Module II: Insurance Terminology
Common terms used in insurance – terms common to both life and non – life
insurance – terms are specific to life and non – life insurance – how insurance
terms are used.
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Insurance
Insurance is a legal contract in which one party (insurer) agrees to compensate
another party (insured) for financial losses arising from specified risks, in exchange for
a premium.
Insurer
The insurer is the company that undertakes the risk and promises compensation.
Insured / Policyholder
The insured is the person or entity whose risk is covered under the policy.
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Policy/ policy document
A policy is the written document containing all terms, conditions, exclusions, and
benefits of insurance.
Example: Your health insurance policy document specifies coverage limits, waiting
periods, and exclusions.
Premium
Premium is the amount paid by the insured to keep the policy active.
Example:₹12,000 paid annually for a health insurance policy.
Risk
Risk is the uncertainty regarding the occurrence of loss.
Example: Risk of illness, accident, fire, or death.
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Peril
A peril is the cause of loss.
Example: Fire, flood, earthquake, theft, accident.
Policies either cover named perils (only the listed events) or "open perils" (everything
except exclusions), and understanding these covered perils is crucial for knowing what
your insurance will pay for after a loss.
Common Examples of Perils
Fire and lightning, Windstorms and hail, Theft, Explosion, Damage from falling objects
or vehicles, Water damage (from burst pipes, not typically floods), Earthquake (often
requires separate coverage)
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Hazard
A hazard is a condition that increases the probability or severity of loss.
Types of Hazards
Physical Hazard: A tangible condition that makes a loss more probable.
Examples: Faulty wiring, cluttered walkways, a house with a pool, slippery floors, or a
location in a flood zone.
Moral Hazard: A tendency for insured individuals to act differently (more recklessly)
because they are protected from the consequences of loss.
Examples: Submitting fraudulent claims, intentionally damaging property, or a
business owner ignoring safety because of insurance.
Morale Hazard: Carelessness or indifference arising from having insurance coverage,
rather than intentional wrongdoing.
Examples: Not locking doors, not maintaining property, or being less careful with
valuables because of coverage.
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Hazard
Types of Hazards
Legal Hazard: Changes in laws or regulations that can increase liability or costs for
insurers or businesses.
Examples: New safety standards or increased legal liabilities for workplace injuries.
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How Hazards Affect Insurance
• Risk Assessment: Insurers look for hazards during underwriting (policy application)
to gauge risk.
• Premium Costs: More hazards often mean higher premiums or even policy denial.
• Coverage: While "hazard insurance" (part of homeowners' policies) covers perils like
fire or storm, identifying hazards helps manage overall risk.
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Peril: The direct cause of the financial loss (e.g., a lightning strike, a car accident, a
burglary).
Hazard: A condition that makes a peril more likely or worse (e.g., frayed electrical
wiring is a hazard increasing fire risk).
Risk: The possibility or likelihood of a peril occurring.
In insurance, a peril is the specific event or cause that results in a loss or damage to
property, such as fire, theft, wind, or vandalism, while a hazard is a condition that
increases the likelihood of that peril occurring (like storing gasoline near a home)
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Sum Assured
Maximum amount payable by the insurer in case of loss.
Example: If sum assured is ₹10 lakh in life insurance, insurer pays ₹10 lakh on death.
Proposal Form
A form filled by the proposer giving personal and risk-related details.
Example: Disclosing age, income, medical history while buying life insurance.
Policy Term
Duration for which the policy remains valid.
Example: A 20-year term insurance policy.
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Rider
An additional benefit added to the main policy for extra protection.
Example: Accidental death rider with a life insurance policy.
Deductible (Excess)
The portion of loss borne by the insured before insurer pays.
Example: If deductible is ₹5,000 and repair cost is ₹30,000, insurer pays ₹25,000.
Claim
A formal request made by the insured for compensation.
Example: Submitting hospital bills to claim health insurance.
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Rider
In insurance, a rider is an optional add-on to a basic policy that provides extra
coverage or benefits for an additional cost, allowing you to customize your plan for
specific needs like critical illnesses, accidental death, or disability, making your
coverage more comprehensive without buying a new policy.
Riders enhance financial protection by offering benefits beyond the standard policy
terms, such as a lump sum for a diagnosed disease or extra payout for accidental
death, while the original policy continues.
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Rider
Common Types of Riders
• Accidental Death Benefit (ADB): Pays an extra sum if death occurs due to an
accident.
• Critical Illness Rider: Provides a lump sum payout upon diagnosis of specified severe
illnesses (e.g., cancer, heart attack).
• Disability Rider (Waiver of Premium): Waives future premiums if you become totally
disabled, keeping the policy active.
• Income Benefit Rider: Pays a regular income to your family if you pass away.
• Long-Term Care Rider: Covers costs for home care or nursing home stays.
• Maternity rider: specialized add-on for health insurance designed to cover medical
expenses related to pregnancy and childbirth.
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Rider
How Riders Work
• Add-on: You select riders to supplement your primary insurance (life, health, home,
etc.).
• Extra Cost: You pay an additional premium for these enhanced benefits.
• Specific Triggers: The rider's benefit is paid out only if the specific event (e.g.,
accident, critical illness) occurs.
• Customization: They allow you to tailor coverage for unique risks, like specific health
conditions or earning potential loss, at potentially lower costs than new policies.
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Beneficiary/Nominee
The person designated to receive benefits (like death benefit).
Maturity Benefit
Payout if you survive the policy term (common in life insurance).
Surrender Value
A partial refund if you cancel the policy early.
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Network Hospitals: A group of medical facilities that have a direct agreement with
your insurer to provide cashless services, where the bill is settled directly by the
company.
Pre-existing Condition (PED): Any medical ailment or injury you had before purchasing
the policy. Most policies have a waiting period before covering these.
No Claim Bonus (NCB): A reward, often in the form of a discount on the next premium
or an increase in the sum insured, given for every year you do not file a claim.
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Actuary: A professional who uses mathematics and statistics to calculate risk and set
premium rates.
Adjuster: An individual who investigates insurance claims to determine the extent of
the company's liability and the amount to be paid.
Underwriter: The person who evaluates your specific risk profile to decide if the
company should accept your application and what the cost should be.
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Moratorium
An insurance moratorium is a waiting period, primarily in health insurance, after
which insurers can't deny claims for pre-existing conditions or policy
misrepresentation, typically 5 years in India as per IRDAI, though it can also refer to
temporary freezes on issuing new policies (like after a disaster) in other insurance
types.
It protects policyholders by ensuring claims aren't rejected due to old information
once the set time passes, barring proven fraud.
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Moratorium
How it Works in Practice (Example)
• You buy a health policy in 2024 but don't disclose you have thyroid issues.
• By 2029 (5 years later), you've completed the moratorium period.
• If you then claim for a thyroid-related issue, the insurer cannot reject it on the
grounds of your earlier non-disclosure unless they can prove you fraudulently hid it.
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Moratorium vs. Waiting Periods
• Moratorium: A period for pre-existing conditions where non-disclosure is eventually
overlooked (unless fraudulent).
• Waiting Periods: General exclusions (e.g., 2-4 years) for specific illnesses, maternity,
or accidents that apply regardless of disclosure.
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Life Insurance–Specific Terms
Life Assured
The individual whose life is insured (may be different from the policyholder)
Sum Assured
Guaranteed amount payable on death or maturity of the policy.
Nominee
Person legally entitled to receive policy benefits upon death of the life assured.
Beneficiary
Final receiver of claim proceeds (especially relevant in trusts/assignments).
Maturity Value
Amount paid when the policy term ends and the life assured survives.
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Life Insurance–Specific Terms
Death Benefit
Amount payable to the nominee on death of the life assured.
Survival Benefit
Periodic payments made during the policy term (common in money-back policies).
Surrender Value
Amount payable if the policy is voluntarily terminated before maturity.
Paid-Up Value
Reduced benefit when premiums are stopped after a minimum period.
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Life Insurance–Specific Terms
Grace Period
Extra time allowed to pay premium after due date without policy lapse.
Revival
Restoration of a lapsed life insurance policy by paying dues and interest.
Proposer
Person who submits the proposal form (may differ from policyholder).
Vesting Age
Age at which policy benefits become payable to the life assured (pension plans).
Risk Commencement Date
Date from which insurance coverage actually starts.
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Life Insurance–Specific Terms
Lapse
Termination of policy due to non-payment of premium within grace period.
Assignment
In insurance, an assignment is the legal transfer of a policyholder's rights, benefits,
and ownership (or some of them) to another party (the assignee), often used for loans
(collateral), gifts, or estate planning
Example: Home Loan (Collateral Assignment): You take out a home loan and assign
your life insurance policy to the bank. If you pass away, the bank gets the remaining
loan amount first, and your family gets the rest.
Absolute Assignment
Permanent transfer of policy ownership.
Conditional Assignment
Transfer subject to fulfillment of certain conditions.
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Life Insurance–Specific Terms
Paid-Up Policy
Policy with reduced benefits when premiums are discontinued after minimum years.
Loan Against Policy
Loan granted by insurer against surrender value of policy.
for instance, if your policy has a Rs. 5 lakh surrender value, you might get a loan of Rs.
4-4.5 lakh (80-90%), paying interest only on the amount used, while your policy
benefits continue
Actuarial Valuation
Scientific valuation of insurer’s liabilities using mortality tables
Mortality Table
Statistical table showing probability of death at different ages.
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Non-Life Insurance–Specific Terms
Indemnity
Principle of compensating only the actual financial loss, not profit.
Deductible / Excess
Portion of loss borne by the insured before insurer pays.
Depreciation
Reduction in asset value applied during claim settlement.
Co-insurance
Sharing of risk between insurer and insured or among insurers.
Third-Party Liability
Legal liability arising due to injury or damage to others.
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Non-Life Insurance–Specific Terms
Reinstatement Value
Cost of replacing damaged asset with new one of same kind.
Market Value
Replacement cost minus depreciation.
Salvage
Residual value of damaged property.
Contribution
Sharing of claim amount among multiple insurers.
Floater Policy
Single sum insured covering multiple locations/assets.
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Non-Life Insurance–Specific Terms
IDV (Insured Declared Value)
Current market value of vehicle (in case of motor insurance)
No Claim Bonus (NCB)
Discount on renewal premium for claim-free years.
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