20 Important Insurance Terms that Improve my Insurance Decision

A handshake with background of important insurance terms.

I believe you’d agree when I said understanding important insurance terms is vital when you are looking for insurance coverage.

This is because when you don’t understand these important insurance terms:

you might misunderstand the whole concept causing you underinsured or overinsured.

you are not aware of your right as a policyholder.
the insurance agent can ‘pusing‘ you around and you’re allowing him to sell a more expensive plan (so he can earn a fatter commission).

Instead of paying for peace of mind, you might end up paying for something useless when you need it the most.

Thus, I came up with these 20 important insurance terms while shopping for my toddler’s medical plan.

[Disclaimer: I am not a certified financial planner. My sharing is purely based on my own research and personal experience. To make the best financial decision that suits your own needs, you must conduct your own research and seek the advice of a certified financial planner if necessary]

20 important insurance terms

Even though I had been having my insurance coverage since 2002, I have to admit that there are many insurance terms that I am not aware of.

Or at least I don’t fully understand the concept and the consequences of these insurance lingoes.

Until last year, I decided to explore more on insurance matters before getting medical coverage for my toddler.

So, these terms are based on my understanding after:

spending many hours reading articles from local insurers’ websites, personal finance blogs and insurance broker’s websites.
reading my own and my husband’s insurance policy.

meeting with 4 insurance agents from 3 different insurers.
going through more than10 insurance proposals.

At the time of writing, I am not an insurance agent. I am just an insurance user. And I also never work in the insurance industry.

Even though I am not from the insurance industry, I believe my sharing shall benefit insurance users like you. Because my sharing is purely unbiased.

Before going further, let’s get to know some common terms when talking about insurance:

policy – the written contract or agreement between the person who buys the insurance plan with the insurance provider.

insurer – the insurance provider that sells you the insurance plan.
policyholder – the person who buys the insurance plan.

For example, I bought a Prulink Assurance Plan in 2002:

Insurer – Prudential.
Policy – the thick agreement of about 120 pages I received from Prudential which contain the written terms & condition for my insurance plan.
Policyholder – me.

And now, here are the 20 important insurance terms:

1. Traditional Plan (term insurance, endowment plan, annuity plan)

Traditional insurance plans are insurance plans before the birth of investment-linked plans.

The common traditional insurance plans are:

Term insurance
- Term life – the plan covers a specific period, say 10, 20 or 30 years. In case of death or Total Permanent Disability (TPD), the insurer will pay the sum assured to the beneficiaries.
- Whole life – the plan covers until the policyholder dies. When that happens, the insurer will pay the sum assured to the beneficiaries.

Endowment insurance – the plan that comes with both protection and savings.
Annuity plan – under the Annuity plan, the policyholder makes a lump sum or periodic premium payments to the insurer. In return, the insurer agrees to provide a stream of income for life.

As of the time of writing, traditional insurance plans are still available in the market. Although, it seems like these plans are less favourable compared with Investment-Linked plans.

Nevertheless, for some circumstances, a traditional insurance plan can give better protection compared to an Investment-Linked plan.

2. Investment-Linked Plan (ILP)

Investment-linked plans are newer insurance plans which exist somewhere in the year the late 1990s to early 2000s. As the name sound, other than protection, parts of the premium is allocated to buy units in a fund managed by the insurer.

For example, my Prulink Assurance plan is an investment-linked plan. Other than the protection, I consider it as an investment too. Now, my cash value is almost equivalent to all the premiums I’ve paid for the past 18 years.

In the case of an unfortunate event, the payout will be the total sum assured and the cash value.

In my opinion, the 2 main disadvantages of the Investment-Linked Plan are:

high fees in managing the funds.

might need to top up the premium when the cash value dropped during a challenging global marketplace.

According to an article from The Edge Markets, the Investment-Linked plans are now overtaking the traditional plans.

3. Standalone Plan for health and medical insurance

A standalone medical plan provides coverage for medical expenses such as hospitalization, surgical and outpatient expenses. This standalone medical insurance does not need to link to a basic policy such as a life policy.

In other words, a standalone medical plan just helps you to pay for the medical expenses only. No savings, investment or lump sum payment.

If you wish to know more about standalone plans such as the difference between a standalone medical plan and a medical plan as a rider, do read my sharing on Standalone versus Investment-Linked Plan (for medical plan).

4. Medical Card

A medical card is just a term that refers to the cards provided by insurance companies for a policyholder with a health and medical plan.

And this health and medical plan can be a standalone plan or as a rider attached to the main policy.

Nowadays, many insurers no longer provide physical medical cards. Instead, they switched to an e-medical card.

Mostly, policyholder just needs to show their NRIC during admission.

5. Riders

Riders are additional features that can be added to the insurance plan.

For example, when I bought my Prulink Assurance plan, on top of the death / TPD coverage, I also bought riders such as:

Pruhealth – health and medical plan

Critical illness coverage
Personal Accident coverage
Hospital benefits

Premium Waiver benefit

Think of it this way: When you buy a new phone, all you need is just the phone itself (main insurance plan). But, you can add additional things such as a phone case, screen protector and power bank.

These additional things are not necessary but they can improve the function of your phone. And you need to pay for these things.

Similarly, the premium shall increase with each additional rider.

If you have budget constrain, you might want to prioritize your coverage needs. And only choose the riders that you need most at that stage of your life.

6. Critical Illness

Critical illness insurance provides coverage for critical or dreaded diseases. When the policyholder is diagnosed with a critical illness based on the insurer’s list, the insurer shall make a lump sum payment to the policyholder.

Some examples of critical illness:

cancer
kidney failure

heart attack
stroke

It’s worth taking note the terms for critical illness cover might differ from insurer to insurer.

7. Personal Accident (PA)

A Personal Accident Plan is an insurance policy that provides coverage for accidental events. Under this plan, the insurer shall make payment based on the terms and conditions stated in the policy.

Some examples of personal accidents:

car accident

road accident
a home accident such as a fall from the stairs
drowning

fire-related injuries

And some common coverage for a Personal Accident plan includes the following:

accidental death benefit

compassionate benefit (funeral expense)
medical expenses
hospitalization income or accidental income benefit

Again, the coverage and benefits may vary from one insurer to another.

8. Hospital Income Benefit

Hospital Income Benefit provides the policyholder with daily cash when the policyholder is hospitalized. The purpose is to ease the policyholder’s financial burden while he is confined at the hospital and unable to work.

9. Premium Waiver Benefit

When I was considering insurance coverage in 2002, I was thinking of what will happen to my policy if a serious unfortunate event happens to me causing me to lose my ability to work.

Do I still have to pay my premium? Do I still get covered? Or my insurance plan is gone with the wind?

That was when my insurance agent proposed the Premium Waiver benefit, an add-on to my investment-linked plan. With the premium waiver benefit, my insurer shall waive my premiums in case of critical illness or TPD.

This means I don’t have to pay the premium. And all my benefits and coverage are still in force, including the following:

medical and health coverage
my PRUsaver top-up plan
beneficiaries would still receive the proceeds of his life insurance policy.

10. Payor Benefit or Payer Benefit

While shopping for my toddler’s medical and health plan, I am seriously considering payor benefit or payer benefit rider.

Why?

Because in case of any unfortunate event happen to me:

the insurer waives my toddler insurance premium.
my toddler’s insurance plan is still in force.

In a more formal explanation, payor benefit or payer benefit is a kind of rider that usually apply to minor policy (insurance plan for those under 18 years old).

With this rider, In case of critical illness, death or TPD, the policyholder does not need to pay the premium but the coverage is still in force. In other words, the insurer waives the premium.

11. Annual Limit and Lifetime Limit

Both Annual Limit and Lifetime Limit are important terms in medical and health insurance. It is where the insurer sets a limit to the medical claim. This means if the claim exceeds the limit, the insurer no longer pays for covered services.

For example, Mark’s medical and health insurance annual limit and lifetime limit are as below:

Annual Limit: RM50,000
Lifetime Limit: RM500,000

Let’s say in January 2020 Mark suddenly got a heart attack. And the treatment cost him RM60,000. Although his Lifetime Limit is RM500,000, he can only claim up to RM50,000 for his heart attack treatment. Because that’s his Annual Limit.

Thus, it’s preferably to have a medical plan with a high Annual Limit.

12. Cashless and Non-cashless Plan

A Cashless Plan means the policyholder does not need to pay using his own money during admission. In other words, the medical centre will directly liaise with the insurer for the whole process.

While Non-cashless Plan requires the policyholder to pay for the medical fees first. And then the insurer shall make a reimbursement.

A Cashless plan can be more convenient but it’s also more expensive when compared to a Non-cashless plan.

13. Co-insurance/Co-takaful

These are among the cost-sharing concept between the policyholder and the insurer.

For example, among the cost-sharing for my husband’s medical plan:

subject to 10% of co-insurance charges for hospital & surgical benefit
with a minimum of RM200
and a maximum of RM1,000

The cost-sharing amount or percentage may vary from one insurer to another. Therefore, it is best to read the insurance policy when first receiving it.

14. Deductible Plan

A Deductible plan is where the policyholder agreed to pay a certain amount before the insurer pays for the medical and health expenses.

For example, as an employee, Mark is covered by employer medical insurance with an annual limit of RM20,000. But, he has concerns about the low annual limit of his employer’s medical insurance.

So, he enrols a deductible plan of RM20,000.

In case his medical expense is RM30,000, the first RM20,000 is covered by his employer’s medical insurance. And the balance of RM10,000 is covered by his personal insurer.

On a side note, if you are dependent on your employer’s medical plan, you might want to read my sharing on why you can’t depend on an employer medical plan.

15. Specified Illness

Specified illness is the list of covered illnesses or diseases stated in the policy.

Some examples of the Specified Illnesses in my personal policy are as below:

hypertension

diabetes mellitus
cardiovascular disease
all tumours, cancers, cysts, nodules, polyps, the stone of the urinary system and biliary system

Again, the Specified Illness may vary from one insurer to another. The right place to check it out is the insurance policy.

16. Free Look period

The Free Look period means the policyholder may cancel the policy by returning the policy to the insurer within 15 days after receiving the policy. And the insurer shall return the premium to the policyholder without penalty.

Previously, I was not aware of the importance of the Free Look period.

Now, I think it is vital for a new policyholder to read and understand all the details stated in the policy within the Free Look period.

17. Pre-existing condition

A pre-existing condition is an illness where a person has already received medical advice or treatment before he signs up for a new medical insurance plan.

The insurer has the right:

to exclude the coverage for the Pre-existing condition
to charge a higher premium due to the Pre-existing condition

18. Waiting period

The waiting period is the number of days a policyholder need to wait before the insurance plan takes effect.

For example, in one of my son’s medical and health quotations:

coverage for Specified Illness takes effect after 120 days.
coverage for other illnesses takes effect after 30 days.

Generally, only for accidental events, the coverage begins immediately.

19. Reasonable and Customary Charges

This term refers to the general and appropriate charges agreed upon by medical practices in Malaysia. The insurer will only reimburse based on Reasonable and Customary Charges.

So, the policyholder must be aware that their treatment is within these charges. Else, be prepared to fork out your own money for the treatment.

20. Incontestability

Incontestability means after a policy has been in force for 2 years, the insurer cannot deny a claim. And the insurer is obligated to pay the claim unless the insurer can prove there’s fraud involved.

This also means, for the first 2 years, the insurer has the right to investigate and deny a claim.

Final thoughts

Other than the above-mentioned 20 important insurance terms, I am sure there are still many insurance terms that are vital in guiding us to make a better protection decision.

At least by now, you are aware of these 20 important insurance terms.

Personally, I think the most important thing when getting an insurance plan is the insurance policy. This was followed by the Free Look period.

It is of utmost importance to read and understand the policy within the 15 days Free Look period. If you’re not happy with the policy, you have the option of cancelling it without penalty.

Lastly, do you have other important insurance terms you wish to share? Feel free to comment below.

Image Credits

Image by Gerd Altmann from Pixabay

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