Busting financial jargon: what are some of the common words people misunderstand?
Insurance jargon is notoriously difficult to understand. Some words, such as repudiate and annuitise, don’t form part of our everyday language. Other words like paid-up benefits, surrender or lapse might well conjure up images that have nothing to do with insurance.
Not understanding these words impacts how you understand insurance and could influence how you engage with and buy insurance. We want to help you understand your insurance policy and some of the important terms that form part of the insurance process. So, we’ve compiled a list of some of the more commonly used terms in a Metropolitan policy document.
Benefits are part of the insurance policy. They say what you get out, what cover you have and when you can claim.
When you repudiate something, you reject it or refuse to accept or support it. This can happen when you lodge a claim with your insurer. Or your insurer may repudiate your claim, which means that the claim is not covered under the terms and conditions of your contract with your insurer. Your insurer will therefore not pay your claim.
Depending on the contract, there can be many different reasons why a claim is not covered by the policy. For example, say your car insurance stipulates that you are only covered for car accidents if you are the driver. If your son borrows your car and is in a car accident, you will not be able to claim from your car insurance.
When buying an insurance policy, your insurer may ask for details about your health, medical history, family medical history, lifestyle and hobbies. Providing this information truthfully is referred to as full disclosure. Your insurer uses this information to decide whether to offer you a policy. Based on your information, they may need to send you for medical tests or examinations before they can tell you which benefits you qualify for, and what your premiums will be. They may also add additional exclusions or waiting periods to your policy.
It is vital to tell the truth and share all the information that you have with the insurer, as this forms the basis of the contract. Not sharing all the information honestly is referred to as non-disclosure. Non-disclosure can lead to your claim not being paid, receiving a smaller pay-out than you were expecting, or your policy being cancelled and your premiums not being refunded.
A waiting period is a period of time (usually a few of months) in which you are not insured for some or all events, even though you are paying premiums.
For example, on a funeral plan there may be a six-month waiting period to claim death benefits if an insured person dies due to natural causes. So, in this case, the event that the insured person does not have cover for is natural death. If the insured life dies due to an accident, the waiting period is not applied.
The reason for having waiting periods is that they make premiums more affordable. Waiting periods also discourage people with life-threatening illnesses from signing up for life insurance and claiming benefits immediately. As a result of waiting periods, medical examinations may not be necessary, and premiums are more affordable for everyone.
Waiting periods may apply when you buy a policy, increase cover or add an insured life to your policy.
When you decide to stop your policy or stop parts of your policy, it can be referred to as surrendering your policy. This is the case when your policy has attained a cash value that will be paid to you if you decide to stop your policy. This cash value will depend on the fund value of the policy. The insurer may deduct fees from the value before it is paid to you, because you did not keep your policy for the full term originally agreed to when you bought the policy.
When your insurance policy is automatically stopped due to you not paying your premiums as agreed in the contract, your policy has lapsed. This means that you are no longer covered by this policy and will not be able to claim any benefits. Some policies may allow you to get your cover back (i.e. reinstate your policy) by contacting your insurer, paying in missed premiums and restarting regular premium payments. The insurer may require you to serve a new waiting period when you reinstate your policy or you may need to redo medical tests and examinations.
To annuitise a payment, is to take a single payment (often referred to as a lump sum) and turn this into a stream of regular payments or an income. These regular payments could be monthly or annual and may include interest.
The claimant is the person that logs a claim with the insurer. This person tells the insurer that there is a claim on a policy and completes the claim forms. This person may also be the beneficiary, but this is not always the case.
The beneficiary is the person who benefits from your policy. They can benefit by receiving a pay-out, in which case we refer to them as the beneficiary of proceeds. Some policies allow the policy to change ownership in certain circumstances, for example when the policy owner passes away. The person whom the owner appoints to become the new owner in the event of his/her passing away is called the beneficiary of ownership.
The cashback benefit may be included on your funeral plan. This benefit typically pays out an amount of money at regular intervals if you pay your premiums on time, and/or do not claim, or other conditions as specified by the insurer. The amount that will be paid to you as a cashback usually depends on either the cover level that you chose or on the size of your premiums. You may forfeit your cashback if you claim on your policy or don’t pay your premiums on time.
If your policy includes a premium holiday, you may be able to skip a month’s premium while still enjoying cover. Usually, you have to pay your premiums regularly to earn a premium holiday.
Premium waiver benefit vs paid-up benefit
Some solutions may include premium waiver benefits. If a certain event happens and you have a premium waiver benefit, your policy continues for a specified period of time and you don’t have to pay any premiums during that time. The events covered could be the death, disability or retrenchment of the policy owner. Some products even offer a premium waiver on the policy owner reaching retirement age. The premiums could be waived for a limited period of time or for the duration of the policy. If the premiums will be waived for the duration of the policy, the benefit is often called a paid-up benefit. For example, say your policy includes a paid-up benefit on the death of the policy owner, which will waive the premium for the duration of the policy. If you then pass away, your policy will continue without any further premiums being required, allowing your family members to continue to enjoy the peace of mind of knowing that their funeral is covered.
Now that you know what these terms mean, you will have a better understanding of your insurance policy document and can use this knowledge to get the most value out of your policy. Speak to your financial adviser about how we can help you plan for and achieve your financial life goals.