Here’s a glossary of the most common insurance vocabulary to help you make sense of your policy.
If you’ve ever been baffled by your insurance policy (who hasn’t, really?), don’t fret. The fault is not yours, as insurance contracts are notorious for being crammed full of jargon, technical terms and phrasing that don’t always mean what you think they mean.
The following glossary of some of the most common insurance terms may help.
A cash dividend refers to a sum of money paid out to eligible policyholders as a result of earnings or accumulated profits. Only specific insurance policies pay out cash dividends, which may be guaranteed or non-guaranteed.
The cash value of your policy refers to the amount of cash you will receive when you surrender your policy. It is accrued via the premiums you pay, minus charges and fees. Cash values typically take time to accumulate, growing the most during the tail-end of the policy’s duration. As such cash values are usually low at the beginning and highest towards the end.
Co-insurance refers to the portion of the bill the policyholder agrees to pay when a claim is filed. For example, if your policy has a hospitalisation benefit with 20% co-insurance, and the bill comes up to $10,000, you will pay $2,000 while your insurer pays the rest. Co-insurance is a way for insurers to keep premiums low, by ensuring policyholders pay their share when they make a claim.
This term commonly makes an appearance in your Integrated Shield plans.
A sum of money paid out to beneficiaries upon the death of the insured person. Death benefits are mandatory in a life policy, but they are also commonly added to many other types of insurance policies.
A deductible is an amount that is required to be paid by the insured before any claims can be processed. The insurer will pay the excess of the deductible. If the amount falls below the deductible, no claims can be made.
This sounds identical to co-insurance mentioned above, but there’s just one slight difference. Deductible refers to the first dollar of the fees, up to the deductible amount. Co-insurance refers to the percentage of the hospital bill that is payable after paying the deductible.
Other than Integrated Shield plans, you’ll see it in a lot in car insurance.
An exclusion is a pre-defined event that your policy does not cover, and any claims made for an exclusion will be rejected. Some examples include pre-existing medical conditions (life insurance), selected occupations (personal accident) and acts of terrorism (travel insurance). It is important to study a policy’s exclusions carefully to determine whether that policy is suitable for your needs.
Free look period
A period of time after signing an insurance policy within which you may withdraw from the contract without any penalties. Typically, free-look periods for insurance policies last 14 days in Singapore, but may differ in some cases.
Refers to the practice whereby insurers subtract costs and fees upfront from a policy’s initial premium payments. Front-end loading is the reason why insurance policies have low cash values at the beginning.
An uncommon term, this may refer to certain types of insurance protection that provides additional coverage for long-term obligations. For example, a life insurance policy may come with the option to include a mortgage protection rider, which pays off any mortgage payments still remaining at the time of the policyholder’s death. Guardian angel benefits are usually designed to unburden the insured’s dependents financially.
Indemnification insurance involves an agreement for the indemnitor (the insurance company) to pay up any claims made against the indemnitee (the policyholder) by a third party. A common example is third-party liability cover included in most home insurance policies.
In-patient means any medical treatment or procedure involving an overnight stay in a hospital or medical facility. Many medical insurance policies have different benefits and coverage for in-patient and outpatient visits.
The maturity date of a policy refers to the end of your policy. This has different implications, depending on the type of insurance policy you are holding.
In a whole life policy, the maturity date for the insured is typically 99 to 100 years of age. Hence, whole life policies typically reach maturity upon the death of the insured due to the maturity date being extended beyond the median age of the population. The death of the insured will trigger a payout equal to the sum assured that the policy offers. In the case of some insurers, should the insured live till the maturity date of the policy, a payout equivalent to the sum assured will be paid out.
In other insurance types (i.e. term life, endowment, etc), the maturity date of the policy specifies the end of coverage after the term agreed on in the contract of insurance is reached. For example, in an endowment plan, a lump sum benefit inclusive of bonuses is usually paid out on the maturity date.
Be sure to check with your insurer what to expect upon reaching your policy’s maturity date.
A multiplier plan may refer to a type of insurance plan that multiplies your basic sum assured in the case of pre-defined events. For example, an insurer may offer a 4X multiplier for critical illness on a life insurance plan with a basic sum assured of $100,000. Should the policyholder be diagnosed with a critical illness such as cancer, they will receive up to $400,000 in benefits.
No claim discount (NCD)
A discount on your next premium which is applicable only if you have not made any claims in the preceding pre-defined period. For example, a motor insurance policy with a three-year NCD will award a discount to drivers who have not made a claim in the past three years. This discount is applicable to their premiums for the fourth year.
Occupational loading refers to the increased cost of insurance for individuals with occupations that are considered to have higher risk of injuries or illnesses. Someone with occupational loading will incur higher premiums than someone without, for the same level and type of insurance coverage.
Outpatient refers to any medical treatment or procedure that can be completed without the need to stay overnight in a hospital or medical facility.
Participating policy or par fund
A participating policy (A.K.A. a policy on a participating fund) refers to a policy that pays dividends to the policyholder. It consists of guaranteed benefits and non-guaranteed bonuses.
Guaranteed benefits refer to the sum assured for death benefits and total permanent disability.
Non-guaranteed bonuses refer to cash dividends and bonuses.
The bonuses are dependent on how the par fund’s investments are performing, number of claims made, and the expenses incurred by the par fund.
Personal liability insurance protects against claims made against the policyholder for damages, loss or injuries. A common application for this type of insurance involves a landlord wishing to protect themselves against tenants seeking compensation for losses arising from renting and staying in their property.
A payment or payments collected by an insurance provider in exchange for keeping a policy active. Premiums may be paid through regular instalments over a specified duration, or paid up all at once in a lump-sum. Different types of policies offer different premium payment structures.
A rider is an additional insurance benefit that is attached to a base policy, broadening and extending the coverage. Riders offer a good way to customise a policy to your specific needs, and are often cheaper when bundled rather than purchased as a standalone plan.
(Note: When the main policy matures or terminates, the riders that were added on will be terminated as well.)
The sum assured of an insurance policy defines the amount up to which your insurer will pay you, in the occurrence of a pre-defined event. A simple example would be a life policy with a death benefit sum assured of $1 million.
With a policy like this, the insurer will pay out the sum of $1 million upon the death of the policyholder, provided the circumstances of death fits the policy’s definition and are not found in the list of exclusions (for example: death from suicide within 12 months of the policy’s start date).
How much your policy is worth at the point of surrender, in cash terms. The surrender value is equivalent to the cash value of your policy, and is it often best to wait until the cash value meets or exceeds the total amount you have paid up in premiums before surrendering.
A pre-defined period of time which must pass before coverage becomes active. For example, a critical illness policy may have a waiting period of three months. If a claim for critical illness is made during the waiting period, the insured may not receive benefits.
This is to protect the insurer against moral hazards. This could refer to instances whereby the insured knows that he/she has a pre-existing medical condition and buys the policy to trigger the claim.
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By Alevin Chan
An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.