’s body that has undergone surgery, like the shoulder we mentioned before.
  • Exclusions are illnesses or conditions that the insurance policy will not cover. These usually include some chronic illnesses and quite a lot of critical illnesses.
  • Sum assured is the amount of money that the insurance company is liable to pay out.
  • Deductible/excess This can be one of two kinds: the compulsory deductible is a flat amount that the insurer agrees to pay, beyond which the insurance company will cover the costs. For all our examples now on, we shall assume a total claim amount of Rs 10,000 for ease of comprehension. If the compulsory deductible is Rs 2000, the insurance company is liable to reimburse the insured only Rs 8000, which is the amount remaining after your compulsory deductible has been deducted.

The second type is the voluntary deductible, which the insured agrees to pay upfront. This helps to lower the premium significantly. Let’s say the voluntary deductible is Rs 2000 as well; then the insurance company is liable to pay out Rs 8000 for a claim amount of Rs 10,000. Interestingly, if the insurance policy has both a compulsory deductible and a voluntary deductible, both need to be taken into consideration. So for the amounts mentioned above, the insured needs to pay Rs 4000 upfront for any claim made. Therefore, for a claim amount of Rs 10,000, the insurance company will pay out Rs 6000, which is what is left over after deducting the deductibles.

There are different types of deductibles with varying clauses – some work as a part of the total sum insured for the year, only after which the insurance company will reimburse you. For example, if your annual insured sum is Rs 10,000, your deductible is Rs 2000, and if you make a claim of Rs 1000, you will not receive anything from the insurance company. When you submit a second claim of Rs 3000, you will be reimbursed Rs 2000 because the total amount of both claims is Rs 4000, minus the deductible of Rs 2000. That’s what the insurance company will reimburse you. So, it is important that you find out not just how much your deductible is, but exactly what type it is.

  • Copayment is a deductible of sorts, but is calculated as a percentage of the claim amount that the insured agrees to pay. For example, if the insured agrees to a copayment of 10 percent for a claim amount of Rs 10,000, the insurance company will pay out Rs 9000. Copayment is applicable to all claims made.  Read here in detail about co-pay and deductibles in insurance.
  • Day care treatment. This is term that arose because traditionally, health insurance would only cover treatments under hospitalisation, which required that a patient be admitted to a hospital for at least 24 hours. Day care treatments are defined as treatments that allow the patient to be admitted to a hospital in the morning, undergo the procedure or treatment, and be discharged by evening.
  • Domiciliary treatment is treatment given to the patient at home. Traditionally, medical insurance would cover only treatments done in hospitals, but now some policies allow coverage for treatments done at the residence as well. This is usually applicable when hospitals don’t have space for the patient, or the patient cannot be moved to the hospital for treatment, or if the treatment is a recurring one and can be done by a medical professional at home.
  • Cashless systemThe traditional method of claiming insurance involved the insured first paying the medical institution and then submitting a claim to the insurance company for reimbursement. In a cashless system, the hospital takes care of the paperwork, and the insurance company gives the payout directly to the hospital; the insured needs to only pay the difference between the billed amount and the insured sum approved to the hospital, making it extremely convenient for the insured. However, to take advantage of this system, the hospital needs to be on the insurance company’s list of network hospitals. Read your policy document to find out if your intended hospital is on the list, or call the insurance company’s customer care, or ask the hospital’s insurance department. Cashless versus reimbursement: Read this to know how to make the right choice when filing a health claim.
  • Cumulative bonus is the health insurance equivalent of auto insurance’s no-claim bonus. However, where the latter offers a discount on the premium, in health insurance, a claim-free year is rewarded with an increased total sum insured. The cumulative bonus is usually a percentage of the total sum insured, which increases with each claim-free year. 
  • Floater plans or family floater plans are insurance plans that cover more than one person. They are usually designed to cover a family unit and provide the insured with the convenience of paying a single premium for the entire family. Here’s how it works: If the entire family is insured for a sum of Rs 10 lakh and a claim is made for Rs 2 lakh, there still remains Rs 8 lakh for the rest of the members covered under the policy. The advantage of a floater insurance plan is that you don’t have to worry about multiple premiums and renewal times, and in certain circumstances it can work out to be more affordable than purchasing multiple health insurance policies. It also offers access to potentially more coverage than individual insurance plans. For a family of four, a policy of Rs 10 lakh potentially gives up to Rs 10 lakh to a single person, whereas purchasing individual policies would set a hard limit at Rs 2.5 lakh for each. There can be disadvantages as well – a family floater policy is usually calculated as per the most high-risk individual under consideration, so if an elderly person is involved, it might be better to look at individual plans. Floater policies also cannot be customised for each family member to the same degree that individual plans can. Read this to know more about family floater plans in detail. 

There are a wide range of health insurance policies available, with varying benefits. Some policies are designed for critical illnesses like cancer, and others offer a payout in case the insured passes away due to injuries from an accident. Some health insurance policies even offer coverage for alternative treatments. All health insurance policies cover injuries due to an accident once the policy is issued, including diagnostic treatments for a short period before hospitalisation (usually 30 days) and rehabilitation after discharge (usually 60-90 days). You will need to go carefully through the various add-ons available and pick the ones that best suit your requirements.

Life insurance

Life insurance is also a very popular type of insurance, and offers tax benefits too. There are different kinds of life insurance, so let us take a look at them in greater detail to understand the differences.

  • Term insurance. This is the easiest kind of life insurance to understand: the insured sum is paid to the next of kin once the insured passes away. There is one variant of term insurance called ‘return of premium’ – if the insurance is valid until a particular age of the insured and the insured reaches that age, the total sum of the premiums paid is paid back to the insured, without interest. Term plans have a high sum assured and a low premium. Here is how buying term insurance online helps in achieving goals.
  • Whole life insurance policies do not have a limit on the age of the insured. When the insured passes away, the sum assured is paid to the dependents/nominees. Whole life insurance plans also offer a component where the insured can opt for a cash payout at particular times during their life, or choose to reinvest the payout.
  • Endowment policies are a popular kind of life insurance policy because they offer a payout to the nominees if the insured passes away suddenly. If the insured survives until the maturity of the policy, they are paid a lump sum. However, in exchange for this convenience and a guaranteed return, endowment policies have high premiums and as such don’t always offer as much return as (say) investing in a term insurance plan or mutual fund. Things to consider before buying an endowment policy.
  • Money-back policies are a different take on endowment policies. A part of the sum assured is paid out to the insured at intervals, and the remainder of the sum assured is paid out at maturity. If the insured passes away before the policy matures, the entire sum assured is paid out to the nominees, irrespective of how much was paid out before.
  • Unit-linked insurance plans. These are more commonly known as ULIPs. The premium is invested in either debt or equities, which is decided by the insured. At maturity, a lump sum is paid out to the insured if they are still alive. As always, if the insured passes away before maturity, the sum assured is paid out to the nominees. ULIPs come with greater risk than traditional life insurance policies but also offer better returns on average.

Traditionally, India’s life insurance provider has been LIC, but now there are many life insurance providers and many kinds of life insurance to choose from. There are others that are more investment focused, such as child life insurance plans that you can start at the birth of your child and can be withdrawn to fund your child’s higher education. There are also life insurance plans geared towards retirement; they offer you a pension after you retire, and pay out a lump sum to your nominees in case of an untimely death.

Motor insurance

Both car and motorcycle insurance are included under motor insurance or automotive insurance. Here are a few terms that you need to be familiar with:

  • Third-party insurance. This is the basic component of motor insurance, and is a legal requirement to operate a vehicle on Indian roads. Premiums for third-party insurance are usually set by the IRDAI, not by the insurance company itself. Your third-party insurance does not cover you, it covers the other person involved in an accident with you. However, if you were to claim benefits of third-party insurance, you would have to get a court order proving that the other person involved in the accident was at fault, and present the order to that person’s insurance company. Third-party insurance does not usually have a large sum assured. Read more about claiming compensation under third-party motor insurance.
  • Comprehensive insurance is the most common type of motor insurance purchased today. It involves an ‘own damage’ component, which means that in case of an accident, you can submit a claim to your insurance company to help defray the cost of repairs to your vehicle. Comprehensive insurance takes depreciation into account, which is why there will always be a component that the insured needs to pay. What this means is that if your car needs a replacement bumper (a plastic part), the value of the bumper is calculated as per a depreciation table. Plastic and glass parts are usually valued at 50 per cent of their purchase value, so the insurance company will reimburse half the price of a new bumper. The comprehensive or own damage policy pricing is set by the individual insurance company, so the pricing is significantly higher than third-party policies and can vary with different add-ons.
  • Own damage is the term for the component of the insurance policy that covers any damages to the insured’s own vehicle. This is what distinguishes comprehensive and zero depreciation policies from third-party policies. Comprehensive policies are also sometimes called own damage policies.
  • Zero depreciation insurance. With parts becoming more complex and therefore more expensive, zero depreciation insurance has taken on more importance. A zero depreciation premium is typically 20 percent higher than the equivalent comprehensive premium, but as the name suggests, it takes into account the price of a new part and not the depreciated value. If you have zero depreciation insurance for your vehicle, you will only have to pay for deductibles (compulsory or voluntary) – the full cost of the replaced part is covered by the zero depreciation insurance policy.
  • Bumper-to-bumper insurance. This an alternative term used by many motor insurance companies for a zero depreciation insurance policy. It is usually pitched as an insurance policy that covers fibre (plastic), glass, and rubber parts of your car as well; literally everything from bumper to bumper.
  • No-claim bonus is similar to cumulative bonus in health insurance, but the benefit is passed on to the customer in a slightly different way. If a customer does not make a claim during a year, a discount is offered on the subsequent year’s premium. The NCB is cumulative figure that increases with each successive claim-free year, but resets to zero if a claim is made and then follows the discount increments from the first step onwards. Read more in detail about NCB. 
  • Accessories. Anything that isn’t standard equipment on your vehicle is not covered by default by your insurance policy. These additional features are called accessories. Accessories can include auxiliary lights, an aftermarket stereo system, etc. You will need to produce a receipt for these items so that the insurance company can add their value to the policy and adjust the premium for them. You will need to ask your insurance provider to add accessories to your insurance policy separately, usually at the time of renewal.
  • Consumables coverage is sometimes offered as an add-on in motor insurance. Consumables include all the bits and bobs that need to be replaced as part of a repair job, including engine oil, brake fluid, lubricants (grease), refrigerant gas for the AC, oil filter, fuel filter, washers, nuts and bolts – pretty much everything excluding fuel.
  • Roadside assistance is a relatively new add-on for motor insurance, but in the past few years it has expanded its scope from merely towing a vehicle and now includes minor repairs, replacing a flat tyre, retrieving spare keys from the insured’s home, and even a cab ride to the insured’s office or home. However, roadside assistance usually operates within a fixed distance from dealerships, or within a certain number of kilometres from city limits, so it is important to go through your policy carefully to understand the limits of your roadside assistance.

Generic terms like compulsory deductible, voluntary deductible, and exclusions are all terms that you will encounter in motor insurance policies. With a standard two-wheeler, it is also highly unlikely that accessories will be insured, but insurance companies are far more open to insuring accessories on high-end or premium two wheelers. Read this to know more about types of motor insurance policies.

Travel insurance

Travel insurance covers any unfortunate eventualities that can occur on a trip, such as a medical emergencytheft or loss of luggage etc. Travel insurance is usually purchased when one travels outside the country, but these days it can be purchased for domestic trips as well. Read this to know types of travel insurance coverage in India.

  • Medical coverage is an essential component of travel insurance, especially if you are travelling to countries where healthcare is expensive. Travel insurance with a medical component will cover the cost of medical attention for minor as well as major events. Make sure medical evacuation is part of the policy; it will cover either road or air evacuation to a medical facility that is equipped to deal with your situation.
  • Luggage insurance covers loss or theft of your luggage, and usually important things in the luggage as well, such as key documents (passport and visa)
  • Trip insurance covers the cost of a trip that you delay or cancel. This will cover the cost of cancelling or rescheduling a flight, hotel bookings, etc.

Home insurance

Home insurance insures your house and its possessions against calamities like fire or a burglary. There are different components to home insurance.

  • Building insurance covers the structure of the house, including such things as pipes and fixtures. Any attached structures like a shed or garage will also typically be included in this type of coverage.
  • Public liability coverage covers damage to your house or the neighbouring house due to an unforeseen event in your house such as a burst pipe.
  • Burglary coverage reimburses you for any valuables that are stolen or damaged in case of a theft in your house.
  • Contents insurance is a more generic cover that covers the contents of the house up to a particular amount; it also covers items lost or damaged due to burglary, theft, fire, flood, etc.

As with health and motor insurance, home insurance also comes with a number of add-on components such as tenants’ insurance, landlords’ insurance, lost wallet cover, lock-and-key replacement cover, etc. that you can use to tailor your home insurance to suit your needs. Here's your complete guide to home insurance.

Umbrella insurance

Umbrella insurance is almost identical to home insurance, except that it covers office space instead of residential properties. This includes the building, fixtures, and office equipment. It may even cover for the loss of business during periods when the business wasn’t running.

Electronic equipment insurance

Mobile phones, tablets, laptop computers, and televisions are all common items today. However, their purchase and repair costs are increasing with each generation, and it is not always affordable to repair them. Electronic equipment insurance will cover your electronic devices, whether it is a loss due to theft, or repair costs that have arisen due to negligence, misuse, being dropped, or getting wet – all things that a standard warranty will not cover. Electronic equipment insurance will also cover breakdowns, and the cost of data recovery as well.

An interesting option for mobile phones is your mobile phone service provider; if you are a postpaid subscriber, find out if you can add mobile phone insurance to your monthly bill. It will be a nominal increase in your bill, as your service provider will typically divide the premium cost into monthly payments.

Other types of insurance

There are other types of insurance available in India as well, such as pet insurance, dengue cover, etc. These are not very common in India, and therefore their coverage is limited.

Armed with the knowledge of insurance jargon, you can make sure that you get the best possible insurance for yourself and your loved ones. Do read your entire policy document carefully and don’t hesitate to ask your agent or insurance provider about any terms you don’t understand, preferably before the purchase, or at least during the ‘free look’ period, to avoid the hassle of purchasing something that doesn’t fit your needs.

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