Life Insurance

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Note: This is applicable to Indians, both resident and NRIs. Almost all policies are serviceable online; hence, you can go through the whole process of enquiries, comparisons, application, documentation, premium payments, policy receipts, returns, etc. from the comfort of your home.

The primary purpose of Life Insurance is to protect one person against financial loss due to death of another person. For example, Mr. Sunil may purchase a life insurance policy on his own life (insured person) to protect his spouse, child or parent (nominee or beneficiary) from financial loss in case of his death. However, some life insurance policies also have a maturity benefit in addition to death benefit in case the insured person does not die within the policy period. To understand this and other aspects of life insurance, we need to learn about the various types of life insurance. But, before that, here are some common terms and phrases used in life insurance. These terms, abbreviations, etc. are used in other insurance and non-insurance topics also. Hence, it is very important to ask questions and clearly understand each term or phrase before taking any decision. Remember, insurance is a very important financial activity and your hard-earned money should not go to waste because of a wrong decision.

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Common Terms & Phrases in Life Insurance

  • Policy is a document detailing the terms and conditions of an insurance contract.
  • Insured Event is the actual mishap that is covered in the Policy. This could be death, healthcare expenses, car accident, damage to home or property due to fire, flood, etc., loss of income/business, or other mishaps.
  • Persons/Entities.
    • Insurance Company or Insurer is the government or private agency that provides the insurance coverage to the customer.
    • Policy Holder is the person or organization who has all rights over the policy, including making changes to the policy.
    • Insured is the person or entity that is actually covered under the insurance policy.
    • Beneficiary is the person who receives the benefits of an insurance policy, may be the insured person himself/herself.
    • Nominee is the person who is appointed or nominated by the Policy Holder to take care of the benefits of the policy on behalf of the Beneficiary, for example, when the Beneficiary is a minor/child.
    • Customer is a general word that could mean the Policy Holder, Insured Person, Beneficiary, etc.
  • Death Benefit. This is the guaranteed amount that the Insurance Company will pay to the Beneficiary on the death of the Insured person if the Insured person dies during the validity of the Policy period. For example, if a person has a life insurance policy with Death Benefit of ₹ One Crore (One Crore = Ten Million) and the person dies, then the Beneficiary will get ₹ One Crore subject to additions/deductions specified in the Policy document.
  • Sum Assured. This is the minimum guaranteed amount that the Insurance Company will pay to the Beneficiary in case the Insured Event takes place. This could be death of the insured person or maturity of the policy or any other factor. Thus, Sum Assured and Death Benefit are not always the same. Sum Assured may be equal to or more or less than Death Benefit; for example, in traditional insurance plans, the annual bonus, which is not connected with Death Benefit but is based on the company’s profits, may be a part of the Sum Assured. Similarly, certain plans offer returns in installments, say after every 5 years; these installment amounts are part of the Sum Assured and the Beneficiary still receives the full amount of Death Benefit on the death of the Insured Person, even after receiving a number of such installments.
  • Sum Insured. This is the maximum amount that the Insured or Beneficiary can receive in case the Insured Event occurs, normally not applicable to life insurance. For example, if a person has health insurance coverage (Sum Insured) of ₹ 10 Lakhs and the person faces medical expenses of ₹ 4 Lakhs, then he/she will get only ₹ 4 Lakhs subject to terms and conditions specified in the Policy document. If the same person faces further medical expenses of ₹ 8 Lakhs within the same year, then the he/she will get only ₹ 6 Lakhs, the balance amount of the Sum Insured of ₹ 10 Lakhs, subject to additions/deductions specified in the Policy document.
  • Policy Termination. There are several ways a policy can terminate. Some are automatic, some are forced. For example, for a Life Insurance policy, if the insured person dies, then the policy is automatically terminated, unless there are other provisions in that particular policy such as continued benefits for the Beneficiary even after death of the Insured. Another mode of termination is Lapse whereby the customer fails pay the agreed Premium amount within the specified time period; a lapsed policy can also be revived subject to pre-defined terms and conditions. Yet another mode of termination is Surrender whereby the customer does not want to continue the policy for any reason. There can be other ways that a policy can terminate or be terminated.
  • Premium. The amount that the customer has to pay to purchase the insurance. For example, for a Life Insurance Sum Assured of ₹ 11 Lakhs, the customer may have to pay a Premium of ₹ 1 Lakh per year.
  • Policy Term (PT). This is the maximum period of time or duration that the policy provides coverage to the Insured person or entity. For example, a customer may purchase a Life Insurance with Sum Assured of ₹ One Crore for 20 years. Policy Term is different for different types of insurance. For most Life Insurance policies the Policy Term is a number of years, while for Health and General Insurance policies the Policy Term is usually one year. Even if the Policy Term is one year, renewal of the policy before the expiry of one year keeps all the benefits of the policy intact, otherwise the policy lapses automatically.
  • Premium Paying Term (PPT). This the maximum time period or duration over which Premiums have to be paid. For example, a particular life insurance policy of a particular company may have a Policy Term (PT) of 12 years with Premium Paying Term (PPT) of 6 years. In this case the customer will pay for a maximum of 6 years but will enjoy the benefits for maximum of 12 years, if everything remains normal. If the policy terminates earlier (due to death, lapse, etc.), then the rest of the years become inconsequential.
  • Premium Payment Mode. This can be one-time (Single Premium), Annual (yearly), Semi-Annual (twice per year), Quarterly (4 times per year), Monthly (12 times per year). This depends on the options provided in the policy plan and the option the customer chooses. Normally, as the frequency increases, the average premium amount also increases. For example, if the Annual premium is ₹ One Lakh, for Monthly mode the total to be paid in one year may work out to ₹ 1.1 Lakhs.
  • Free Look Period. This is the period of time that is allowed by the Insurance Company to the Customer, after issuing a Policy, to decide whether he/she wants to continue with it or not. This is normally 15 days from the date of receipt of the policy document by the Customer. If the Customer decides not to continue, he/she can return the original policy documents to the Insurance Company within the Free Look Period and get a full refund, subject to deduction of certain charges.
  • Grace Period. This is the amount of time that is allowed by the Insurance company to the Customer to pay the Premium after it becomes due. Normally premiums are payable on or before the due date. For annual mode premiums, the grace period may be 30 days after the due date. The policy continues to remain in force, but if the insured event takes place during the Grace Period, the Insurance Company will pay the agreed amount to the Beneficiary after deducting the Premium amount that had become due.
  • Claim. This is the application for compensation by the Insured Person or the Beneficiary under the terms of the insurance policy. This is a vital part of insurance. No insurance company or agency will pay a single penny unless there is a formal claim by the person concerned.
  • Maturity Benefit. This is the benefit to the Customer if the Policy terminates without the insured event taking place. For example, for a car insurance policy, if there has been no claim in a particular year, the subsequent year’s Premium may be reduced by 5% or the Sum Insured may be increased by 5%. In case of Life Insurance, there may be a lumpsum payment of money to the Insured or the Beneficiary according to the terms of the particular policy. As explained below, pure Term Life Insurance plans have no Maturity Benefits whatsoever.
  • Tax Benefits. There are two types of transactions in insurance: payment of premium and receipt of returns. Payment of premium is from the Customer to the Insurance Company, while receipt of returns or pay-out is from the Insurance Company to the Customer. When a person purchases insurance, he/she pays the premiums. In most countries of the world, this premium amount is deducted from the person’s income, subject to certain rules, for calculation of that person’s tax in that particular year; thus the person’s tax amount gets reduced. In India, this is covered under Section 80C of the Income Tax Act; as of 2018, the total amount allowed, for insurance and some other investments, under 80C is limited to ₹ 1,50,000. After a certain period of time, if the policy matures without the death of the person and it is a policy that provides Maturity Benefits, then he/she receives a lumpsum amount or small amounts over a number of years; these amount(s) are also exempted, subject to rules, from tax calculations. Otherwise, if an insured person dies, then his/her Beneficiary receives a lumpsum amount or small amounts over a number of years as Death Benefit; these amount(s) also are exempted, subject to rules, from tax calculations. In India, these are covered under Section 10(10D); as of 2018, there are no limits under Section 10(10D); in short, the entire returns from insurance are exempted from tax.
  • Customer Complaints. If a Customer has any complaints against his/her Insurance Company, there are a number of avenues of recourse. First is to complain to the Grievance Redressal Officer (GRO) of the Insurance Company. Second is to approach the Insurance Ombudsman who is authorized to handle cases up to ₹ 20 Lakhs. Customers can also go to the Consumer Courts, at District Level (up to ₹ 20 Lakhs), State Level (up to ₹ One Crore), and National Level (above ₹ One Crore). However, insurance companies are highly regulated and are accountable to a number of authorities. A single major mistake can land the company in deep trouble; hence they employ top-class professionals who ensure that every single insurance policy and every single claim is properly processed and that there is no fraud or wrong-doing. Even after that, there have been instances of Customers getting their rightful dues after approaching the above grievance redressal systems.

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Types of Life Insurance

  • Term Insurance. This is pure insurance without any investment. There are normally two types of term insurance:
    • Pure Term Insurance. There is no maturity benefit in pure Term Insurance but the Premium is very low and the Sum Assured is very high. We will see some possible scenarios with the example of Mr. Sunil, 45 years old, healthy non-smoker, not engaged in any high-risk occupation, and not residing in any high-risk area, who wants to purchase a Term Insurance policy with Policy Term (PT) of 10 years, Premium Paying Term (PPT) of 5 years, and Death Benefit of ₹ One Crore. Beneficiary is his wife, Mrs. Sunil. In this case, Mr. Sunil’s annual premium may be as low as ₹ 30,000 only (total ₹ 1,50,000 in 5 years). This table shows a number of possible instances and the benefits to Mr and Mrs Sunil over a period of time. This is an approximate example only, just to give you an idea, and the actual benefits will be different, depending on the proper details of the person to be insured, insurance company, policy type/offering, etc.
      Year Total Premiums Paid (₹)
      Death Benefit (₹)
      Paid To
      2 60,000 Yes 1,00,00,000 Mrs. Sunil
      4 1,20,000 Yes 1,00,00,000 Mrs. Sunil
      5 1,50,000 Yes 1,00,00,000 Mrs. Sunil
      8 1,50,000 Yes 1,00,00,000 Mrs. Sunil
      10 1,50,000 No 0 (zero) N/A
    • Term Insurance with Return of Premium (TROP). TROP is term insurance which returns only the premiums paid on completion of the policy term if the insured is still alive. Obviously, the premium amount is more than pure term insurance, maybe 4 to 5 times higher, for the same Death Benefit. Using the example of Mr. Sunil above, with the same policy parameters of 10-year PT, 5-year PPT, and ₹ One Crore Death Benefit, the annual premium becomes ₹ 1,25,000 (total ₹ 6,25,000 in 5 years). Let us see some comparative figures with the same table as above. Again, this is an example only.
      Year Total Premiums Paid (₹)
      Death Benefit (₹)
      Paid To
      2 2,50,000 Yes 1,00,00,000 Mrs. Sunil
      4 5,00,000 Yes 1,00,00,000 Mrs. Sunil
      5 6,25,000 Yes 1,00,00,000 Mrs. Sunil
      8 6,25,000 Yes 1,00,00,000 Mrs. Sunil
      10 6,25,000 No 6,25,000 Mr. Sunil
  • Endowment. This is insurance with investment. This means that, along with Death Benefit, there is Maturity Benefit also in Endowment plans. Let us take the example of our Mr. and Mrs. Sunil above to see what benefits they would get under a typical Endowment plan. Unfortunately, Endowment plans do not provide the high death benefits of Term Plans. Death benefits in Endowment are usually 10-15 times the annual premium. Hence, to get death benefit of ₹ One Crore in a normal Endowment Plan, Mr. Sunil would have to pay a premium of ₹ 7-10 Lakhs per year. This is absurd from the point of view of death benefit alone. Endowment plans cannot be considered separately as insurance, or separately as investment. Endowment plans are ideal as long-term savings for certain life events, such as childrens’ education, retirement, etc., along with the security of death benefit. Are these dual benefits available elsewhere? The answer is “No”. Shares, Mutual Funds, Bank Fixed/Term Deposits, etc. all have their benefits, but are either short-term or high-risk. Thus, getting back to our example of Mr. Sunil, if he purchases an Endowment policy with annual premium of ₹ One Lakh for Policy Term (PT) of 25 years, Premium Paying Term (PPT) of 12 years, he can get Death Benefit of ₹ 15 Lakhs, along with Maturity Benefit of ₹ 30 Lakhs (in case he survives beyond the Policy Term of 25 years). Let us see the example table again with these figures:
    Year Total Premiums Paid (₹)
    Death Benefit (₹)
    Paid To
    2 2,00,000 Yes 15,00,000 Mrs. Sunil
    5 5,00,000 Yes 15,00,000 Mrs. Sunil
    12 12,00,000 Yes 15,00,000 Mrs. Sunil
    15 12,00,000 Yes 15,00,000 Mrs. Sunil
    25 12,00,000 No 30,00,000 Mr. Sunil
  • Guaranteed Income Plans. In recent years, there has been a significant increase in the number of Guaranteed Income Plans being provided by various companies. Are these truly guaranteed? Are these truly secure? The answer is 100% YES. The Insurance industry in India is as secure as the Banking industry. Remember, the Insurance industry in India is very strictly regulated by the IRDAI (Insurance Regulatory and Development Authority of India) and various other government/statutory bodies. It is practically impossible for any small company to get into insurance and there are systems in place which ensure that the common man does not suffer. If required, a sick company is taken over by a stronger company. Thus, when an insurance company uses the word “guaranteed”, you can rest assured that they will deliver on their promise otherwise the government will take very strong action against them. An example of a guaranteed income plan is 12:24: pay for 12 years, then get returns over the next 24 years (288 months). Of course, there are variations also, such as 5:10 and 8:16, along with 12:24. In the 12:24 plan, if you pay a premium of ₹ 50,000 per year for 12 years (total ₹ 6,00,000), then from the 13th year onwards you or your heirs will continue to get an income of ₹ 4,500 per month for the next 24 years (288 months, total ₹ 12,96,000). Plus there is death coverage of 11 times the annual premium and full tax benefits.
    Annual Premium (₹) Total Premiums Paid (₹) Guaranteed Monthly Income (₹) Total Gauranteed Income (₹) Approx Tax Savings (₹)
    50,000 6,00,000 4,500 12,96,000 1,80,000
    1,00,000 12,00,000 9,000 25,92,000 3,60,000
    5,00,000 60,00,000 45,000 1,29,60,000 18,00,000

    This is an example only and the actual benefits are much better.

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  • Money Back Plans. Some Endowment plans also have pay-backs during the Policy Term, whereby the Beneficiary gets back certain amounts periodically, say after every 5 years, during the Policy Term. These are known as Money Back plans.
  • ULIP stands for Unit Linked Insurance Plan. This is like Mutual Funds with a Death Benefit. Like Endowment, there are 2 components to ULIP: life insurance and investment. The investment portion is referred to as Fund Value. While the Death Benefit remains fixed, the Fund Value increases or decreases according to market dynamics. In ULIPs, Sum Assured is usually the higher of Death Benefit or Fund Value, while Maturity Benefit or Surrender Value is the Fund Value. Since the investment part is totally market based, the Fund Value may increase to huge amounts or may crash to lower than the sum of premiums paid. An important point to note here is that, Mutual Funds and ULIPs do give substantial returns, sometimes unexpectedly high returns, when continued on a long-term basis (10-15 years), even if they appear to be floundering in the beginning. Like Mutual Funds, ULIP funds are managed by Fund Managers and the Customer can decide the type of funds that his/her money is invested in. People with high risk appetite can go for high-growth equity funds which can shoot very high or can crash. People with low risk appetite can go for more secure debt funds, while others can go for balanced funds. There is normally an option for the Customer to switch between the various types of funds a certain number of times per year.

Guaranteed Income 108% per Year for 24 yearsGet Life Insurance Information

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