Way2know: Insurance Domain Knowledge

Insurance Domain Knowledge

Insurance

What is insurance?

Insurance is a means of protection from financial loss.

It is a practice or arrangement by which a company or government agency provides a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a premium.

An entity which provides insurance is known as an insurer or insurance company or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder.

What are types of Insurance?

Insurance can be broadly classified into 3 main categories.

Life Insurance
Health Insurance
General/Non-Life Insurance

Life Insurance

Life Insurance is a contract between insurance policy holder and insurance company where insurance company promises to pay designated beneficiary sum of money (benefit) in exchange for premium, in case of specified event occurs to insured person within policy period or pays maturity amount upon completion of policy period.

Health Insurance

Health insurance is a type of insurance coverage that pays whole or part of medical and surgical expenses incurred by the insured. Insured person need to pay premium to insurer to get this coverage.

General Insurance

General insurance is Non-life insurance. It is contract between insurance company and policy holder, which help policy holder to protect things that are valuable for the policy holder (ex: home, Vehicle etc) from unexpected events. Policy holder will pay premium to insurance company for protection of assets.

Below picture illustrates how insurance can be further classified.

Note: Classification may be done in different ways based on different parameters.

Terminologies used in Insurance

Annuity

An annuity is a type of policy offered by insurance companies designed to accept and grow funds, this help to create stream of income for customers.

It is form of insurance investment entitling the investor to a series of annual sums. Generally fixed sum of money is paid to investor every year.

Beneficiary

Beneficiary is a person or entity named by policy holder for receiving the benefits of a life insurance policy.

Claim

Claim in insurance is a request to an insurer (insurance company) a An insurance claim is a formal request to an insurer (insurance company) from insured or beneficiary asking for a payment based on the terms of the insurance policy. The insurance company reviews the claim for its validity and then pays out to the insured or Beneficiary (requesting party on behalf of the insured) once approved.

Co-Insurance/Co-Pay

Co-insurance is a type of insurance in which insured pays a part of cost. Cost is shared between insured and insurer.

Example: Suppose total expense is 100 and co-insurance is 20%, then insured pays 20 and insurance company pays 80.

Deductible

A deductible is the amount of money an individual (insured) pays for expenses before his/her insurance plan starts to pay.

Example: Suppose total cost is 1000 and deductible is set as 500, till 500 individual (insured) needs to pay; only the bill amount in excess of 500 will be paid by insurance company. If total bill is less than 500, then entire amount to be paid by individual (insured).

Dependent

Dependent is a person who relies on another, especially a family member, for financial support.

Example: child is dependent on parents for financial support.

Free look Period

Free look Period is a period where a new insurance policy owner is able to terminate the contract without penalties such as surrender charges.

Generally free look period is for 15 days from policy issuance, in these 15 days customer can return the policy document & get the complete refund.

Grace period

Grace Period is the time provided to the customer over and above the due date to make the payment for the renewal premium without lapsing the insurance policy or reducing any of the policy benefits.

Generally grace period is for 30 days from the due date.

Insured

Insured is a person or organization covered by insurance.

Insurer

Insurance company which provides insurance coverage is called insurer. The party in an insurance contract undertaking to pay compensation on occurrence of specified event.

Lapse

Lapse in insurance is a state of an insurance policy; policy gets moved to lapse status when the policy holder fails to pay the premium within the given grace period.

Maturity

The date on which the face amount of a life insurance policy becomes payable to the policy beneficiary due to policy reaching its maturity date as stipulated in the policy document. Amount of payable to the beneficiary on maturity is called maturity value. Upon reaching the maturity date policy is called matured policy.

New Business Proposal

New business proposal is an application from submitted by the customer to the insurance company. Customer need to provide all details accurately in the proposal form.

No-claim bonus

No claim bonus is discount given by the insurer to the policyholder for making no claims for a specified period.

Paid Up Value

Paid-up value is the reduced amount of sum assured paid by the insurance company, in case the policyholder discontinues payment of premiums before the agreed period.

Generally minimum three years of premium required to be paid to get paid-up value.

Policy Issuance

Policy issuance is the process of creating an insurance policy and providing it to the policyholder.

Premium

Insurance premium is the amount of money that an individual or an organization must pay for getting coverage under an insurance policy.

Re-Insurance

Reinsurance, also known as insurance for insurers or stop-loss insurance Reinsurance is insurance that is purchased by an insurance company from one or more insurance companies to mitigate the risk of loss.

Reinstatement

If an insured person or policy holder fails to pay the premium within the provided grace period the insurance policy gets lapsed, then the insurance coverage can be renewed. This process of putting the insurance policy back to active status after a lapse is known as reinstatement.

Renewal Premium

Renewal premiums are the subsequent premiums that are paid after the first premium payment by the insured to the insurer in order to keep the policy in active status and avail the benefits of the policy accordingly. Most of the Insurance policies need to be renewed every year. This process of paying the renewal premium and keeping the policy active is called Renewal.

Terminated Policy

Policy holder (insured) or insurance company (insurer) can decide to terminate before the stipulated maturity date due to various reasons. Policy which is terminated before the maturity is called terminated policy.

Underwriting

Underwriting is the process of evaluating the risk of insuring a person or property. Underwriter evaluates the risk takes a decision to accept or reject the proposal based on the risk.

Insurance Policy/Contract Life Cycle

Following diagram illustrates the life cycle of an insurance policy.