Life Insurance FAQs

Insurance is a means of protection from unforeseen financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss and secure from financial loss.

An entity which provides insurance is known as an insurer, insurance company, insurance carrier or underwriter. A person or entity who buys insurance is known as an insured or as a policyholder. The insurance transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate the insured in the event of a covered loss. The loss may or may not be financial, but it must be reducible to financial terms, and usually involves something in which the insured has an insurable interest established by ownership, possession, or pre-existing relationship.

There are 4 broad terms in which

  1. Life Insurance
  2. General Insurance
  3. Health Insurance
  4. Pension Insurance

Life insurance can provide tension free that your beneficiaries will be provided for after you die. Learn more about selecting the right policy for you, and how some policies can even serve as retirement savings. There are basically 4 types of life insurance,

            1) Term Insurance

            2) Traditional / Endowment Insurance

            3) ULIP

            4) Guaranteed Income Insurance

You must check and see whether or not there is availability of guarantee of return, what the lock in period is, details of premium to be paid, what would be implications of premium default, what the revival conditions are what the policy terms are, what are the charges that would be deducted, would loan be available etc.

In case of certain proposals, depending upon the age of entry, age at maturity, sum assured, family history and personal history, special medical reports may be necessary for consideration of a risk. E.g. if the proposer is overweight, special reports like Electro Cardiogram, Glucose Tolerance test etc could be required, while for underweight proposers, X-ray of the chest and lungs with reports could be required.

Surrender Value is allowed as a percentage of this paid up value.  Surrender value is calculated as per the surrender value factor, which depends on the premiums paid and elapsed duration.

If the policy conditions permit grant of loan, loan is sanctioned as a percentage of the Surrender Value.

Usually the Insurance Company will send intimation attaching the discharge voucher to the policy holder at least 2 to 3 months in advance of the date of maturity of the policy intimating the claim amount payable.  The policy bond and the discharge voucher duly signed and witnessed are to be returned to the insurance company immediately so that the insurance company will be able to make payment. If the policy is assigned in favor of any other person the claim amount will be paid only to the assignee who will give the discharge.

The basic documents that are generally required are death certificate, claim form and policy bond, Other documents such as medical attendant’s certificate, hospital certificate, employer’s certificate, police inquest report, post mortem report etc could be called for, as applicable. The claim requirements are usually disclosed in the policy bond.

Term insurance is the simplest and purest form of life insurance. It provides financial protection to your family at the most affordable rates. You can get a large amount of life cover (i.e. sum assured) at a relatively low premium rate. The benefit amount is paid out to the nominee in case of death of the person insured.

Term insurance is available with many product mixes, like return of premium, insurance with add on cover of accidental benefits, etc.

Assume you earn an annual income of 10 Lakh. For your family’s financial well-being, this income should continue even when you are not around. There are a few ways that you can make this happen.

A bank a/c saving of 2 Crores as FD, which will at 5% generate a yearly income of 10 Lakh for your family.

A sizeable investment which might grow to a corpus of 2 Crores, before your death.

If you can’t manage to create a large saving/ investment, then a viable option is a term plan of 2 Crores. It will pay this amount to your family on your demise. Premiums for a 2 Crores life cover start at 1000 per month 2 only, which is less than half the cost you would pay for dinner with family at a restaurant.

The earlier you buy a term plan, the better (and cheaper) it is. With time, the premiums become more expensive. For example, premiums for a 30-year-old, non-smoker male would amount to for a 30-year policy duration. The premium increases to 1428 per month, if the policy is bought at age 40. Keep in mind the premiums get fixed at the age you purchase, for the entire policy duration.

Also, with current lifestyles and increasing instances of diseases and illnesses, it may become difficult to get a term plan later, as you grow older.

The life cover you need depends on your current annual income. We recommend that a life cover equivalent to 10-15 times your annual income is sufficient to provide for a safe future for your family.

If budget is a problem, you could go for monthly premium payment option over a yearly commitment. However, it is important to have a sufficient life cover so that your family’s financial security is not compromised.

Surrender value in Unit Linked Policies is usually expressed as fund value less the surrender charge.

The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policyholders are pooled together to form a Unit fund.

It is a component of the Fund in a Unit Linked Policy.

Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund.

The following are some of the common types of funds available along with an indication of their risk characteristics.

General Description Nature of Investments Risk Category
Equity Funds Primarily invested in company stocks with the general aim of capital appreciation Medium to High
Income, Fixed Interest and Bond Funds Invested in corporate bonds, government securities and other fixed income instruments Medium
Cash Funds Sometimes known as Money Market Funds — invested in cash, bank deposits and money market instruments Low
Balanced Funds Combining equity investment with fixed interest instruments Medium

Investment returns from ULIP may not be guaranteed.” In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder”. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.

ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time.

Premium Allocation Charge
This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses.

Mortality Charges
These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc.

Fund Management Fees
These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV) .

Policy/ Administration Charges
These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate.

Surrender Charges
A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions.

Fund Switching Charge
Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.

Service Tax Deductions
Before allotment of the units the applicable service tax is deducted from the risk portion of the premium.

Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units.

One has to verify the approved sales brochure for
•  all the charges deductible under the policy
•  payment on premature surrender
•  features and benefits
•  limitations and exclusions
•  lapsation and its consequences
•  other disclosures
•  Illustration projecting benefits payable in two scenarios of 6% and 10% returns as prescribed by the life insurance council.

NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers.

Yes, one can invest additional contribution over and above the regular premiums as per their choice subject to the feature being available in the product. This facility is known as “TOP UP” facility.

Yes. “SWITCH” option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.

Yes, Products may have the “Partial Withdrawal” option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.

A) Discontinuance within three years of commencement – If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later.

B) Discontinuance after three years of commencement – At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount equivalent to one full year’s premium, the contract shall be terminated by paying the fund value.

C) Policies having 5 year lock-in-period: For policies bought on or after 01-09-2010, lock in period has been increased to 5 years. Upon discontinuance of the payment of premium, the policyholder has the option of (i) Reviving the policy or (ii) Complete withdrawal without any risk cover. A notice shall be sent by the insurer giving the above options, within 15 days from the date of expiry of grace period, if no option or option (ii) is exercised within 30 days of such notice, the proceeds of discontinued policy shall be refunded but not before the completion of the lock-in period. If such discontinuance is within lock in period, the policyholder shall have the right to revive the policy within a period of two years from the date of discontinuance but not later than the expiry of the lock-in period.

The Insurers are obliged to send an annual report, covering the fund performance during previous financial year in relation to the economic scenario, market developments etc. which should include fund performance analysis, investment portfolio of the fund, investment strategies and risk control measures adopted.

Endowment plan is a life insurance policy which provides you with a combination of both i.e.: an insurance cover, as well as an savings plan. It helps you in saving regularly over a specific period of time, so that you are able to get a lump sum amount on policy maturity, if the policyholder survives the policy term.

The policyholder gets his/her sum assured on a fixed date in future as per the policy terms and conditions. However, in case of sudden death of the policyholder, the insurance company will pay the sum assured (plus the bonus, if any) to the nominee of the policy. Besides, it is also useful to secure yourself or your family post-retirement or to meet various financial needs such as funding for children’s education and/or marriage or buying a house.

Endowment plans are similar to our regular insurance policies. They not only provide you with a life cover but also help you save on a regular basis. And once the policy matures with the given condition that the policyholder has survived the policy term, he/she will receive a lump sum amount. This amount can be utilized to meet financial needs like purchasing property, children’s education or retirement etc.

A savings plan is an ideal term & endowment plan that saves your funds and pays you a lump sum amount for your future needs. It not only saves and invests your funds but also offers you a life coverage at a low cost.

If you are seeking life coverage at an affordable cost and also want your funds to grow steadily, you can purchase a savings plan.

Savings plan entitles you to a lifetime income after a specific period of time. The income is a certain percentage of the sum assured. Besides, you also earn dividends, bonuses, etc. In unfortunate events like death or disablement, the nominee receives the sum assured.

Yes. All premiums that you pay for savings plan are eligible for tax redemption under section 80C and 10(10D) of the current Income Tax laws.