LIFE

INSURANCE
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1
Chapter 1:

Life Insurance Basics

The other day, Amit, a 26 something techie, was told by Sumit ( a
certified financial planner), his financial advisor and planner to buy life
insurance cover. As Amit never had the time or acumen to understand
about investments or insurance, he asked Sumit to explain the basics
first. Sumit started explained the following:

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 Individual
1.1 What is life Insurance Insured
Insurance is a contract between two parties
whereby one party (known as insurer or Premium
assurer) agrees to bear the risk of another
(known as insured or assured) in exchange
for a consideration known as premium and
promises to pay a fixed sum of money (called Assurer
sum assured or cover) to the other party on Life Insurance
happening of an uncertain event (death) or Company
after the expiry of a certain period (called
tenure of the policy). Accepts Risk

Insurance is structured to reduce the

uncertainity risk and to protect the financial
condition of an individual’s family in the case Sum assured
of unexpected loss of life. Received by
insured

Sum assured
Received by
insured 3
1.2 How life Insurance Works
The underlying concept behind life insurance is
sharing of risks by pooling of funds. Groups of
people having similar risk come together and make
contribution towards a pool and the money so
collected is used towards compensating for any
losses suffered by members of the pool. When this
pool of money is managed by a company it is called
life insurance.
EXAMPLE
What happens if 25 persons dies?
UNDERLYING ASSUMPTION
All 5000 persons are exposed to common
risk, i.e. death
PROCEDURE
Everybody contributes Rs. 1200/- each as
premium to the pool of funds
Total value of the fund = Rs. 60,00,000
(i.e. 5000 persons * Rs. 1,200)
25 persons die in a year on an average
Insurance company pays Rs. 2,00,000/- out of
the pool to the family members of each of the 25
persons dying in a year

ASSUMPTIONS EFFECT OF INSURANCE

• Number of Persons = 5000 Risk of 25 persons is spread over 5000 people
• Age and Physical condition = 60 years and
healthy
• Number of persons dying in a year = 25 Two concepts emerge out of the above example
• Economic value of loss suffered by family of each - criteria for insurable Risk and Underwriting.
dying person = Rs. 2,00,000/-
• Total annual loss due to deaths = Rs. 50,00,000/-
• Contribution per person = Rs. 1,200/-
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1.3 Why life insurance is necessary

Insurance planning is an essential feature of every

personal financial Plan because of the following
reasons:-

Number of nuclear families increasing

Earlier joint families was the norm in Indian society but

now-a- days an increasing trend of a higher percentage
of nuclear families in the total number of households
compared to joint families increases the need for
life insurance as the dependency ratio increases
significantly.

Increase in Debt levels

With the change in Indian economy in last 20 years

and subsequent growth with it, people’s appetite for
loans (home loans, car loans, personal loans etc) have
also grown exponentially. Banks and other entities are
ready to give them credit. As the proportion of debt
increases there is a greater need for term insurance.
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What happens if you die leaving behind
outstanding home loan or car loan or personal
loan. Unlike home loan, other types of loan do not
have the feature of term insurance in-built in the
premium. So, you need insurance to take care of
this unpaid debt risk.
Absence of social security increases need for risk
cover
India does not offer a social security system
unlike the western countries like USA where the
government provides you a minimum allowance
to maintain your standard of living if you are
unemployed and or do not have anybody else
looking after you.
If you live well past your working age (highly
possible with the advancement in medical
science) then you would need income support.
Life insurance can help you in your post-
retirement years by providing regular income,
so it functions as a useful tool for retirement
planning.
Providing financial support to the dependants
Particularly for those with dependents, life
insurance is a fundamental element in their
comprehensive financial plan. The purchase of life
insurance is one of the most effective methods of
protecting against the consequences of untimely
death.
After a family suffers the loss of a loved one, it
usually encounters a stressful readjustment period.
In situations like this, proceeds from life insurance
policy (sum assured) can help the heirs / family
members to maintain their standard of living.
Enables goal based savings and investment
Insurance is a means to systematically channelize
your savings and invest regularly. Your periodic
premiums are simply enforced savings and due
to this discipline, you are assured of a lump sum
amount on maturity. A policy can come in handy
at the time of your child’s education or marriage.
Not only this, it can also help in your retirement
planning and succession planning.
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Tax Benefits

Your tax can be saved twice on a

life insurance policy-once when you
pay your premiums and once when Absence of Providing financial
you receive maturity benefits. Even social security support to the
during the continuance period, increases need dependants
if you receive survival benefits, for risk cover
they are tax free. So, life insurance
policies attract the EEE (exempt, Increase in debt Enables goal
exempt, exempt) regime which levels based savings
is good for you as at all the three and investment
stage, you do not pay any tax.

Any amount that you pay towards Nuclear families

life insurance premium for yourself, Tax Benefits
increasing
your spouse or your children can
be included under section 80C
Need for
deduction of Rs.1.50 lakhs in a
life
financial year.
Insurance

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1.4 Who needs life insurance
Basically, if you have a family to support and
are an income earner, then you need Life
You need
Insurance. In view of the economic value of their
contribution to the family, housewives too need
life
life insurance cover.
insurance
But if you are a single person with no
dependents, then don’t make the mistake of
thinking that you don’t need life insurance cover.
Actually, even a single person requires sufficient
life insurance to cover the expenses of personal
debts, medical as well as funeral bills. In case you
are uncovered, you might pass on the legacy of
unpaid expenses to family or relatives.
Earning Having
Income dependents

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1.5 What is the importance of a
For example, if the proposer is overweight,
proposal and the disclosures made special reports like Electro Cardiogram, Glucose
therein Tolerance test etc could be required, while for
underweight proposers, X-ray of the chest and
The disclosures made by you in a proposal form lungs with reports could be required.
while buying a life insurance policy form the basis
for underwriting a policy and therefore any wrong In the end, Amit understood that he needs life
statements or disclosures can lead to rejection of a insurance cover immediately as he had just got
claim later on causing inconvenience to your heirs / married 2 years back and has a son take care
immediate family. of plus has taken personal loan to finance his
lifestyle expenditure.
1.6 What are special medical reports
required to be submitted in Life
insurance
Special medical reports may be necessary for
consideration of a risk in case of some proposals,
depending upon the age of entry, age at maturity,
sum assured, family history and personal history.

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Key Learning Points
1) Insurance is a contract between two parties e. Savings and Investments
f. Tax Benefits
whereby one party agrees to undertake the risk of
another in exchange for consideration known as
premium and promises to pay a fixed sum of money 4) Primarily, anyone who has a family to support
to the other party on happening of an uncertain and is an income earner needs Life Insurance.
event (death) or after the expiry of a certain period.
5) The disclosures made in a proposal are the
basis for underwriting a policy and therefore
2) The underlying concept behind insurance any wrong statements or disclosures can lead to
rejection of a claim.
is sharing of risks by pooling of funds. Groups of
people sharing similar risk come together and
make contribution towards a pool and the money
so collected is used towards compensating for any
losses suffered by members of the pool.

3) Insurance is necessary because –

a. Increase in the number of nuclear families

b. Increase in Debt
c. Absence of social security increases need for
risk cover:
d. Providing financial support to the dependants
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Multiple Choice Questions
1. Statement 1:
Insurance is a device for the reduction of the uncertainty of one party
called the insured, through the transfer of particular risks to another party
called the insurer, who offers, a restoration at least in part of economic losses
suffered by the insured.

Statement 2:
The party bearing the risk is known as the ‘insured’ or ‘assurer’ and the
party whose risk is covered is known as the ‘insurer’ or ‘assured’.

Which Statement is false? LOS 1.1

a) Statement 1
b) Statement 2
c) Both Statements are false
d) Both Statements are true

2. The concept of insurance involves transfer of LOS 1.1

a) Needs
b) Liability
c) Risk
d) Ownership

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3. Policy is issued for Rs. 5,00,000 each to 100 persons. There are 100 persons
from whom premium would be collected. 1 person in 100 is expected to die,
therefore the premium collected per person would be Rs. . LOS 1.2
a) 3000
b) 2000
c) 5000
d) 4000

4. Why insurance is a significant component of financial planning? LOS 1.3

a) Absence of social security increases need for risk cover & Providing
financial support to the dependants
b) No tax benefits
c) To provide cover as debt is increasing in form of home loans
d) Both a & c

5. Who should buy life insurance? LOS 1.4

a) Anyone who is earning and having dependents
b) Anyone who is not earning
c) Anyone who is earning with no dependents
d) None of the above

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6. The disclosures made in a form the basis for underwriting a
policy and therefore any wrong statements or disclosures can lead to rejection of
a claim. LOS 1.5
a) Attestion form
b) Proposal form
c) Auto-debt form
d) All of the above

7. What additional information is required if all required forms are submitted for
life insurance policy? LOS 1.6
a) Attestation
b) Medical Report
c) Premium
d) Survey Report

Answer Key

Question No Correct Choice Question No Correct Choice

1 B 5 A
2 C 6 B
3 C 7 B
4 D
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2
Chapter 2:

Risk & Life Insurance Contracts

Having convinced Amit about the need for life insurance, Sumit began
explaining him about the features of a life insurance policy and the clauses
mentioned therein.

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2.1 What are the distinguishing fea-
tures of Life Insurance Contracts?
The important features of an life insurance Self
contract are :

1. Rule of insurable interest

Assets Parents
For an insurance contract to be valid, the proposer
should have insurable interest in the subject
matter of insurance. Insurable interest implies
that the proposer should benefit financially by the Insurable
continued existence of the insured life or should
be put into financial loss by the loss/damage/ Interest
death of the subject matter insured.

In life insurance, insurable interest should exist

at the time of entering into the contract. Further, Children Spouse
in life insurance it is the owner of the policy and
not the beneficiary who should possess insurable
interest. However, it is quite possible that owner
and the beneficiary are the same though it is not
mandatory.
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2. Doctrine of utmost good faith
In all legal contracts, it is essential that the parties to the contract exercise good
faith. However, in insurance the emphasis is on utmost good faith which should
be exercised by the insured. As the insured alone has complete information about
the subject of insurance, he should reveal all the facts to the insurer. In case of
breach of this condition the contract becomes void.

2.2 What are the common clauses in a insurance contract

The insurance contract contains the following clauses:-

a) Declaration section where in the insured declares that the information

provided by him is true to the best of his knowledge.
b) The operative clause which describes the insured and the extent of coverage.
c) Exclusions under the policy.
d) Conditions which need to be fulfilled for the cover to be valid.
e) Riders and endorsements which are not standard part of the policy but can
be covered subject to extra premium. The term rider is used in Life policies. A
common rider is accidental death also called double indemnity, whereby if death
occurs due to an accident, the claim amount payable is double the face value of
the policy.

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Key Learning Points
1. Risk is a condition whereby there is a possibility of loss
occurring. In insurance the subject matter insured is called
the Risk. There are two main components in definition of risk
– uncertainity and undesired consequences.

2. Risk management is concerned primarily with pure risk

and managing pure risks. The process of risk identification
and evaluation/ measurement is called Risk Analysis.

3. The distinguishing features of Insurance Contracts are -

a) Rules of insurable interest

b) Doctrine of utmost good faith

4. The insurance contract contains the common clauses -

declaration, the operative clause, exclusions under the policy,
conditions which need to be fulfilled for the cover to be valid,
riders and endorsements which are not standard part of the
policy but can be covered subject to extra premium.

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Multiple Choice Questions
1. Which feature/ rule in life insurance says that the proposer should benefit
financially by the continued existence of the insured life or should be put into
financial loss by the loss/damage/death of the subject matter insured?
LOS 2.1
a) Rule of insurable interest
b) Doctrine of utmost good faith
c) Both (a) and (b)
d) None of the above

2. Which common clause in a life insurance contract can be covered at extra

premium by the proposer? LOS 2.2

a) Rider
b) Declaration clause
c) Recharge clause
d) Operative clause

Answer Key

Question No Correct Choice

1 A
2 A
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3
Chapter 3:

Life Insurance –Required Cover

Just like a fish takes to swimming in water quickly, Amit’s signaled through
his frequent questions that he was game for more. So, Sumit went ahead
and educated Amit about what factors should he look for before buying a
policy, deciding type of policy and duration and also apprised him about
the amount he should insure for and how to arrive at that amount.

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3.1 What should one look for before deciding to buy a life insur-
ance policy
a) Assess your need for buying any life insurance policy – the standard thumb rule is
that your life cover should be 10 times your annual income so that your family is not
impacted financially in case something were to happen to you
b) Read the policy brochure and policy wording documents thoroughly and
understand the features yourself. Also understand the benefit illustration given by
the agent / website but do not trust them blindly, take your time to ask all types of
questions and do your own research
c) Understand the type of policy – traditional or market linked
d) Availability of guarantee of return in case of traditional policies
e) Understand the various fund options in case of market linked policies
f) Any charges to be deducted from your premium amount
g) Liquidity terms and conditions in the policy – lock-in-period, total term of the
policy and any loan availability in case you need money before the policy ends
h) Coverage of the policy – this is necessary to know what is covered and do you
need to fill up any gaps in your coverage
i) Exclusions under the policy – this is necessary to know to what is not covered and
to avoid rude shock (read claim rejections) by life insurance company later
j) Details of premium to be paid – premium amount and total premium paying
period
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k) Free-look period – all life insurance Understand the
companies allow you to return the policy type of policy
within 15 -30 days If you do not like the Read the docs Avl of
policy or you think that the product is not thoroughly guaranteed
return
suitable for you
l) Impact of premium non-payment
m) Revival terms and conditions Understand
fund options
n) Claim settlement ratio – higher is this Assess need for
ratio, higher is the percentage of claims life cover What to
settled by a company. This ratio is publicly look before
available on IRDAI website and also on the you buy life
website of some insurance aggregators. policy
Minimum acceptable ratio should be Liquidty T & C
90% .Any company having higher ratio is Claim Ratio
generally considered good
o) Grievances redressal facility and
customer experience reviews
Coverage &
Lapse & Revival Exclusions
T&C
Premium
details & Free
look period

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Now Amit clearly understood that
the policy charging the cheapest
premium might not be the best
one. Sumit made him realize that
he did not want to land up in a
situation where his family faces
claim rejection or bad customer
service.
It is important to identify not only
the right policy but also the right
insurance company
3.2 Which life insurance plan should you opt for
It is advisable to always choose a pure insurance product rather
than combining insurance with investments such as market linked
insurance policies i.e. ULIPs (Unit Linked Insurance Policies)
It is seen that traditional policies such as endowment policies and
money back policies deliver very poor returns like 3 % to 4 % per
annum over the entire term. This does not even match inflation
and hence it is not recommended to take these products.
Products like ULIPs and products like them (read combination
policy of traditional + market linked) have hidden charges and
high commissions, which lead to an inefficient use of your funds
which could otherwise have been invested, so, it is not advisable
to opt for them.
You will learn in detail about the various types of life insurance
policies in one of the later chapters.
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3.3 What should be the term or duration
of your life insurance policy
The important aspects of any life insurance policy are:

a) The sum assured

b) The term or duration of the policy
c) The premium amount

Most of the people focus on the sum assured and

compare various policies based on that, and finally select
a policy based on the premium amount. But in this
exercise, the aspect that often gets ignored is the term
of the policy.

Most people think they need insurance till they retire

– which usually means till the age of 60 years. So, for
example, if you are 35 years old, you would buy a policy
for 25 years so that it remains in force till you turn 60
(that is, till you retire). This approach is not right.

Think about the number of people who are financially

dependent on you currently , and decide for how many
years more they would remain dependent on you .Also,
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think about any financial dependent you might add,
and decide for how many years they would remain so. Years
If you have taken some liabilities like a long term loan remaining for
dependency
then for how many years it will continue to be so?
Years
remaining for
Example 1: If Amit is 26 years old and has an earning liabilities
Years
spouse and a son who is 1 years old, he might need remaining
insurance only for 24 years , because by the time he is to long term
goals
50 , his son would be 25 and would be on his own.

Example-2: If Amit is 26 years old and doesn’t have a

child yet, he will have to take that into consideration
and purchase life insurance for a slightly longer
duration.

So, there is no fix answer to the question: What should

be the tenure of your life insurance policy? You need
to carefully analyze your situation well (read long term
goals, needs and any liabilities) before you commit
yourself to a long term policy . Term of your life cover

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3.4 How much Life Insurance cover is
needed
The amount of life cover depends on the following
factors in general: -

a) Your age
b) The amount of Life Insurance coverage you
need will depend on many factors such as:
c) Your life stage (young and married, married
with kids, nearing retirement etc.)
d) Number of dependants on your income
e) Any outstanding loans (like home loan, car
loan, personal loan etc..)
f) Present lifestyle of your family
g) Amount of money needed for your children’s
education
h) Amount of money needed for you and your
spouse’s post-retirement period
i) Amount of your assets or networth already
accumulated by you
j) Your capacity to pay the premium

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3.5 How to calculate the required life insurance Solution :
cover through HLV method First Step: Find inflation adjusted
The human life value (HLV) method is used for calculation of rate = (1+10%)/(1+8%)-1 = 1.85 %
amount of sum assured for which an individual should assure his p.a.
life, takes into consideration the following aspects:
Second Step: He needs to find
a) Average of present value of the annual future earnings of the present value (sum assured)
the individual. needed to generate Rs.3,50,000/-
b) The number of years the individual is expected to work every year to meet his family’s
before he/she retires. needs in his absence . This amount
c) The expenses that are incurred by the individual on him/ itself is subject to inflation adjusted
herself. rate of growth - 1.85 % p.a.

Example: Amit, 26, furnishes the following information to Sumit : Now , enter the given values in
Current Salary - Rs. 6,00,000/- and estimates average increment of Excel in the following manner to
10 % p.a. till he turns 60 . calculate PV :
Inflation rate assumed at 8 % p.a.
Self maintenance expenditure - Rs.2,00,000 annually NPER 34
Annual premium for existing life insurance cover of 5 lakhs – RATE 1.85%
Rs.20,000/- PV -87,74,640
Annual Taxes – Rs.30,000/- PMT 3,50,000
Surplus available for his family’s lifestyle and maintenance – TYPE 0
Rs.3,50,000/- FV 0
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This means that Mr. Amit, will need to have
a life assurance cover of Rs.88 lakhs on his
life.
Now from this figure, he should deduct
the existing sum assured of the policy plus
present value of assets (if any) to arrive at
the remaining gap which he should fill by
buying a new policy.
Note that above calculation can also be
done for 24 years because by that time his
son will be on his own. So, HLV method can
tell you the required insurance cover based
on either retirement age or the age until
which you expect to have responsibilities.
Note that you don’t need insurance if you
don’t have dependants.
Life insurance is meant to replace your
income and provide financial support to
your dependants if something unfortunate
happens to you.
Key Learning Points
1) Before you decide to buy a policy you must check
and see the type of policy , 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.
2) It is recommended to always opt for a pure
insurance product rather than combining insurance
with investments such as what is done by way of
market linked insurance policies i.e. ULIPs etc.
3) It is seen that traditional policies such as
endowment policies and money back policies provide
very poor returns, giving a yield of 3% to 4 % per
annum over the entire term. This does not even match
inflation and hence it is not recommended to take
these products.
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4) Products like ULIPs and the like have hidden IV. What your investment needs are
charges and high commissions, which lead to an V. What your affordability is
inefficient use of your funds which could otherwise
have been invested. 8) Human Life Value (HLV) of an earning
member in the family could be defined as the
5) Probability is the foundation on which amount that the family would require to retain
insurance rests: here the risk of a few is spread over the same standard of living in the absence of the
many. With the risks that one is exposed to in life on earning member. This would be the maximum
the rise, insurance is the best way for managing life’s amount for which a person can seek insurance
vagaries. protection.

6) The important aspects of any life insurance

policy are:
i. The sum assured
ii. The term or duration of the policy
iii. The premium amount

7) The amount of Life Insurance coverage you

need will depend on many factors .Some of them
are :
I. How many dependants you have
II. Whether you have any debt outstanding
III. How much you need for your children’s
education
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Multiple Choice Questions
1. What factors you should consider before you decide to buy a life insurance policy?
LOS 3.1
a) Type of policy & Any lock-in-period
b) Availability of guarantee of return & Any charges to be deducted
c) Details of premium to be paid
d) All of the above

2. You are given a buying choice between 2 policies – one with high claim ratio but
premium is high and other policy having low claim ratio and lower premium. What
should you do? LOS 3.1

a) You will buy second policy because your friend has also purchased that
b) You will buy the first policy because it has a higher claim ratio
c) You will buy second policy it has the cheapest premium
d) None of the above

3. Which life insurance plan you should opt for? LOS 3.2

a) Traditional policies such as endowment policies and money back policies which
provide very poor returns yielding 3 % to 4 % per annum
b) A pure insurance product like term plan
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c) Products like Unit Lined Insurance Plans (ULIPs) and the like which have hidden
charges and high commissions
d) Either a or c

4. You should buy traditional policies like endowment and money back even though
they deliver very low returns LOS 3.2

a) Yes, because your parents have been doing it that way

b) No ,because they are unable to beat inflation over long holding period of time
c) Yes, because the returns are guaranteed
d) Both a and c

5. What should be the term or duration of your life insurance policy? LOS 3.3

a) The number of people who are financially dependent on you currently & decide
for how many years more they would remain dependent on you.
b) Any financial dependent you might add, and decide for how many years they
would remain so.
c) Only focus on the sum assured and compare various policies based on that, and
finally select a policy based on the premium amount
d) Both a & b

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6. You should decide the term of the policy on the basis of premium you can pay. Is this
statement true or false? LOS 3.3

a) True, as this how the previous generation has been doing it & they can’t be wrong
b) May be true but not sure
c) False
d) Can’t decide

7. The amount of life insurance cover is dependent on what factors? LOS 3.4

a) The number of dependents on you

b) Any debt or mortgage , if taken
c) Your investment needs and your affordability
d) All of the above

8. The amount of required life insurance cover should not be based on which of the
following factors? LOS 3.4

a) The amount of tax saving investments needed under section 80C of Income Tax
Act,1961
b) Present lifestyle expenses of your family
c) The fervent requests made by life insurance agents to buy the policy from him so
that he gets keep his job.
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d) Both (a) and (c)

9. of an earning member in the family could be defined as

the amount that the family would require to retain the same standard of living in the
absence of the earning member LOS 3.5

a) Insured Life Value (ILV)

b) Human Life Value (HLV)
c) High Life Value (HLV)
d) All of the above

10. Is it always necessary that you should buy life insurance? LOS 3.5

a) Not required if you don’t have any dependents on your income

b) Yes, because everyone saves tax in the annual ritual of buying a new policy
c) Not required if you have already built enough assets to replace your income and
support your family’s lifestyle and goals
d) Both (a) and (c)

Answer Key
Question No Correct Choice Question No Correct Choice Question No Correct Choice
1 D 5 D 9 B
2 B 6 C 10 D
3 B 7 D
4 B 8 D 32
4
Chapter 4:

Life Insurance Plans & Riders

Sumit now explained to Amit the various types of life insurance plans
and their features.

33
4.1 Whole Life Insurance

4.1.1 What is Whole Life Insurance and

explain its features?
Whole Life insurance is the oldest type of life assurance
wherein premium is paid by the life assured throughout
the life time of the assured and the sum assured is paid
to the beneficiary on the death of the assured.

a) The payment under the policy is assured and paid at

maturity of the policy which is usually 100 years of age or
earlier in the event of death
b) These policies are mainly useful for planning one’s
estate (succession planning) which is not the priority for
most of the Indians. Most of the Indians look at insurance
as an investment option
c) This type of policy requires premium payment to
be made indefinitely and the policy holder may find it
difficult to continue the premium payment during his old
age although some companies also offer limited premium
payment period.
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4.2 Endowment Policies
4.2.1 What is Endowment life Insurance and explain its features?
These are traditional policies floated by Insurance companies. An endowment policy
covers risk for a specified period (maturity period), at the end of which the sum assured
is paid back to the policyholder, along with the bonus accumulated during the term of the
policy. This sum assured is also payable if the life assured dies before the end of maturity
period.

a) You can choose with bonus option or without bonus option right at the inception of
the policy. Premium is higher in the case of with bonus option
b) The returns on endowment policies are typically very low – approximately 3%
to 5% per annum – and often do not beat inflation. A big reason for low returns from
endowment policies is that the premiums are invested in the debt market where itself
gross returns are low
c) This type of policy provide the advantage of security for the family in the event of
the assured’s premature death and also facilitates retirement by paying out a lumpsum
amount at an age agreed upon, should the assured continue to live upto that age.
Generally, people try to coincide this with their retirement age of say 60 years
d) These type of policies are popular in India as they combine life insurance with
investments and although the premium is high, still they thrive due to the people’s desire
to get some returns
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4.3 Money Back policy

4.3.1 What is Money Back Policy and explain its features?

A variant of Endowment policy is money back policy. These policies are designed to provide
sums required as anticipated expenses over a stipulated period of time. Mainly they are
marketed by companies as products providing money at major milestones in the life of the
assured

a) These type of plans work by returning a certain percent of the sum assured to the insured
person periodically as survival benefit .Usually , in a 25 year policy , you can expect survival
benefit payment at a interval of every 5 years
b) The premium is payable for the term chosen by the policyholder
c) You can choose with bonus option or without bonus option right at the inception of the
policy. Premium is higher in the case of with bonus option
d) If the insured survives till the expiry of maturity date of the policy, the survival benefits
are deducted from the maturity value,i.e, the balance amount is paid as maturity value
e) The life of policyholder is covered for the full sum assured during the term of the policy
irrespective of the survival benefits paid
f) Here also the premium is high and these plans return very low,i.e, 3 % to 5 % because
they also combine insurance with investments and they invest your premium in the debt
market

36
 Whole Life Endowment Money Back

High premium High Premium High Premium

Usually invests in debt Usually invests in debt Usually invests in debt

market market but some plans market
invest in equity also

Combination of Combination of Combination of insur-

insurance & investments insurance & investments ance & investments

No survival benefits Low returns Low returns

received during tenure
of policy

Useful for succession No survival benefits Survival benefits re-

planning received during tenure ceived during tenure of
of policy policy

37
4.4 Children Policies

4.4.1 What is Children’s Policy and explain

its features?

These types of policies are taken out on the life of the

children where the parent is the proposer. Through
such policies the parent can plan to get funds when the
child reaches various stages in life like undergraduate or
postgraduate education.

a) These plans carry high premiums and low returns

for the policyholders
b) These so called children plans are just a separate
category aimed at children’s life but in reality they are
either a money back policy or endowment policy or even
a combination with some other market linked structure
c) Only good thing about such plans is that many such
plans offer waiver of premiums (WoP) rider benefit in
case of unfortunate death of the parent/proposer during
the term of the policy. WoP means that in case the
parent dies the premium need not be paid but the life
cover continues as before.
38
4.5 Pension and Annuities

4.5.1 Definition and types

An annuity is a contract with a life insurance company under which
you receive fixed payment on an investment for a lifetime or for
a specified number of years. The person who buys the annuity by
paying the premium is called the annuitant and the company that
provides the annuity benefit is called the annuity provider.

Annuities can be divided into two types — deferred and immediate.

In deferred annuity, you save in a systematic manner to build up

sufficient funds for retirement. The withdrawal starts after the
retirement of the investor. This type of annuity represents the
accumulation phase during which the annuitant pays premium to the
insurer.

In the immediate annuity plan, you invest a lump sum amount as

the premium and the insurance company starts paying back annuity
immediately. These are suitable for investors who have retired
already or are nearing retirement, and want steady income from the
accumulated retirement corpus. This type of annuity represents the
distribution phase or liquidation phase.
39
Annuity payment options
There are various annuity payment options that you
can opt for. You should select the options that suit
your specific needs the best. Some of the popular
options are:
Life annuity: This option pays you annuity for
life. The payment stops when you die. Thus, it is
suitable someone who does not have any financial
dependents.
Life annuity with return of purchase price: This
option pays you annuity for life and on death
the initial purchase price (premium paid in the
beginning) is returned back to the nominee.
Joint life and last survivor annuity: This option pays
annuity throughout your life and on death continues
the annuity during the lifetime of the named
spouse. Thus, it takes care of expenses of both the
partners.
Life annuity increasing at a fixed rate: In this option,
the annuity amount increases every year at a simple
rate. This option may work well for those who have
not factored in inflation and need an increasing
annuity with each passing year. This option needs a
b.ig corpus to sustain over the long term.
4.5.2 Need for Pension and
Annuities
The purpose of annuities is exactly the
opposite of life insurance (covers the risk
of dying too early),i.e, the risk of living too
long (read increasing life expectancy due to
advanced medical care facilities). If you live
too long then you will be hit by increase in
cost of living and higher medical expenditure.
Retirement benefits like Provident Fund
and gratuity are paid in lump sum which are
often spent too quickly or not invested wisely
with the result that the employee / retiree
finds himself without enough regular income
support in his post - retirement days. So,
pension is an ideal tool of planning for your
golden years as the benefit is in the form of
regular income at regular intervals.
40
 Rise in life Rise in cost Need for
expectancy of living Annuities

4.6 Market Linked Plans - Unit Linked Insurance

Plans (ULIPs)
4.6.1 What are Unit Linked Insurance Plans
(ULIPs)?
Unit Linked Insurance Policies (ULIPs) are a combination of
investment and protection and allow you the flexibility and choice
on how your premiums are invested. Herein, the policy holder pays
premiums of which a part of the money is invested in markets (this
depends on funds chosen) and another part covers mortality charges
for providing the life insurance cover. ULIPs therefore combine
insurance protection with investments.

Medical underwriting (medical test) is not necessary to buy a ULIP

policy unlike traditional plans. Typically, sum assured = 10 times of
the premium paid. 41
The policy provides you with a Types of ULIPs
choice of funds in which you can
invest. You also have the flexibility Type 1 ULIP – pays higher of the sum assured or fund value to
to switch between different funds your nominee in case of death of policyholder.
during the life of the policy. The
value of a ULIP is linked to the Type II ULIP – pays both the sum assured and fund value to your
prevailing market value of units nominee in case of death of policyholder. In this case, premium is
you get after investing in the fund, higher than that Type-1 plan
which in turn depends on the
fund’s performance. All types of ULIP plans usually have a lock-in-period of 5 years. So,
it is a product meant only for long term.
In the event of death or
permanent disability, the policy
will provide the Sum Assured
(to the extent you are covered)
so that you can take comfort
in knowing that your family is
protected from sudden financial
loss.

42
4.6.2 What Types of Funds do ULIPs offer?
Most of the life insurance companies offer a wide range of funds to suit one’s investment objectives,
risk profile and time horizons. Different funds have different risk profiles. Possible return also varies
from fund to fund. Below given are details of some such funds

Common type of funds Nature of Investments Risk Category

Equity Funds Primarily invested in company stocks Medium to High

with the general aim of capital
appreciation.

Debt Funds Invested in corporate bonds, Medium

government securities and other fixed
income securities

Cash Funds Sometimes known as Money Market Low

Funds –invested in cash, bank deposits
and other money market instruments

Balanced Funds Combining both equity and fixed Medium

income instruments
43
Many more combinations and varieties of
funds under the garb of different names
are offered by life insurance companies in
market today. But basically they are derived
from the above mentioned funds.
Investment returns from ULIP may not
be guaranteed. In unit linked 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.
Note that the past returns of a fund are
not necessarily indicative of the future
performance of the fund.
4.6.3 What are the Charges, fees and
deductions in a ULIP?
Different insurance companies have varying charge
structures in ULIPs. Herein, you will learn about the
different types of fees and charges which are generally
deducted from the fund value by extinguishing the
units of the investor. Note that the insurers have the
right to revise fees and charges over a period of time.
Premium Allocation Charge
Premium Allocation Charge is deducted as a fixed
percentage from the premium paid in the initial years
of the policy. This is charged at a higher rate. The
charges include the initial and renewal expenses and
intermediary commission expenses. It is a front load
charge as it is deducted from your premium paid.
44
Mortality Charges
This charge is to provide for the insurance
coverage under the plan. Mortality charges
depend on a number of factors like age, amount
of sum assured, etc., and are deducted on a
monthly basis.
Policy administration charges
This charge is levied for the administration of the
policy and it is deducted on a monthly basis by
the cancellation of units from all funds chosen.
This charge can be levied at a fixed rate or as a
percentage of your premium.
Fund Management Charges
Fund Management Charge is the fee imposed
by the insurance company for the management
of the various funds in the ULIP. It is levied for
the management of the funds and is deducted
before arriving at the NAV figure. The maximum
charge allowed is 1.35 percent per annum of the
fund value and is charged daily. Generally, insurers
levy the maximum amount allowed in equity funds,
while the charge on non-equity funds is much
lower.
Partial Withdrawal Charge & Surrender Charge
ULIPs have the option of partial withdrawals &
surrender of funds. These withdrawals can be free
for up to a certain limit or you can be charged based
on your transactions. Both partial withdrawl and
surrender of fund or plan are subject to certain
terms and conditions.
Switching your funds
The moving of investment between different fund
options is called switching. There are options to
switch your funds for free up to a certain limit per
year. Any further changes might incur a charge of
Rs.100-250 per switch. Charges may differ from
company to company.
45
 High Charges
deduction
No Medical test Sum Assured
required = 10 times of
premium paid

5 Year Lock-In
period
Combo of
Insurance &
Investment

ULIPs
Choice of
different funds

Premium tax
deductible Switch facility

Market linked
returns

46
4.6.4 How much of the premium is used
to purchase units?
The total amount of premium paid is not used to
buy units. Insurers allot units on the portion of the
premium remaining after providing (read deducting)
for various charges and fees. But the portion of the
total premium used to buy units differs from product
to product.

The total monetary value of the units allocated is

invariably less than the amount of premium paid
because the charges are first deducted from the
premium collected and the remaining amount is
used for allocating units. This practice brings you to
the concept of “front loading” of charges.

Herein, power of compounding works on a lower

amount which is invested in the markets so in
the long run ULIPs have potential to create lower
amount of wealth than mutual funds wherein the
charges are recovered from fund value on daily basis
rather than being front loaded.
47
4.6.5 What should one verify before
signing the proposal for a ULIP?
You should look out or understand first the
following before deciding to buy any ULIP policy: -
a) All types of charges applicable in the policy
b) features and benefits
c) Lock-in-period
d) Liquidity rules / charges and payment on
premature withdrawal
e) limitations and exclusions
f) Policy lapsing and its consequences
g) Benefit Illustration projecting benefits
payable in two scenarios of 4% and 80% returns as
prescribed by the life insurance council.
In a nutshell, ULIPs as a policy choice are good if
you or comfortable paying high charges upfront
in lieu of combined benefit of investment and
insurance and commensurate market linked high
returns.
4.7 TERM PLAN - A UNIQUE
FORM OF LIFE INSURANCE
4.7.1 What is a term plan and
explain its features?
A term policy is a simple pure life insurance
which provides a sum assured only in case of
the policy holder’s death before the maturity
of the policy. If the insured lives beyond the
period stated in the policy, no payment is
made. They charge the cheapest premiums
as compared to other traditional insurance
policies.
Term insurance provides pure death
protection and does not have any savings
element as some other insurance policies
do. There is no maturity benefit as this type
of policy is not a investment policy, your
premiums are not being invested anywhere
48
but are being utilized by the life insurance company only to cover mortality risk.

These policies are slowly gaining popularity among the Indian population as they understand its
advantages like cheaper premium and as a tool for succession planning.

Life
Insurance

Traditional Plans Pure Insurance Market Linked

Plans

Whole Life Endowment Money Back Pension Plans Term Plan ULIPs Pension Plans

49
4.7.2 Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY)
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) is a government of India backed

pure life insurance scheme which is very affordable .Basically it is a pure term
insurance policy and available for people between the age group of 18- 50
years.

Important features of Pradhan Mantri Jeevan Jyoti Bima Yojana

are : -

a) A government of India backed pure life insurance

scheme which is very affordable
b) The policy provides life coverage for 1
year.
c) The policy offers a maximum
sum assured of Rs. 2 lakh.
d) As compared to the
other term insurance
policy the plan
offers very low
premium
rates
per
50
year i.e. Rs. 330. Moreover, the premium rate is surrender benefit.
equal for all age groups ranging from 18 to 50 years. c) Tax Benefit- The premium paid towards the
e) The insured can renew the policy every year. policy is eligible for tax deduction under section
f) According to one’s own choice, the insured can 80C of Income Tax Act. In case the insurance
walk out of the scheme at any time and rejoin it in holder fails to submit form 15 G/15 H then any life
future. insurance proceeds exceeding Rs. 1,00,000 will be
g) The claim settlement process offered by the taxable by 2%.
policy is very simple and subscriber friendly.
h) There are certain cases under which the death Entry Age Minimum Maximum
benefit offered by the policy is terminated:-
1) If the insured person is above 55 years. Maximum maturity 18 years 50 years
2) The policy holder is insured through different age 55 years
bank accounts. Policy Term 1 year ( Renewable yearly)
3) If the insured has inadequate balance in saving Sum Assured Rs.2,00,000
bank account to keep the insurance in force. Premium amount Rs. 330

Benefits Offered by Pradhan Mantri Jeevan Jyoti

Bima Yojana : -

a) Death Benefit- In case of demise of the insured

person the PMJJBY provides a death coverage of
Rs2,00,000 to the beneficiary of the policy.
b) Maturity Benefit- As this is pure term insurance
plan, PMJJBY does not offer any maturity or
51
4.8 RIDERS
4.8.1 What is a Rider?
Riders are the additional benefits provided by the
life insurance companies that gives extra benefit by
the cost of extra premium (such as critical illness,
accidental death, waiver of premium etc).

By and large combinations of any sort come with

limitations or additional premium. This applies
especially to riders offered with life insurance
products.
On the positive side, riders are convenient. They
expand the amount and type of cover that you can
get with your main life insurance policy. The amount
of additional insurance you can get via riders
depends on the value of the base policy.

On the negative side, the riders get terminated once

they are used or when the main policy or base policy
terminates or lapses.

52
4.8.2 Explain the types of Riders . a lower limit on sum assured (determined by the
value of the base policy). Further, their structure
Critical illness or Surgery Rider is rigid and there are limitations on renewal of
the rider. Therefore, when you look deeper, a
Standalone critical illness policies cover a
standalone product makes more sense despite its
comprehensive list of critical diseases. They impose
higher cost.
no restrictions on the extent of cover.
Accidental death or disability benefit rider
A policyholder who has this cover gets an amount
equal to the sum assured if he is diagnosed as
It provides a lump sum cover to the insured for
having one of the critical illnesses included in the
death or disability due to an accident. is another
policy contract. For a 40-year old healthy person
rider offered by many insurers. This rider pays
having a cover of Rs5 lakh, the cost of such a rider the sum assured in case of the insured’s death
starts from Rs3,000 and can go as high as Rs9,500. or total and permanent disability due to an
In comparison, a standalone critical illness policy
accident. However, the rider may not provide for
(cover for Rs5 lakh for a 40-year old) starts from
loss of income due to temporary disablement,
Rs1,500 and goes up to Rs7,500.
which is a risk that is more common. This is a
state, which in some instances is worse than
On the face of it, buying a rider may appear
death, as it deprives you of the ability to earn.
more desirable because of its lower cost. But the
A standalone personal accident policy from
standalone policy covers a wider set of critical
a general insurer offers more comprehensive
illnesses. In case of such a policy, you can also get a
cover. Not only does this policy cover for death
higher sum assured. Critical illness riders come with
53
due to accident, partial and total disability, it also
covers temporary total disability and pays out a
weekly compensation of 1 per cent of the sum
assured up to a maximum of 104 weeks (two
years). What is more, the size of the cover in this
policy is not restricted by the sum assured on the
base policy. In case of a standalone policy, you have
the flexibility to hike your cover depending on your
income, profession and age.
For instance, a fracture can prevent you from
working for weeks. In such a case, this policy pays
a weekly allowance that is linked to the insured’s
income. Many riders do not offer this.
Waiver of premium rider
This is an essential part of child insurance policies.
This rider waives off subsequent premiums if the
insured or the earning parent dies or is disabled
and is unable to continue paying the premiums.
If this happens, the insurance company pays the
remaining premiums.
This is perhaps the only exception where a
rider offers great value .This rider waives future
premiums if the insured dies or is disabled and
is unable to continue paying the premiums.
If this happens, the insurance company pays
the remaining premiums without limiting or
compromising on the benefits. This is by far the
most useful rider. Parents buying insurance plans
to provide for their child’s financial future should
certainly consider this rider.
Hospital cash benefit rider
It provides a pre-specified sum of cash for each
day that the insured is hospitalised. The maximum
number of days of hospitalisation during the entire
term for which this rider is available is specified
in the policy. But it comes with a number of
exclusions hidden in the fine print. One may be
better off creating an emergency fund that can be
utilised at the time of hospitalisation.
Riders typically cover only a few critical illnesses
such as stroke, heart attack, cancer, kidney failure,
among others. Also, the policy guidelines restrict
54
the premium payable (and hence the
sum assured you can avail) on such a
rider. This usually depends on the type Accidental
of policy and its tenure. Death
Benefit Rider
The sum assured offered on these
riders cannot exceed the value of the Waiver Of
Premium
sum assured on the base policy. Rider
Critical Hospital
Illness Cash
Combing a rider with your life Benefit
Rider
insurance cover offers you Rider
convenience. However, this may not
be what you need. The rider may
not help you when you need it most. Premium paid on base policy (including paid for any rider)
Use the standalone approach to also is tax deductible on all types of policies –whole life ,
achieve your insurance needs without endowment , money back , term plan or annuities plan and
compromising on the extent of cover ULIPs also upto the extent of Rs.1,50,000/- p.a.
you get. Do not add riders to your
policy just because of their low cost. Amit thanked Sumit for enlighting him about the plethora
Buy them only if they satisfy your of options available when it comes to buying a life insurance
insurance needs. policy.

55
Key Learning Points
1) Whole Life insurance is the oldest type of life
assurance wherein premium is paid by the life assured
throughout the life time of the assured and the sum
assured is paid to the beneficiary on the death of the
assured

2) An endowment policy covers risk for a specified

period, at the end of which the sum assured is paid
along with the bonus accumulated ( if option chosen)
or on death of the policyholder whichever occurs first.
This type of policy combines the advantage of security
or protection for the family in the event of the assured’s
premature death and /or facilitates retirement by paying
out a lumpsum amount at an age agreed upon, should
the assured continue to live upto that age.

3) Money back policies are designed to provide sums

required as anticipated expenses over a stipulated period
of time. Mainly they are marketed by companies as
products providing money at major milestones in the life
of the assured

56
4) There is an increased need for Retirement
Plan due to Increase in Life Expectancy & Increase
in the Cost of Living (Medical Expenditure). The
main purpose of an annuity is to protect against
risk as well as provide money in the form of
pension at regular intervals. Thus, annuities and
pension plans cover the risk of living a long life.
5) Unit Linked Insurance Policies (ULIPs) offer
a combination of investment and protection and
allow you the flexibility and choice on how your
premiums are invested. In these policies, the policy premium etc).
holder pays premiums (or a single premium) of
which part of the money is invested and another
part goes towards providing the life insurance
cover.
which provides a large sum assured in case of the
policy holder’s unfortunate demise. Term policies
are the purest form of insurance available today.
They are very cheap compared to other insurance
policies. If the policyholder dies before the policy
term gets over only then his heirs get the money.
8) Riders are the additional benefits provided
by the life insurance companies that gives extra
benefit by the cost of extra premium (such
as critical illness, accidental death, waiver of

6) In ULIPs, 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.

7) A term policy is a simple pure life insurance

57
Multiple Choice Questions
1 Which type of policy requires the premium to be paid by assured throughout the
lifetime of the assured ? LOS 4.1.1

a) Whole Life Policy

b) Endowment Policy
c) Money-Back Policy
d) Unit Linked Insurance Plan (ULIP)

2 covers risk for a specified period, at the end of which

the sum assured is paid back to the policyholder, along with the bonus accumulated
during the term of the policy. LOS 4.2.1

a) Whole Life Policy

b) Endowment Policy
c) Money-Back Policy
d) Unit Linked Insurance Plan (ULIP)

3 life insurance policies help with regular inflow of cash at

periodic intervals LOS 4.3.1

a) Whole Life plans

b) Endowment plan
58
c) Money-back plans
d) Term plans

4 What is FALSE about Annuity? LOS 4.5.1

a) Annuity is the periodical payment made by the insurer to the assured, in

consideration for the capital payment or lumpsum payment received by them.
b) The purpose is similar to that of life insurance, where the payment is made on the
death of the assured.
c) In the case of annuity the payments are made as long as the annuitant is alive.
d) Both a & c

5 The general need for a pension policy results from the existence of what key
problem? LOS 4.5.2

a) Anticipated fall in income and risk of living long after retirement

b) Lack of employment oppurtunities
c) Likely deterioration in health
d) Uncertaininty of investment performance

6 offer a combination of investment and protection and allow you

the flexibility and choice on how your premiums are invested LOS 4.6.1

a) Endowment Policy
59
b) Money-Back Policy
c) Unit Linked Insurance Policies (ULIPs)
d) Term Policy

7 Premium Allocation Charge & Fund Switching Charge are associated with what type
of policy? LOS 4.6.3

a) Endowment Policy
b) Term Policy
c) Money-Back Policy
d) Unit Linked Insurance Policies (ULIPs)

8 The different types of products sold by life insurance company include

a) Endowment Plans & Money-back plans

b) Whole life insurance plans & Term Plans
c) Pension Plans & ULIPs
d) All of the above

9 This type of policy is not a saving instrument as the assured does not get any
amount from the policy should he survive the policy period. LOS 4.7.1

a) Equity Insurance
b) Term Insurance
60
c) Maturity Insurance
d) Life time Insurance

10 are the additional benefits provided by the life insurance companies

that gives extra benefit by the cost of extra premium LOS 4.8.1

a) Bonus
b) Dividend
c) Riders
d) Survival Benefit

Answer Key

Question No Correct Choice

1 A
2 B
3 C
4 B
5 A
6 C
7 D
8 D
9 B
10 C
61
5
Chapter 5:

Regulatory and Legal

Amit, although convinced by now, was concerned as to what will happen
if something were to go wrong after buying any policy like problems in
claims, existence of any mechanism for grievances redressal and overall
who governs the life insurance companies.

Sumit told him not to worry as the authorities have a robust system in place
addressing his issues.

62
5.1 What is Insurance Regulatory
and Development Authority of India
(IRDAII)?
IRDAI is the regulator of the life insurance industry
in India. It has the following mission:
• To protect the interests of the policy holders.
• To regulate, promote and ensure orderly
growth of the insurance industry.
5.2 What are the Duties, Powers and
Functions of IRDAI?
Section 14 of the IRDAI Act, 1999 lays down the
duties, powers and functions of IRDAI which are:
i. Issuance of certificate of registration, renewal,
modification, withdraw, suspend or cancel such
registration
ii. Protection of the policyholders interest
iii. Laying down qualifications, training and code of
conduct for intermediaries
iv. Laying down code of conduct for Surveyors
v. Promote efficiency in the conduct of insurance
business
vi. Promoting and regulating professional
organisations connected with the insurance and re-
insurance business
vii. Levying fees and other charges for carrying
out the purposes of this Act
viii. Calling for information, conduct of inspection,
audit of all organizations associated with the
insurance business
ix. Control of the rates, terms etc. offered
by general insurers in respect of business not
controlled by Tariff Advisory Committee (TAC)
x. Specifying the manner in which accounts
should be maintained by insurers and
intermediaries
xi. Regulation of investment of funds by insurers
xii. Regulation of maintenance of solvency
margins
63

xiii. Act as a dispute settlement authority
between insurers and intermediaries
xiv. Supervise Tariff Advisory Committee
(TAC)
xv. Specify the percentage of premium
income to be utilised for promoting
organizations mentioned in clause 6
xvi. Specify the rural sector obligation of
insurers
xvii. Exercise any other powers as
prescribed
5.3 What matters are to be stated in life
insurance policy as per the Policy holders
Interest Regulations, 2002?
1. A life insurance policy should clearly state:
a) the name of the plan , its terms and conditions
b) whether it is participating in profits or not
c) the basis of participation in profits such as
cash bonus, deferred bonus, simple or compound
reversionary bonus
d) the benefits payable and the contingencies upon
which these are payable and the other terms and
conditions of the insurance contract
e) the details of the riders attached to the main policy
f) the date of commencement of risk and the date of
maturity or date(s) on which the benefits are payable
g) the premiums payable, periodicity of payment,
grace period allowed for payment of the premium, the
date for the last installment of premium, the implication
of discontinuing the payment of an installment(s)
of premium and also the provisions of a guaranteed
64
surrender value
h) the age at entry and whether the same
has been admitted
i) the policy requirements for (a) conversion
of the policy into paid up policy (b)surrender
(c) non-forfeiture and (d) revival of lapsed
policies
j) contingencies excluded from the scope of
the cover, both in respect of the main policy
and the riders
k) the provisions for nomination, assignment
and loans on security of the policy and a
statement that the rate of interest payable on
such loan amount shall be as prescribed by the
insurer at the time of taking the loan
l) any special clauses or conditions, such as
suicide clause etc
m) the address of the insurer to which all
communications in respect of the policy shall
be sent
n) the documents that are normally required
to be submitted by a claimant in support of a
claim under the policy

65
2. While forwarding the policy to the insured, the insurer shall
inform through the letter forwarding the policy, that the insured
has a period of 15 days from the date of receipt of the policy
document to review the terms and conditions of the policy and
where the insured disagrees to any of those terms or conditions,
he has the option to return the policy stating the reasons for
his objection, whereby he shall be entitled to a refund of the
premium paid, subject only to a deduction of a proportionate
risk premium for the period on cover (15 days) and the expenses
incurred by the insurer on medical examination of the proposer
and stamp duty charges. This 15 day period is known as free-
look period.

3. In respect of a cover, where premium charged is dependent

on age, the insurer shall ensure that the age is verified, as far as
possible, before issuance of the policy document. In case where
age has not been admitted by the time the policy is issued, the
insurer shall make efforts to obtain proof of age and admit the
same as soon as possible.

66
5.4 What are the rules regarding
policyholders’ servicing?
An insurer carrying on life insurance business shall at
all times, respond within 10 days of the receipt of any
communication from its policyholders in all matters, such
as:

a) recording change of address

b) noting a new nomination or change of nomination
under a policy
c) noting an assignment on the policy
d) providing information on the current status of a policy
indicating matters, such as, accrued bonus, surrender value
and entitlement to a loan
e) processing papers and disbursal of a loan on security
of policy
f) issuance of duplicate policy
g) issuance of an endorsement under the policy, noting
a change of interest or sum assured or perils insured and
guidance on the procedure for registering a claim and early
settlement

67
5.5 What is the Claims procedure in
respect of a life insurance policy?
a. A life insurance policy shall state the primary
documents which are normally required to be
submitted by a claimant in support of a claim.
b. A life insurance company, upon receiving a
claim, shall process the claim without delay. Any
queries or requirement of additional documents,
to the extent possible, shall be raised all at once
and not in a piece-meal manner, within a period of
15 days of the receipt of the claim.
c. A claim under a life policy shall be paid or be
disputed giving all the relevant reasons, within 30
days from the date of receipt of all relevant papers
and clarifications required. However, where the
circumstances of a claim warrant an investigation
in the opinion of the insurance company, it shall
initiate and complete such investigation at the
earliest.
d. Subject to the provisions of section 47 of the
Act, where a claim is ready for payment but the
payment cannot be made due to any reasons of a
proper identification of the payee, the life insurer
shall hold the amount for the benefit of the payee
and such an amount shall earn interest at the
rate applicable to a savings bank account with a
scheduled bank (effective from 30 days following
the submission of all papers and information).
e. Where there is a delay on the part of the
insurer in processing a claim for a reason other
than the one covered by sub-regulation (d), the
life insurance company shall pay interest on
the claim amount at a rate which is 2% above
the bank rate prevalent at the beginning of the
financial year in which the claim is reviewed by it.
68
5.6 What grievance redressal
mechanism is available to life insurance
policy holder?
a. The Consumer Affairs Department of the
Insurance Regulatory and Development Authority
of India (IRDAII) has introduced the Integrated
Grievance Management System (IGMS) which is
an online system for registration and tracking of
grievances. You must register your grievance first
with the insurance company
b. In case you are not satisfied with its disposal by
the company, you may escalate it to IRDAI through
IGMS by accessing www.igms.IRDAI.gov.in In case
you are not able to access the insurer’s grievance
system directly, IGMS also provides you a gateway
to register your grievance with the insurer.
c. Apart from registering your grievance through
IGMS website, you have other channels for
grievance registration - through e-mail to Consumer
Affairs Department, IRDAII or simply call IRDAI Call
Centre at Toll Free 155255 through which IRDAI
shall, free of cost, register your complaints against
insurance companies as well as help track its
status.
The Call Centre assists by filling up the complaints
form on the basis of the call. Wherever required,
it will facilitate in filing of complaints directly
with the insurance companies as the first port of
call by giving information relating to the address,
telephone number, website details, contact
number, e-mail id etc of the insurance company.
d. When a complaint is registered with IRDAI,
it facilitates resolution by taking it up with the
insurance company. The company is given 15
days time to resolve the complaint. If required,
IRDAI carries out investigations and enquiries.
Further, wherever applicable, IRDAI advises
the complainant to approach the Insurance
Ombudsman in terms of the Redressal of Public
Grievances Rules, 1998
69
Key learning Points
1. Some duties, powers and functions of IRDAI upon which these are payable and the other terms
are : and conditions of the insurance contract
e. the details of the riders attached to the main
a) Protection of the policyholders interest policy
b) Laying down qualifications, training and code of f. the date of commencement of risk and the
conduct for intermediaries date of maturity or date(s) on which the benefits
c) Promote efficiency in the conduct of insurance are payable
business g. the address of the insurer to which all
d) Regulation of investment of funds by insurers communications in respect of the policy shall be
sent
2. Some matters to be stated in life insurance h. While forwarding the policy to the insured,
policy as per the Policy holders Interest the insurer shall inform through the letter
Regulations, 2002 are : forwarding the policy, that the insured has a
period of 15 days from the date of receipt of
A life insurance policy shall clearly state: the policy document to review the terms and
a. the name of the plan governing the policy, its conditions of the policy and where the insured
terms and conditions disagrees to any of those terms or conditions,
b. whether it is participating in profits or not he has the option to return the policy stating the
c. the basis of participation in profits such as reasons for his objection, whereby he shall be
cash bonus, deferred bonus, simple or compound entitled to a refund of the premium paid.
reversionary bonus
d. the benefits payable and the contingencies
70
3. An insurer carrying on life or general
business, as the case may be, shall at all times,
respond within 10 days of the receipt of any
communication from its policyholders in all
matters, such as :

a) recording change of address

b) noting a new nomination or change of
nomination under a policy
c) noting an assignment on the policy
d) providing information on the current status of
a policy indicating matters, such as, accrued bonus,
surrender value and entitlement to a loan

4. If a complaint is not solved by the life

insurance company then the policyholder
can approach the Insurance Ombudsman for
grievance redressal.

71
Multiple Choice Questions
1. Which body has created a call centre for lodging a complaint?

a) Insurance Association
b) Insurance Institute of India
c) IRDAI
d) Life Insurance Council

2. What is FALSE about the duties & functions of IRDAI?

a) Laying down qualifications, training and code of conduct for intermediaries

b) Regulation of investment of funds by the insured
c) Protection of the policyholders interest
d) Promote efficiency in the conduct of insurance business

3. What point may not be disclosed by life insurance company in the policy
document?

a) The name of the plan governing the policy, its terms and conditions
b) The details of the riders attached to the main policy
c) The date of commencement of risk and the date of maturity or date(s) on which
the benefits are payable
d) None of the above
72
4. What is free-look period in a life insurance policy?

a) The timeframe within which you can use the policy for free
b) The timeframe within which you will get your money back
c) The timeframe within which you can return the policy
d) Both (a) and (c)

5. If you return the policy within the free-look period of 15 days than what kind of
charges you have to pay?

a) A deduction of a proportionate risk premium for the period on cover (15 days)
b) No charges at all
c) The expenses incurred by the insurer on medical examination of the proposer and
stamp duty charges.
d) Both a & c

Answer Key

Question No Correct Choice

1 C
2 B
3 D
4 C
5 D
73
6
Chapter 6:

Must Know Concept and Terms

Amit dropped names of some terms during his course of discussion with
Amit, which made him to ask for more clarity on related terminologies.
Sumit was only happy to oblige:

74
6.1 Who are the insurance
intermediaries? Individual
Agents
Intermediaries mean distributors or agents.
Traditionally life insurance has been sold by
agents who are of 2 types - Individual Agent
and Corporate Agents (a firm / company).

But now-a-days you can also buy insurance

policies online from the insurer’s website and Aggregators Corporate
Intermediaries
insurance aggregator websites which will give websites Agents
you the benefit of lower premiums as there is
no agent in between. But to do so you must
be knowledgeable enough to choose the right
policy for you and have to handle all paper
work.
Insurance
Cos
website

75
6.2 Key Life Insurance Terms
6.2.3 Sum Assured (SA) and Maturity
6.2.1 Premium
Value (MV)
Premium simply means the amount which you
need to pay to the insurance company to buy a The amount of life insurance cover for a life
policy. A single premium policy will require you to insurance policy which is guaranteed payable on
pay only one amount. Most of the policies give you the death of the policyholder during the policy
the option to pay premium monthly/ quarterly or term is called Sum Assured. This is also called
annually. You have to pay the premium at the said Death Benefit. Death Benefit can be equal to or
frequency for a fixed number of years depending more than sum assured depending on the type of
on the policy terms and condition set at the policy and terms and conditions therein.
beginning.
The amount to be paid by insurance company
when the policy matures during the lifetime of
6.2.2 Insurer and Insured the policyholder is known as maturity value or
maturity benefit. This will include the sum assured
The insurer is the insurance company that offers and the bonuses (if this option is chosen at the
you the policy. beginning). Some policies also offer loyalty benefit
payable at end.
The person in whose name the insurance policy is
taken is known as the policy holder or the insured. So, maturity value can be equal to or more than
The person whom you name as the nominee is the sum assured depending on the type of policy and
one who will get the insured amount if you die. The terms and conditions therein.
nominee is referred to as the beneficiary.
76
Example: A Endowment
poli 6.2.4 Bonus
Age of policy 30 years Bonus means a benefit for the policyholder in addition to the
holder sum assured. Bonus can be of two types – With profit bonus or
a guaranteed bonus.
Cover Rs 10,00,000
A with-profit bonus is linked to the profit of the company. If the
Term 20 years company makes a profit, it declares a bonus accordingly. The
bonus is added to your sum assured and is payable either on
Annual premium Rs 40,000 maturity of the policy or to your nominee if death occurs before
that. This is offered purely at the discretion of the insurer and
If the policy holder passes away depends on the profits made in a particular year. It may or may
before the policy matures, the not be declared every year
beneficiary gets Rs 2,00,000 along
with the bonus too (if any). A guaranteed bonus is a part of the sum assured. It will be paid
If he is alive when the policy to you irrespective of the profits of the company.
matures, he will get Rs 2,00,000 as
well as any bonuses declared during
the tenure of the policy.
Let’s say the bonuses amounted
to Rs 1,00,000. His maturity value
would be Rs 3,00,000 (sum assured
+ bonuses).
77
6.2.5 Term of the policy and Term Example : A Moneyback Policy
Insurance
The duration of your policy is known as the term Age of policy holder 30 years
of the policy. In other words, your life is covered
for up to a particular time period which is the Cover Rs 2,00,000
term of the policy. So, if you paid premium for
a 25 year policy then 25 years is the term of the Term 15 years
policy.
Annual premium Rs 18,000
A term policy is a simple pure life insurance which Now the policy promised to give back a portion of
provides a sum assured only in case of the policy the sum assured (10%, 15%, 20%, 25%) every three
holder’s death before the maturity of the policy. years.
If the insured lives beyond the period stated in
the policy, no payment is made. After 3 years: Rs 20,000
After 6 years: Rs 30,000
6.2.6 Survival Benefit After 9 years: Rs 40,000
After 12 years: Rs 50,000
Survival Benefit means the amount which payable
to policyholder at the end of specified durations. On maturity: Rs 60,000. The amount so received
These amounts are fixed and predetermined. This on maturity is called ‘Maturity Benefit’. This
is prevalent usually only in money-back policies. feature is present in all types of policies except for
pure term plans.
78
 10 years). If you surrender before this, you do
Should you die during this tenure, your beneficiary not get back any money.
will get the entire Rs 2,00,000. Irrespective of
whether or not you have been paid any amount till The policy ceases to exist after this payment has
date. The amount so received is known as Death been made. It is important to understand that
Benefit. you will lose out on returns if you surrender
(stop and withdraw) your policy before time.
6.2.7 Surrender Value
Different rules and terms conditions apply for
If you surrender your policy before completion of traditional and market-linked plans.
its full term, you can get back portion of the total
premiums paid after deducting some charges. This
amount of money is called Surrender Value.
6.2.8 Paid Up Value
When you want to stop paying the premium
Surrender Value is applicable only for those
but still want the policy cover to continue then
policies which are having a savings and investment
you have an option that is converting the policy
component. Pure risk covers like term plans do
into a paid-up policy. When you do so then the
not have any surrender value but traditional plans
policy cover size will be reduced and will be
acquire this value.
proportional to the total premiums paid. This
sum assured is called paid-up value.
You will get a portion of your money only if you
have paid consecutive premiums for two years (if
Paid Up Value = Original sum assured x (No of
premium paying term is less than 10 years), and
premiums paid/ No of premiums payable)
three years (if premium paying term is more than
79
Example:
Age of policy holder 30 years
Cover Rs 10,00,000
Term 20 years
Annual premium Rs 40,000

Default occurs after 12 yearly premiums are paid

Paid up Value = 10,00,000 x (12 / 20 )
The policy acquires the paid up value of 6,00,000/-.

This means that the policy is effective as before except that

from the date the 13th premium was due, the sum assured
is 6,00,000/- instead of original 10,00,000/-. To this sum
assured the bonus already vested (accrued) before the
policy lapsed, is also added.

So,if the bonus accrued up to the date of lapse is 50,000/-

, the total paid up value is 6,00,000 + 50,000 = 6,50,000.
Note that only those type of policies can be made paid-up
which are having a savings element.

Different rules and terms conditions apply for traditional

and market-linked plans.
80
 Insured

Insurer Sum
Assured

Understand
fund
Premium options
Must Know Maturity
Terms Value

Paid-Up
Value
Bonus

Surrender
Value Term of
Survival
Benefit Policy

81
Key Learning Points
1. Intermediaries means distributors or agents.
Traditionally life insurance has been sold by agents
which are of 2 types - Individual Agent and Corporate
Agents (a firm / company ).

2. Nowdays you can also buy insurance policies

online from the insurer’s website which will give you
the benefit of lower premiums as there is no agent in
between.

3. Sum assured is the amount of money an insurance

policy guarantees to pay before any bonuses are added.
In other words, sum assured is the guaranteed amount
you will receive. This is also known as the cover or the
coverage and is the total amount you are insured for.

4. Maturity value is the amount the insurance

company has to pay you when the policy matures. This
would include the sum assured and the bonuses.

5. Bonus is the amount given in addition to the sum

assured. Reversionary bonus is a bonus that is added to
82
policies throughout the term of the policy. It may or
may not be declared every year. When it is declared,
it will not be given to you immediately.
6. Bonus will be payable as a guaranteed sum
to the policyholder either at the end of the policy,
or, if death occurs before that, to the nominee.
This bonus can either be a with-profit bonus or a
guaranteed bonus.
stipulated in the policy. This is known as Paid-Up
value
9. Survival Benefits is the amount payable at
the end of specified durations. These amounts
are fixed and predetermined. This is prevalent
usually in money-back policies.

7. Halfway through the policy, you might want

to discontinue it and take whatever money is due
to you. The amount the insurance company then
pays is known as the surrender value. The policy
ceases to exist after this payment has been made.
Do remember, you will lose out on returns if you
withdraw your policy before time.

8. After premiums are paid for a certain defined

period or beyond and if subsequent premiums
are not paid, the sum assured is reduced to a
proportionate sum, which bears the same ratio to
the full sum assured as the number of premiums
actually paid bears to the total number originally
83
Multiple Choice Questions
1. How can you buy life insurance products

a) Directly from insurance companies from their websites

b) From insurance agents - individuals
c) From insurance corporate agents
d) All of the above

2. The amount an insurance company would pay to the nominee if a policyholder died is
known as the

a) Premium
b) Sum assured
c) Face value
d) Real value

3. The amount paid out by the insurer under a 30 year life insurance policy exceeded the
sum insured. The excess is likely to result from

a) Charges refunded
b) frequency loading
c) a tax rebate
d) a bonus
84
4. A life insurance policy can be made paid-up only if what feature exists

a) Rider benefit
b) Savings element
c) Indexation benefit
d) Nomination facility

5. is the amount of money you are entitled to receive at the end of

specified durations

a) Paid Up Value
b) Surrender Value
c) Survival Benefit
d) Interim Benefit

Answer Key

Question No Correct Choice

1 D
2 B
3 D
4 B
5 C
85
7
Chapter 7:

Returns and Taxation

Sumit asked Amit why he was looking worried? Amit answered how
can he calculate the returns of any type of policy being pitched by the
distributor or portal. Sumit replied that it can be easily solved in MS-
Excel. Also, Amit wanted to understand taxation of policy before buying
any.

86
7.1 Calculating Returns of different types of
policies in MS-Excel
As per the attached excel workbook

7.2 Taxation of different policies at different

stages
Payment stage - tax deductions on Premiums Paid for a Life
Insurance Policy under Section 80C

Tax deduction under Section 80C of the Income Tax Act, 1961,
allows exemption up to Rs.1.5 lakh per annum on premiums
paid. Deductions available for premiums paid towards life
insurance policies of self, spouse and dependent children.

Life Insurance issued before 31st March 2012: The tax

deduction is applicable only for the total premium amounting
to a maximum of 20% of the sum assured.

Life Insurance issued on or after 1st April 2012: The tax

deduction is applicable only for the total premium amounting
to a maximum of 10% of the sum assured.
87
 Deductions of upto Rs.1.50
lakh p.a.

Applicable for policies

purchased for self , spouse and
dependent children

Premiums of upto 20% of

the sum assured for policies
issued before 31.03.12

Premiums of upto 10% of

the sum assured for policies
issued on/after 01.04.12

Tax deductions
on premium
payments u/s
80C

88
Accumulation / Payout stage - tax deductions on 2012 then the exemption is applicable only if the
Payouts of a Life Insurance Policy under Section total premium paid doesn’t exceed 10% of the sum
10(10D) assured.

Life insurance payouts (sum assured/coverage)
received as a death benefit to the nominee or
on maturity or a survival benefit to the insured,
including bonuses if any is exempted from tax under
Section 10 (10D) of the Income Tax Act, 1961.
Payouts are not tax exempted under the following
cases:
• Life Insurance issued on or after 1st April 2003
but on or before 31st March 2012: Payouts received
are not tax exempted, except as a death benefit, for
any policy issued on or after 1st April 2003 but on or
before the 31st March 2012.
Note that monies received on surrender of a
traditional policy or a ULIP can be taxable/ tax-free
subject to certain conditions.
TDS applicablity on payments / bonus recd from
life insurance policy
Policy proceeds exempted under section 10(10D)
will be given to the insured without TDS (Tax
Deduction at Source). Even if these proceeds are
taxable as per section 10(10D) but do not exceed
Rs 100,000/- then also no TDS is to be deducted
by the insurer when making the payment to the
insured.

• Maximum limit on Life Insurance premiums: If As per section 194DA of the Income Tax Act, 1961,
the total premiums paid during the policy period are any sum received by an insured Indian resident
more than 20% of the total sum assured received. from an insurer under a life insurance policy shall
be subject to TDS @ 2% if the said sum is not
• Life Insurance issued on or after 1st April 2012: exempted under section 10(10D).
If life insurance policy is issued on or after 1st April 89
Multiple Choice Questions
1. What is the tax exemption limit on premiums paid under section 80 C?

a) Rs.1 lakh
b) Rs.1.5 lakh
c) Rs.2 lakh
d) Rs.2.5 lakh

2. What is the criteria for a policy premium to be tax exempted if bought after 1st April,
2012?

a) Premium should be within a maximum of 10 % of the sum assured

b) Premium should be more than of 10 % of the sum assured
c) Premium should be equivalent to 20 % of the sum assured
d) All of the above

3. What is tax treatment of the survival benefit in the hands of policyholder?

a) Taxable under section 80C

b) Exempted under section 80D
c) Exempted under section 10(10D)
d) Taxable under section 80TTA
90
4. When can TDS be deducted on payments received from life insurance company ?

a) Policy is exempted under section 10 (10D)

b) Policy is not exempted under section 10 (10D)but proceeds are less than Rs.1 lakh
c) Policy is not exempted under section 10 (10D) and proceeds are more than Rs.1 lakh
d) None of the above

5. What percentage of TDS can be deducted by a life insurance company on payments

made?

a) 5%
b) 8%
c) 2%
d) 10 %

Answer Key

Question No Correct Choice

1 B
2 A
3 C
4 C
5 C
91
8
Chapter 8:

Review and Closure of Policy

Having cleared cobwebs of ignorance surrounding life insurance, Sumit
now finally chose to end the discussion with talk on points regarding
review and closure of policy.

92
8.1 Things To Do On Your Life
Insurance Policy’s Anniversary
The first insurance policy bought by
individuals is usually a compulsive tax
saving tool or is a result of word-of-
mouth information from close relatives
or friends. Seldom, thought is given to
serious financial planning, factoring in
inflationary pressures or lifecycle changes
Having said that, there are avenues to
rectify or modify decisions by reviewing
your need. The best time to analyse one’s
needs and financial dynamics revolving
around lifestyle is during the policy’s
anniversary.
Lifestyle changes
One should factor in the changes in one’s
life and lifestyle while renewing a policy. •
Upcoming Marriage
• Check if spouse has cover
• If earning spouse then buy cover after HLV calculation
• Revisit nomination
Upcoming divorce
• No of dependents decrease
• Revisit nomination
Child Birth
• Recognise increase in cost of upbringing and
education
• Parents should increase their cover
Rise in Income over years
• Increase cover as per rise in net worth
• May invest additional amount in ULIP policy via top-
up
May explore option of adding rider for additional
benefits
93
 Job loss / Business downturn
• Check if policy provides flexibility of premium
payment at later date
• Check if any option to stagger the premium payment
Payment options
One should revisit payment options to bring in more
flexibility to the policy. One can always rework the
various processes of payment such as visiting the branch,
online payment and electronic fund transfers.
In your busy schedule while you are juggling with
multiple tasks, remembering due dates for policy
premium payments can be quite a stress. Switching to an
automated ECS facility or even linking to your credit card
can be some effective options.
Changes or new tax rules
The Union budget usually has an impact on individuals
and their finances. It is important that customers speak
to financial planners after every budget
announcement to understand their existing
portfolio and watch out for the changes in tax
norms before making any future purchases.
Rising medical costs
Given that healthcare expenditure is rapidly
increasing every year, families may want
to reconsider or rework their health cover
according to lifestyle changes and expenses
incurred. This is a good time to add to the
health cover if it does not match the changing
cost scenario.
In the case where a dependant has met with
a serious ailment which has strong chances of
recurrence, options to increase the medical
cover may become limited. In situations
like these, one can consider buying a unit-
linked health plan which may not require any
medical tests and will hedge against future
expenses.
94
Loan plans
Plan your partial withdrawals and loans in advance.
Usually most insurance companies offer products that
provide customers an option to get a loan on their
policies. One should decide the minimum and maximum
withdrawal limit, corpus goals and interest rates offered
by the company.

Service experience
The tools and services available now can help customers
manage their policies more comfortably. You should
evaluate the need for various services and tools
introduced by your insurance company while renewing
your policy.

Keeping tabs
Before purchasing an insurance plan, one must study the
service efficiencies of a company, especially in the areas
of claims settlement or investment performance.
95
Even on an ongoing basis, it would be a good
practice to review information on important
service parameters of your insurance company
to understand the overall efficacy. This will help
when it is time to reap the benefit or when a
bereaved applies for the cover/claim.

Inform the nominee

Keep your nominees informed about your
financial decisions. All precautions you have taken
to fill up the proposal form can be meaningless
if you fail to inform your nominees about the
whereabouts of your policy documents. Some
people refrain from telling the nominees about
the policy either out of a feeling of insecurity or
ignorance.

96
 Lifestyle Service Keeping tabs
changes experience

Payment Loan plans Inform

Options nominee

Changes or New Rising medical

tax rules cost

97
8.2 When Should You Exit a Life
Insurance Policy You Don’t Need
Anymore?
Letting the policy lapse
Except for term plans, almost all insurance
policies have some type of exit option that can The easiest way to exit a policy during the initial
be exercised at a cost. You can find the details years is to let the policy lapse if you have missed the
below as to when and how you can exit from life free look period. Stop paying your premiums and
insurance policies: your policy lapses. You will not receive anything if
the policy lapses and all your premiums would be
lost. Exit option beyond the free look period is not
Exiting in the initial phase of the offered by term plans.
policy
The Free look period Exiting after two / three years
After completion of two / three years, insurance
As per IRDAI rules, all the policies have a free look
companies offer the following exit options :
period of 15 days from the date of receipt of the
policy. Within this period, policy holder can return
the policy to the insurance company and request Surrendering the policy
for a premium return. He gets the refund after
deduction towards proportionate risk premium for This option have been explained in chapter no.6 in
the period on cover, medical tests, stamp duty and LOS no.6.2.7
service charges. These charges are not refunded.
98
Letting the policy become paid up
This option have been explained
in chapter no.6 in LOS no. 6.2.8
Let policy lapse

Timing the market

After the lock-in-period of 5 Free look period Surrender
years is over, then you can exit
your ULIP policy (unit linked
insurance plan). Your units will
be redeemed at the prevailing Ways to
NAV on the date of redemption.
Before 5 years lock-in-period if
exit a
you stop paying the premium and policy
convert the policy into paid-up
then the existing fund value will
be transferred to a discontinuance
fund earning 3.5 % return only, so,
this option is not advisable.
Convert into Market Timing
Paid-up

99

When you should hold on
to the policy
Insurance policies are beneficial
when held for long term specially
ULIPs. As the policy progresses, the
benefits keep on increasing. So if
you have already passed the first
few years then it may be wise to
hold on.
If you think to exit from your
insurance policy and want to
reinvest the proceeds elsewhere
then check that the new investment
option should earn better returns
and also should have the potential
to recover the losses incurred in
exiting the insurance policy.
8.3 What documents are generally required to be
submitted in case of death of life assured while
the policy is in force?
Generally, basic documents required are death certificate,
claim form and policy bond. Among other documents are
medical attendant’s certificate, hospital certificate, employer’s
certificate, police investigation report, post mortem report etc.
These may be asked depending upon case to case.
The claim requirements are usually outlined in the policy bond
and the insurer’s website.
8.4 What is meant by settlement options?
A settlement is the way in which the life insurance policy
proceeds are paid out to you, the policyholder. The terms and
conditions are given in advance in the policy document at the
beginning of the contract.
For example, a policy may offer settlement options like paying a
lump-sum or regular monthly flow of income for certain number
of years after completion of maturity period.
100
8.5 What are the
requirements to be
submitted in case of a
Maturity Claim?
Usually the policyholder receives the
intimation from insurance company
along with discharge voucher at least
2 months in advance of the maturity
date of policy. This intimation notice
informs the claim amount payable.
Also, the intimation mentions that
the policyholder has to submit the
original policy bond and discharge
voucher duly filled and signed by him
along with signature of witnesses.
You also need to submit your bank
account details like a cancelled
cheque for getting the claim money.
Key Learning Points
1. Things To do on Your life insurance policy’s anniversary
to leverage the unique flexibility that comes with insurance
products:
i. One should factor in the changes in one’s life and lifestyle
while renewing a policy.
ii. One should revisit payment options to bring in more
flexibility to the policy.
iii. Understand and watch out for the changes in tax norms
in Union Budget before making any future purchases.
iv. Given that healthcare expenditure is rapidly increasing
every year, families may want to reconsider or rework their
health cover according to lifestyle changes and expenses
incurred. This is a good time to add to the health cover if it
does not match the changing cost scenario.
v. Plan your partial withdrawals and loans in advance.
Usually most insurance companies offer products that provide
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customers an option to get a loan on their policies.

vi. The tools and services available now can help

customers manage their policies more comfortably.

vii. Before purchasing an insurance plan, one must

study the service efficiencies of a company, especially
in the areas of claims settlement or investment
performance.

viii. Keep your nominees informed about your

financial decisions. All precautions you have taken to
fill up the proposal form can come to a naught if you
fail to inform your nominees about the whereabouts
of your policy documents.

2. Ways to exit a life insurance policy in the initial

phases - use the free-look period

3. Ways to exit a life insurance policy after 2/3

years - surrender the policy or let the policy become
paid-up.

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Multiple Choice Questions

1. How long is the free-look period under a life insurance policy from the date of receipt
of policy document

a) 5 days
b) 10 days
c) 15 days
d) 20 days

2. What are the ways to exit a life insurance policy if it is in initial phase

a) Surrender the policy

b) Exit in the free-look period
c) Let the policy lapse
d) Both b & c

3. What are the ways to exit a life insurance policy after three years of continuance

a) Surrender the policy OR let the policy become paid up

b) Let the policy lapse
c) If exiting a unit-linked plan then check the market sentiment and behaviour before
exiting
d) Both a & c
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4. How can you exit a term insurance plan

a) Surrender the policy

b) Let the policy lapse
c) Let the policy become paid up
d) Both a & c

5. What points you should review on your policy anniversary

a) Analyse lifestyle changes & Revisit payment options

b) Take decisions without informing your nominee
c) Impact of new tax norms & consider rising medical costs
d) Both a & c

Answer Key

Question No Correct Choice

1 C
2 D
3 D
4 B
5 D
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