Policy Meaning
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The term policy refers to a legal contract that details all the essential workings of the insurance. Colloquially, many people also use the term policy to mean insurance itself.
In other words, insurance is an agreement, documented by a policy, whereby an insurance company provides monetary coverage or compensation to a policyholder for any losses incurred. Typically, insurance policies consist of a few fundamental elements: the term period, sum assured, coverage details, exclusions, premium, riders, conditions, declarations, and more.
[ABSLI Digishield plan]
Essential Policy Components
There are three major components that can help one determine whether a certain policy suits their needs. These include:
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Premium:
The premium of an insurance policy is the amount a policyholder pays, usually on a monthly basis, to obtain coverage. It is calculated by the insurer according to the policyholder's level of risk. For example, if you are opting for a life insurance policy, and are aged 50+, you may have to pay a higher premium for the coverage. Similarly, your 20-year-old nephew may opt for the same policy and enjoy a lower premium due to his age.
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Sum Assured:
The term sum assured refers to the amount the policyholder will receive if certain pre-determined circumstances are met, as per the policy. For example, a life insurance policy offers a payout on the demise of the policyholder. The payout is the sum assured and can vary from policy to policy.
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Term Period:
The term period refers to a set time frame for which the policy would be considered valid. For instance, a Unit Linked Insurance Plan (ULIP), may offer a term period of 5 years. This means that the policy would reach maturity once those 5 years are over.
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Exclusions:
It is essential to understand the exclusions of a policy, as these are essential conditions that make the insurance coverage invalid. For instance, death due to war is not covered by life insurance, which means the policyholder’s family would not receive the payout.
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Riders:
Riders are used to enhance the policy by adding extra conditions to the coverage. For instance, a critical illness rider in health insurance covers the policyholder from illnesses such as cancer, heart disease, kidney failure and more.
Policy Benefits
An insurance policy offers several benefits, including:
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Financial protection:
Insurance helps individuals and businesses to mitigate financial risks by providing coverage against unexpected events or losses, such as accidents, illnesses, property damage, and legal liabilities.
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Peace of mind:
Knowing that one is protected by insurance can offer peace of mind, reducing stress and anxiety in case of unforeseen events.
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Compliance:
Some types of insurance, such as auto and health insurance, are mandatory by law. Having insurance coverage ensures compliance with legal requirements.
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Business continuity:
Insurance can help businesses to recover from unexpected events that may disrupt their operations, such as natural disasters, theft, or lawsuits.
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Personal and family protection:
Life insurance and disability insurance provide financial support to individuals and their families in case of death or disability, helping to cover expenses such as medical bills, funeral costs, and living expenses.
Overall, insurance provides a safety net that can help individuals and businesses to navigate unexpected events and protect their financial stability.
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