LIFE INSURANCE
” Life insurance is like a spare tire.”
What is Life Insurance?
Life insurance is a contract between an insurance policy holder and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money the benefit in exchange for a premium, upon the death of an insured person often the policy holder. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer; common examples are claims relating to suicide, fraud, war, riot, and civil commotion.
Why Life Insurance?
Your family enjoys financial security in your absence. Your wife gets the money to meet daily expenses and pay back loans like home loan, car loan and any other liability. Your children enjoy a quality education and there’s money for their marriage.
Life Insurance is a contingency plan for death and family’s financial security.
Life Insurance must be availed for risk protection. Your family gets the money on an unexpected demise.
Life Insurance also has savings and investment plans. They invest your money in equity or fixed income.
The loan facility is available against Life Insurance Plans. You can assign the Life Insurance Plan and take a loan against it.
Life Insurance enjoys tax benefits. You get tax deductions under Section 80C of the Income Tax Act up to Rs 1.5 Lakhs a year.
Life insurers offer annuity plans for retirement. Annuity plans give you regular income after retirement.
The policyholder gets the following benefits from Life Insurance Plans:
Term insurance plans are pure risk cover. The death benefit is paid only on the death of the insured within the term of the plan. There are no survival benefits.
The survival benefit is paid by endowment life plans at maturity. These plans combine savings and protection.
Terms of Life Insurance
- Insured: This is the person whose life in being insured under the Life Insurance Plan. If the person availing the plan is different from the person being insured, the buyer is the proposer of the plan. The proposer must have an insurable interest in the person being insured under the plan.
- Term of the contract: This is the time period of the Life Insurance Plan or the period when Life Insurance is available. The life insurer specifies an upper age limit (maximum age), when the term of the policy ends.
- Sum assured: The amount being insured is the sum assured of the Life Insurance Plan. According to IRDA regulations, life insurers with terms of more than 10 years must provide a minimum sum assured of at least 10 times annual premium for people below 45 years of age and 7 times for those above 45 years of age.
- Premium paid: The premium paid depends on sum assured. Premiums could be monthly, quarterly, half-yearly or annually and is clearly mentioned in the contract. Some Life Insurance Plans have a single premium paid at the start of the plan. A grace period is provided for delayed premium payments. You can revive the Life Insurance policy within the time frame specified by the life insurer, on payment of pending premiums + penalties.
Bonus in Life Insurance
Life insurers periodically announce a bonus, as a percentage of the sum assured. This amount is added to the sum assured and paid to the policyholder on maturity of the plan. This amount is paid on maturity or in case of death within the term of the plan, the sum assured + accrued bonus is paid by the insurer.
Guaranteed Bonus: Guaranteed bonus is paid as a percentage of the sum assured. It’s paid for the first few years of the Life Insurance Plan, say 5 years. The guaranteed bonus is received at the end of the term of the plan. Reversionary bonus: An insurer declares a reversionary bonus, if it performs well. This bonus is completely at the discretion of the insurer. This bonus is declared after the completion of the guaranteed bonus period and is applicable only on participating policies.
What is surrender of a Life Insurance Plan?
If you surrender the Life Insurance Plan before the full term of the plan is completed, you get a portion of the money paid in premiums, after certain charges are deducted. If you decide to terminate the Life Insurance Plan before maturity, the insurer pays you (policyholder), what is known as the surrender value.
A surrender charge is deducted which varies across Life Insurance Plans. You can surrender traditional Life Insurance Plans. These are whole Life Insurance Plans, money back plans or endowment plans. Life insurers cannot levy surrender charges if you terminate the plan after 5 years as per IRDA rules and guidelines.
Types of Surrender Value
- Guaranteed Surrender Value
You get guaranteed surrender value only after paying at least 2-3 annual premiums. If the premium paying term is less than 10 years, your Life Insurance Plan acquires a surrender value after paying two annual premiums. If the premium paying term is more than 10 years, your Life Insurance Plan acquires a surrender value after paying three annual premiums.
If you surrender the Life Insurance Plan after 3 years, the life insurer has to pay at least 30% of the total premiums, excluding the premiums paid for the first year. Any additional premium paid for riders and bonus that you have received from the insurer, is excluded.
If you terminate the Life Insurance Plan after 4-7 years, you get 50% of premiums paid. If you surrender the Life Insurance Plan in the last two policy years, you get up to 90% of the premiums paid.
- Special Surrender Value
This surrender value depends on sum assured, term of the plan, premiums paid on the plan and bonuses. You can calculate special surrender value by
Special surrender value = Surrender Value of the Life Insurance Plan = [{(Number of premiums paid on the plan / Number of premiums payable on the plan) X Sum Assured of the plan} + Accumulated Bonus on the plan] X Surrender Value Factor.
The Surrender value factor is basically a percentage of Paid-up value + bonus.
Types of Life Insurance Plans
- Term Life Insurance
Term Life Insurance is pure risk cover. You pay a premium for a sum assured (This is specific cover under the plan) for a specific tenure. If the policyholder dies within the term of the plan, nominees get the sum assured called death benefit. This plan has no survival benefits.
Term Life Insurance Plans have low premiums as they are pure risk plans. They offer protection only in the event of death. These plans have no maturity value.
- The 3 key factors of term Life Insurance:
Sum assured
Premium to be paid by the insured
Term of coverage
These factors define a term Life Insurance Plan. The term can be a year or more than one year. The premium may be constant or could change with time. The policy holder’s life is insured for a specific term. If the policyholder dies within the term of the plan, nominees get the death benefit. Term life plans have no survival benefits
- Endowment Life Insurance Plans
Endowment Life Insurance Plans have a savings feature. You get a lump sum at maturity. This is the sum assured + any accrued bonus. On death of the policyholder within the term, you get sum assured + accrued bonus. Endowment Life Insurance Plans have tenure ranging from 5-30 years.
You also have the non-participating/no profit version of the endowment Life Insurance Plan. These plans have much lower premium than participating plans. Endowment Life Insurance Plans offer survival benefits unlike term life plans. You enjoy guaranteed and reversionary bonuses on endowment plans. Some Endowment Life Insurance Plans offer the compounded reversionary bonus. The bonus amount is added to the sum assured when it’s declared. Subsequent bonuses are calculated on the enhanced sum assured.
- Money Back Plans
Money back Life Insurance Plans are a type of endowment Life Insurance Plan. They not only cover the life of the policyholder across the term, they also pay up a certain percentage of the sum assured as cash payments, at regular intervals within the term of the plan. Money back plans have the added advantage of life cover and regular cash inflow. Money back Life Insurance Plans are participating plans, where the sum assured + accrued bonuses are paid. Money back plans offer low returns.
- Whole Life Insurance
Whole Life Insurance Offers Life Insurance cover across the entire life of the insured (policyholder), or up to a maximum age specified by the insurer, whichever is earlier. You have to pay the premiums in time, to avail the benefits of whole Life Insurance. Whole Life Insurance also has the shorter premium payment option and the return of premium plan. The whole Life Insurance offers guaranteed additions along with the bonus if any, added to the sum assured. The whole Life Insurance offers guaranteed death benefits and guaranteed cash value among others. Whole Life Insurance is excellent for estate planning as it helps leave a legacy behind. Sadly, Whole Life Insurance doesn’t offer high returns unlike some saving plans.
- Unit Linked Insurance Plans
Unit Linked Insurance Plans or ULIPs is a Life Insurance Plan which offers insurance + investment. ULIPs help you earn market-linked returns by investing a part of the premium either in equity or debt (fixed income). ULIPs offer returns in-line with the performance of the market. Part of the ULIP premium is used for mortality cover (life cover) and the remaining amount is invested in equity or debt or a mix of both.
The performance of the ULIP depends on the returns from the investment. The risk and return from the ULIP depends on the fund the ULIP invest. You can choose the fund mix based on a comfortable asset allocation.
- Riders on Life Insurance
- Accidental Death Benefit Rider
- In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.
- Accelerated Death Benefit Rider
- If you avail accelerated death benefit rider, your family gets a part of the sum assured if you/policyholder suffer from a terminal illness. This money comes in handy to meet medical expenses of the illness. This rider specifies how much of the sum assured is payable in advance.
- Critical Illness Rider
- If you avail the critical Illness rider along with Life Insurance Plan, you/policyholder get a lump sum on diagnosis of critical illness like cancer, stroke, heart attack or kidney failure. Treatment for critical illnesses can be expensive. A critical illness rider can easily tide over high costs of medical treatment. After detection of a critical illness, the policy may continue or get terminated.
- Accidental Disability Benefit Rider
- If a policyholder is partially or permanently disabled in an accident, the accidental disability benefit rider comes into play. The rider pays a certain percentage of the sum assured to the disabled policyholder for a period of 5-10 years after the disability caused in the accident. The policyholder and his family can live on this income. The rider comes into play only for disabilities caused in an accident.
- Waiver of Premium Rider
- The waiver of premium rider is very important if you are unable to pay future premiums due to disability/income loss. The life insurer waives off future premiums, while the policy continues to remain active. This is just like insuring premiums payments on Life Insurance Plans, till the expiry of the policy. What happens if you don’t avail waiver of premium riders? Well, the policy will expire as you cannot pay the premiums. Your family won’t get the death benefits under Life Insurance.
- Income Benefit Rider
- The income benefit rider offers regular income in case of demise/disability of the policyholder. The rider pays monthly income on death of the insured for a period of 5-10 years along with the sum assured.
- Accidental Death Benefit Rider
