UNIT 3 LIFE INSURANCE PRODUCTS

Objectives
After completing this unit, you will be able to:
 Discuss the need, features and significances of various types of traditional life
insurance products
 Differentiate between traditional and unit linked insurance plans
 Explain how various needs of consumers are met by different life insurance products
 Discuss the concept of annuity and the types of annuity products available in the
insurance market

Structure
3.1 Introduction
3.2 Term Insurance Plans
3.3 Whole Life Plans
3.4 Endowment Plans
3.5 Money Back Policies
3.6 Child Plans
3.7 Annuity Plans
3.8 Group Insurance
3.9 Unit Linked Insurance Plans (ULIPs)
3.10 Riders
3.11 Needs and Life Insurance
3.12 Summary
3.13 Keywords

3.1 INTRODUCTION

A product, broadly defined, is anything that satisfies a customer’s need or want. From an
institution’s point of view, a new product represents an opportunity to create value, and in
so doing, offers a strategic competitive advantage. Life Insurance Products are generally
designed for two reasons namely; for Death Benefit; i.e. providing the benefit to be paid on
the death of the insured person within a specified period and for Survival Benefit i.e.
providing the benefit to be paid on the survival of the insured person on completion of

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specified period. Of late with the advent of unit linked plans the categorizations of Life
Insurance Products have been broadly into 2 types:

Traditional Products and

Unit Linked Insurance Plans [ULIPs] also referred to as Variable Insurance Plans.
In this chapter, we have discussed the various types of life insurance plans, their features
and benefits and differentiated between traditional plans and ULIPs. Traditional Products
are those Life Insurance Products which are designed basically for Life Cover for the
individual and savings component is also present in many of these plans, except in pure term
insurance plans. The investment of the premium paid by the insured is made in specified
Government securities. The plans are either ‘participating’ i.e. the bonus is given or ‘Non-
participating’ i.e. these plans are not eligible for any bonus. Major types of traditional plans
include -
 Term insurance plans
 Endowment plans
 Money back plans
 Child policies
 Annuity or pension plans
We shall discuss these plans in detail in this unit.

3.2 TERM INSURANCE PLANS

Term Insurance is the cheapest form of insurance but most valuable in case of death of the
life assured. It can also be defined as the insurance wherein ‘only Death Benefit’ is paid &
there is ‘no Maturity Benefit’. Features of term insurance plans are as follows:

 S.A. is payable only if death occurs during the specified pre-determined term.
 There is no Maturity Benefit i.e. the premiums paid are forfeited if the death doesn’t
take place during pre-determined term.
 The cost of the insurance is low.
 The individual can get higher cover for lower premium which is not possible in any
other insurance plan.
 There is only ‘Life Cover’ but no ‘Saving Component’ present.

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  Sum Assured (S.A.) may be kept constant throughout the tenure of the policy or may
be increased or decreased.
 These plans are not very popular because the surviving member doesn’t get
anything out of it. He thinks that his money has gone waste. However this is a very
valuable plan for the benefit of the dependents of the life assured.

Types of Term Insurance

There are different types of Term Insurance to comply with the different needs of the
people. They are as follows:
 Annual Renewable Term Plan
 Level Term Life Insurance Plan
 Single Premium Term Plan
 Regular Premium Term Plan
 Convertible Plans
 Joint Life Plans
 Mortgage Redemption Assurance Policy / Loan Cover Term Assurance
 Term Insurance with Return of Premium

Explanation of each of the above mentioned plans

Annual Renewable Term Plan

 This is the simplest form of Term Insurance.
 The term is for only one year.
 The death benefit is paid if the death occurs during the one year term.
 No benefit is paid if the insured dies even one day after the last day of the
one year term.
 The premium calculation is based on the expected probability of the insured
dying in that one year.
 The purchase of one year term plan is rare.
 Renewal of the one year term policy may be difficult in some cases because
if the insured falls ill during one year term but doesn’t die, it is difficult for
him to renew the plan next year due to his illness. Otherwise he has to
produce ‘Proof of Insurability’.

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 Thus Annual Renewable Term Plans with guaranteed continuation every year for
the period of 10 to 30 years or occasionally until age 95 yrs are available. The
premium is slightly higher than for a single year’s coverage, it may increase
every year which may become unviable.

Level Term Life Insurance Plan

 This is more popular than Annual Renewable Term Plan
 The premium is guaranteed to be the same for entire term.
 The most common terms are 10, 15, 20 & 30 years.
 The premium calculation is based on the sum of cost of each year’s annual
renewable term rates with the time value of money over the term.
 The renewal may or may not be guaranteed & the proof of insurability may
be required to be produced if the health of the insured goes down
significantly during the term.

Single Premium Term Plan

 As the name suggests, the premium is paid only once.
 It is the most convenient mode of payment, but higher lumpsum payment
puts off many people opting for insurance covers.
 The term can be specified.

4. Regular premium Term Plan

 This is a plain vanilla insurance policy.
 If one-time huge lumpsum premium is not possible, regular premium option
is taken.
Convertible Plans
 Convertible Plans are those plans which can be changed to another plan
after or within a certain period from commencement.
 A Convertible Term Assurance Plan can be converted to the Whole Life or
Endowment Plan within a specified period in the original plan.
 If the option to convert is not exercised, the policy will continue on the
original terms.
The advantages of Convertible plans are as follows:

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  When the right of conversion is exercised, there would be no further
underwriting decision to be taken.
 There will be no ‘Medical Examination’ at the time of such conversion,
so even if the insured is in the adverse medical condition, the policy of
his choice will be given to him., subject to the insurers’ terms and
conditions governing such conversions.
 On conversion, the premium structure will change for the period after
conversion.
 The past payments are not revised.
 The convertible plans are opted in early stages of career by those who
think that their income level is going to improve very soon but at
present they are not in a position to pay huge premiums. They do not
wish to delay their insurance benefits till that time e.g. converting term
plans to endowment plans.
Joint Life Plans
 This is a combination of a Pure Endowment Plan with two Term Assurance
Plans.
 Two or more lives can be covered under one plan.
 Usually married couples or partners are covered under these plans.
 The S.A. is paid on the death of any of the insured persons during the term
or at the end of the term.
 A ‘Joint Life Declaration’ is required to create a joint interest in the policy.
 In case of partners, the partnership deed is examined to verify the nature of
financial interest of each partner.
 Each life is underwritten separately.
 Bonuses accrue on the single basic S.A. only.

Mortgage Redemption Assurance Policy / Loan Cover Term Assurance:

 This plan is targeted at those who have taken housing loan.
 The Outstanding indebtedness under the Housing Loan is covered by this
plan.
 The S.A. is equal to the outstanding loan amount at a particular time.
 The S.A. progressively decreases in the same proportion as the loan amount
is paid back.

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  The premium works like EMI (Equated Monthly Installments).
 S.A. is payable only if death of the borrower occurs during the currency of
the loan.
 On the death of the borrower, the outstanding loan is automatically repaid
out of the policy money and the family has no burden to repay the
outstanding home loans.
Term Insurance with Return of Premium:
This is a Term Assurance Plan for a specified term.
At the end of the specified term, the basic premiums paid till date are refunded.
Though the policy term is over, the cover may continue thereafter for some
definite period; say 5 years after the term is over, during which the policyholder
continues to enjoy free life cover without payment of further premiums.
The premium structure is so designed that the interest accrued on the premium
during the term is sufficient to meet the single premium cost of the extended
cover.

3.3 WHOLE LIFE PLANS

The Whole Life Plan is somewhat similar to that of the Term Plan with some differences. It
can be defined as the insurance plan in which the S.A. is payable only on death whenever it
may occur. It differs from the Term Plan in payment of S.A. In Term Plan, S.A. is payable if
the death occurs within the specified period whereas in Whole Life Plan, S.A. is payable on
death whenever it occurs. There is no specified period mentioned. Also in case of Whole Life
Plan, some payment will be made at some time. Some insurers pay the S.A. when the Life
assured completes, say, 80 years of age or 100 years of age & so on. In case of Pure Term
Plan such type of payment of S.A.as maturity benefit is never done.

Features and Benefits of Whole Life Plans:

 This plan is mainly devised to create an estate for the heirs of the policyholder as the
plan basically provides for payment of sum assured plus bonuses on the death of the
policyholder.
 This plan provides permanent protection to the insured at a moderate cost.
 For the insured of average earning & hoping to have considerable protection for his/her
family but not having the capacity of paying huge premium, this plan is a good option.

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 Under the Whole Life Plan, maximum life assurance cover is provided as compared to all
other plans.
 The premiums are payable till the S.A. becomes payable i.e. till the claim arises.
 The premium can also be paid for the shorter period as in the case of ‘Limited Payment
Policy’. The limited payment could be one year as in the case of ‘Single Premium Policy’.

 The persons who feel that their professional earnings may not continue for a longer time
opt for limited payment plans; e.g. army officers who may have to retire before the age
of retirement, performing artists who cannot estimate their future earnings,
Professionals working abroad, whose future earnings are not fixed.
 The Whole Life Plan can be a ‘Participating Policy’ & thus is eligible for bonus.
 The Term policy can be converted to Whole Life Plan for better insurance benefits. The
Convertible Whole Life Plan can be converted to Endowment Plan.

There are certain drawbacks of the Whole Life Plans. They are as follows:
 The Whole Life Plan can’t meet the varied needs of insurance during the entire life
span of an individual.
 It might become difficult for the policy holder to pay the premiums during the old
age when the income has ceased & he may want to discontinue the premium
payments.

3.4 ENDOWMENT PLANS

These are basically of 2 types: Pure endowment and Endowment plans

 The Pure Endowment Plan is the insurance plan wherein the S.A. is payable only on
survival of the policyholder to the fixed term. If life assured dies during the term,
nothing is payable to the nominee. The product features are as follows:

– This plan is exactly opposite to the Term Plan. In Term plan, the S.A. is payable only
on death & under Pure Endowment Plan, S.A. is payable only on survival.
– The basic element of insurance i.e. ‘life cover’ is absent.
– They are regarded as Financial Contracts more than an Insurance Contract.

Annuity plans are designed on this concept of pure endowment as the annuity payment
begins only after the annuitant has survived the term.

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 Endowment Plans
The ‘Endowment Plan’ is the insurance plan which is a combination of a Term Plan &
the Pure Endowment Plan. This gives to a policyholder both the benefits i.e.
Maturity as well as Death Benefit. The features of the plan are as follows:-

– This is a type of policy wherein the Pure Endowment policy is superimposed by a

Decreasing Term Assurance Policy.
– The S.A. is payable either on survival to the specified term or on death during the
policy term.
– This is a ‘Saving Plan’ in which contributions are made in terms of premium. The
insurers accumulate these premiums, invest it & return it to the policyholder on
maturity if he survives or pay the specified amount in case of the death of the
policyholder.
– Thus the policyholder gets the life cover, he has the great feeling of his family’s
security in case of his untimely death & at the same time the policy may serve as a
good saving tool if he survives over the policy term.
– The endowment plans can be made ‘With Profit Plans’ at the option of the
policyholder & the bonuses declared after every valuation can be added to the
policy accumulations.
– The Endowment plans can be made for ‘Single’ or ‘Joint-Life’.
– The Endowment Plan can be taken in the name of minor children. The proposal
should be made by the parents or guardian.
– This plan can be offered to the industrial workers with low incomes.
– The Salary Savings Scheme (SSS) policies can be of Endowment type.

3.5 MONEY-BACK POLICIES

 It can also be called as ‘Anticipated Endowment Policy’ or ‘Money-saver Policy’.

 In this plan, the ‘Survival Benefit’ is paid at specified intervals during the policy term, say,
after every 3 or 4 or 5 yrs.
 The payment of Survival Benefit doesn’t affect the S.A. payable on death. This means
that if for example, the policy term is for 20 years & the survival benefit is to be paid
every 5 yrs. The first two installments of survival benefits are paid at the end of 5th & 10th
yr and the death of the policyholder occurs in the 11th year, then the full S.A. with

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 bonuses ( in case of participating policy) is paid as a death benefit. The amount already
paid as survival benefit is not deducted from the death claim amount.
 At the same time, when the policy holder survives through the complete policy term, the
last survival benefit will be his Maturity benefit which will not be the full S.A. but the
Maturity amount (S.A. + vested Bonus) minus the survival benefits already paid.
 The specified % of S.A. is paid at particular time interval.
 This plan is preferred by many people since it gives full life cover throughout the policy
term as well as a portion of accumulation is returned back which can fulfill the policy
holder’s other financial needs.
 The premiums are certainly higher than plain endowment policies due to the added
advantages.

3.6 CHILD PLANS

 This is the Endowment Plan taken in the name of the minor child.
 The proposer is either the parents or guardians.
 The plan specifications vary with every insurer.
 In some plans the risk on the life of the insured child begins only when the child attains a
specific age.
 The time slot between the date of commencement of the policy & the commencement
of risk is called as ‘Deferment Period’ & the date on which the risk will commence is
called as ‘Deferred Date’.
 The Deferred Date will be the policy anniversary date.
 The commencement of risk on the deferred date doesn’t require any medical
underwriting.

 Since there is no life cover during the deferment period, if the child dies during that
period, the premiums are returned.
 There are various options available depending on the deferred date. E.g. a child between
the age 5 to 12 is covered under insurance & the risk commences at the age 12 or some
policies may state that the commencement of the policy will be between the age 1 to 12
yrs. & the risk commencement will be 2 yrs. after that but not before particular age, say,
7 yrs. or so like in LIC Jeevan Kishore plan.

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 The Children’s plans have conditions by which the title of the policy is automatically
passed on to the insured child when he becomes a major one. This process is called as
‘Vesting’.
 The policy anniversary date corresponding to majority of a child or any later date can be
chosen as ‘Vesting Date’. The vesting date can’t be before 18 yrs. The deferred date &
the vesting date need not be the same.
 After vesting, the same contract turns into a contract between the insurer & the major
child.

3.7 ANNUITY PLANS

Annuity is called as ‘Upside down application of the life insurance principle’. Annuity is also
called as ‘Reverse of life insurance’.

Concept of Annuity
In case of an Annuity plan, the Annuitant pays the specified capital sum to the insurer, in
lump-sum or in installments and in return he gets promise from the insurer to make a series
of payments to him/her as long as he/she is alive. This is where it differs from the life
insurance contract. In case of life insurance contract, the life assured pays a series of
payments or premiums to the insurer in return of which he/she gets a promise from the
insurer to pay a specified sum to the beneficiaries, in case of the death of the life assured.
Another remarkable point is that in case of the life insurance contract, the insurer ‘starts’
paying on the death of the insured & in case of Annuity, the insurer ‘stops’ paying on the
death of the annuitant.
Annuity is also a ‘Risk-sharing’ plan based on the group of insured of the same age. In
case of insurance two types of risks are covered: ‘Dying too early’ & ‘Living too long’. In
case of life insurance, risk of dying too early is covered and in case of Annuity, risk of
living too long is covered.
In case of Annuity, contributions are made by all the members of the pool and the law of
large numbers is applied to this group. The contributions from large no. of annuitants
are used as a capital & each member is paid an annuity as per mode selected by
him/her.
No medical underwriting is done in annuities. Thus medical examination of annuitants is
not required for annuity plans.

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 Annuity is paid by the insurers in monthly, quarterly, half-yearly or yearly instalments as
per the choice of the annuitant.
There are variations in annuity in actual practice. So accordingly annuity may not stop on
death of the annuitant, it may continue.
Like life insurance policies, annuities can be purchased on the lives of two or more
persons. The annuity can be paid till the end of the death of the last survivor, as per the
conditions of the contract.

• Annuity Concept -- How it works

Premium paying term

Lumpsum created
Purchase price of
Annuity

DOC of policy Age from when annuity

payments begin

Fig 3.1 shows the concept of annuity at the accumulation stage. Here the policyholder pays
premium till the vesting age after which he is entitled to regular annuity payments

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 • How Annuity works

Annuity receiving period

DOC of policy Age from when annuity Annuity payments

payments begin paid till life/ as
per terms of
annuity plan

Fig 3.2 shows the concept of annuity at the payment stage. Here the policyholder
starts receiving regular annuity payments from the vesting age till his/ her death and
subsequently to his/ her spouse depending on the type of annuity plan selected by
him/her.

Annuity Categories and Various Types

Immediate Annuity
 Annuity holder has to purchase this annuity at a lump sum purchase price
 Annuity payments (pension) starts immediately on the commencement of
the policy
 It is beneficial for people who get lump sum money and want to ensure a
regular guaranteed income thereafter e.g. VRS benefits, or maturity of an
investment, or through sale of fixed assets/ home/ land etc.
Deferred Annuity
 In case of Deferred Annuity, payments are made only after a specified
period known as Deferment period
 Annuity holder has to purchase this annuity by paying specified number of
installments i.e. lumpsum (purchase price of annuity) has to be created first
through regular premium payments.

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  This plan is helpful for people who wish to ensure a regular specified income
at a future date; e.g. Business men, Professionals, or people working in
private sector where there is no pension benefit, or for those who wish to
enhance their group pension payments by buying an individual pension plan.

Types of Annuity Payments

Life Annuity - Pension is continued throughout the life time of annuitant and ceases
on the death of the annuitant.
Joint Life Annuities - Annuity paid during the lifetime of the annuitant or his spouse
whichever is longer.
Annuity Certain – For a fixed number of years like 5 years, 10 years, 15 years, 20
years.
Annuity Certain and thereafter for life -- For fixed number of years and thereafter
as long as the annuitant survives. If the annuitant dies during the selected term,
annuity installments for the remaining period will be paid to the legal heir or
nominee.
Annuity Certain Joint Life – For a fixed number of years and thereafter till the death
of the annuitant or his spouse.
Return of Purchase price – Annuity is paid for life, and after the death of the
annuitant the purchase price is returned to the legal heir.
Increasing annuity payments: Annuity is paid on any of the above mentioned terms,
but annuity increases every year by a fixed percentage or amount.

3.8 GROUP INSURANCE

 It is a scheme which provides insurance benefits to a large number of persons under

a single policy called ‘Master Policy’.
 The individuals covered under the group policy are not parties to the contract
 The insurance contract is between the insurer & the body that represents the
individuals covered.

 This body may be the employer/ association of individuals like a trade or

professional association, through whom the collective interests of the individuals are

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 safeguarded (banks/financial institutions protecting against payment defaults due to
death of borrower).

Essential Features of Group Insurance

 The group should pre-exist and should not be formed for the purpose of taking
group insurance.
 The entry and exit from the group should be for reasons other than availing benefit
of the Scheme.
 Minimum 25 members would be considered adequate in the group.
 The members should be in the age group of 18 – 60 yrs.
 Individual members are not separately assessed for risks. The underwriting is done
for the group as a whole.
 Because the coverage is not the choice of the individual the chances of adverse
selection are low. Hence the rules of medical examination are liberal.

Group Insurance Cover

• The amount of cover is decided by using certain criteria and not by individual
beneficiaries.
• The criteria of cover will apply uniformly to all members. E.g. If the criterion is
income/ grade, the cover can be fixed as a fixed multiple of income/ same for all
persons in the same grade; e.g. if the cover for grade 1 is 10 lacs, then all grade 1
employees will get Rs. 10 lacs cover, irrespective of tenure/ age/ income of the
members within that grade.

Consideration
The premium charged will change from year to year because:
 Size of group is likely to change due to entry and exits (deaths, retirement,
resignations).
 The insurance cover may also vary from year to year due to change in age, income,
rank etc of existing members.

 The mortality experience maybe different than expected. If the experience is better
than the premium is reduced. This system is called ‘Profit Sharing’ or ‘Experience
Sharing’.
Types of Group Insurance Schemes

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  One Year Renewable Group Term Insurance Scheme
 Group Savings-Linked Insurance Schemes
 Group Gratuity schemes
 Group Superannuation Schemes

Explanations:
One year renewable group term insurance schemes cover members for specific
amounts, payable on their death within the year. This is the simplest and the
cheapest of the schemes. It operates just like one year pure term insurance plans for
individuals.
Group Savings-linked Insurance Schemes: Contributions from the employees are
made up of two elements.
 Part of it is used as the premium for a term insurance cover of the specified
amount (SA).
 The balance is credited to a savings scheme (earning interest as in banks).
Group Gratuity schemes
• Gratuity is paid to employees who retire or die after long years of service.
• The amount of gratuity is linked to the number of years of service and the salary
drawn during the last few years.
Group Superannuation Schemes are also offered to employers and are related to the
payment of pensions to employees. The group superannuation schemes offered by
insurers are intended to help employers administer the pension funds.

3.9 UNIT LINKED INSURANCE PLANS (ULIPs)

ULIP’s offer a combination of life insurance and investment features to the consumer.
Traditional plans differ from ULIP’s in the sense that they offer life insurance cover only (as
in the case of pure term plans), or a combination of life cover and savings element (as in
endowment plans). The premium collected is invested in government securities as
prescribed by the IRDA; thus negating the risk element associated with investments.
Traditional plans are therefore preferred by risk adverse clients, while those who prefer the
fast track to making money, or in other words are risk takers; may view the fixed returns
products as unviable for their investment needs. Hence the need for ULIP kind of products
that enables the client to enjoy market related returns in a rising equity market scenario,

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while the risk of the markets sliding also looms large. Variable Insurance Plans are meant for
the high risk profile category of clients, who are relatively younger, and may not need the
funds in the short term.
In short, ULIP’s are a category of goal-based financial solutions that combine the safety of
insurance protection with wealth creation opportunities. In ULIP’s, a part of the investment
goes towards providing life cover. The residual portion is invested in a fund which in turn
invests in stocks or bonds. The value of investments alters with the performance of the
underlying fund opted by the policyholder. Simply put, ULIP’s are structured such that the
protection element and the savings element can be distinguished and hence managed
according to the client’s specific needs, offering unprecedented flexibility and transparency.

Difference between Traditional plans and ULIP’s:-

Features Traditional plans ULIP’s
Investment Mix High exposure to bonds and Policyholder can choose
govt. secs, and no exposure exposure to equity, debt
to equity
Transparency in cost No Yes
Alter scope of cover No change in sum assured Freedom to enhance life
and premium cover, top-up premium
Charges Unknown to customer. Mostly flat and transparent
Variable charges through the charges, known to customer
term of the policy
Vary exposure to risk No option to vary exposure Option to switch between
funds available; e.g. equity to
debt; or vice versa
Premium holiday No Allowed
Liquidity Policyholder can take loan Partial withdrawals allowed
against the policy after after specified years of
specified years of commencement of policy.
commencing policy. No loan allowed
Policy value Complex calculation to arrive Surrender value indicated at
at paid up value after end of each policy year. After
specified years of policy specified years, surrender
commencement value is the fund value

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 accumulated.

Working of ULIP
It is critical that the client knows how his money gets invested once he purchases a ULIP.
Once you decide the amount of premium to be paid and the amount of life cover you
want, the insurer deducts some portion of the premium upfront. This portion is known
as the Premium Allocation charge and this varies from product to product. The rest of
the premium is invested in the fund or mixture of funds chosen by you. Mortality
charges and administration charges are thereafter deducted on a periodic (mostly
monthly) basis whereas the fund management charges are deducted on a daily basis.
Since the fund of your choice has an underlying investment – either in equity or debt or
a combination of the two – your fund value will reflect the performance of the
underlying asset classes. At the time of maturity of your plan, you are entitled to receive
the fund value as at the time of maturity. The pie-chart below (figure 3.3) illustrates the
split of the ULIP premium in a graphical format. In addition to the investment fund
ULIP’s offer the benefit of insurance cover as well. The mortality charge mentioned
above goes towards provision of this cover. Over a period of time, the component of
charges as a percentage of the premium paid tends to decrease. Which is why, one
should continue paying the premiums regularly. That is the best way of making ULIP’s
deliver on its dual benefit of protection and wealth creation.

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 Policy administration
charges Fund management charges
Mortality
charges
30%

Premium
allocation charge

Investment
amount

70%

Premium break-up

Figure 3.3 shows break-up of premium & its various components. Percentages may differ
according to insurer & plans

ULIP Charges
Unlike conventional traditional products, charges are segregated in ULIP & thus made
known to the customer. We can know the charges applicable on our ULIP through:-
Sales benefit illustration: A sales benefit illustration illustrates various charges, year by
year, for the term of the plan so that we know exactly how much money is deducted as
charges & what is invested.
Brochure: A brochure informs us about the various charges & their purpose.
Advisor: The advisor must provide true and correct information on all charges applicable
on the policy.

Although ULIP’s offered by different insurers have varying charge structures; broadly
important charges that we should know are:

Policy administration charges: These charges are deducted on a monthly basis to recover
the expenses incurred by the insurer on servicing and maintaining the life insurance policy
like paperwork , work force etc.

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Premium allocation charges: These charges are deducted upfront from the premium paid by
the client. These charges account for the initial expenses incurred by the company in issuing
the policy- e.g. cost of underwriting, medicals & expenses related to distributor fees. After
these charges are deducted the money gets invested in the chosen fund.
Mortality charges: Mortality expenses are charged by life insurance companies for providing
a life cover to the individual. The expenses vary with the age and either the sum assured or
the sum-at-risk which is the difference between sum assured and fund value of the
insurance policy of an individual. Mortality charges are deducted on a monthly basis.
Fund management charges: A portion of the ULIP premium, depending on the fund chosen,
is invested either in equities, bonds, Govt. securities or money market instruments.
Sometimes it is a combination of these, in varying proportions as decided by the investor.
Managing these investments incurs a fund management charge (FMC). The FMC varies from
fund to fund even within the same insurance company depending on the underlying assets
in the fund. Usually a fund with higher equity component will have a higher FMC.
The important thing to note about ULIP’s is that the overall charge structure for the plan
comes down substantially over a long term. However it may be noted that insurers have the
right to revise fees and charges over a period of time.
Other charges
ULIP’s can easily be customized to suit one’s needs & requirements. This is primarily due to
range of features that ULIP’S offer to the customer. Below mentioned are few charges
applicable in case the client has opted for an additional feature.

Features and Charges

Attachment of Riders with ULIP: Riders are additional or supplementary benefits that are
bought along with a main life insurance plan. Some of the commonly offered riders are
critical illness benefit rider, accident & disability benefit rider, waiver of premium rider etc.
For example; in case you opt for a Critical illness rider you get additional protection from 9
critical illnesses.
Charges: Insurance companies levy rider charges in case you opt for riders.

Switch: ULIP’s not only allow you to invest your money in fund options with various debt –
equity exposure but also give you the option to switch between different funds. For
example, you can switch money from a fund with 100% equity to a balanced portfolio, which
has 60 per cent equity and 40 per cent debt.

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Charges: Your insurance company may charge you a fee for switching your funds Generally
only a limited number of fund switches are recommended in a year as a ULIP is a long-term
investment tool therefore most of the companies allow a certain number of switches each
year free of charge, with subsequent switches, subject to a minimal charge.
Up Top: One of the unique feature offered by ULIP is Top Up where you can make additional
contribution over & above the regular premium.
Charges: Insurance companies deduct a certain percentage from the top-up amount as
charges. These charges are usually lower than the regular charges that are deducted from
the annual premium.
Surrender: You may decide to surrender (premature partial or full encashment of units) your
policy before the term of the plan.
Charges: Surrender charge may be deducted for premature partial or full encashment of
units wherever applicable, as mentioned in the policy conditions. These charges are levied as
a percentage of the fund value or as a percentage of the premium.

3.10 RIDERS

 Riders are the additional, optional features added with the basic plan according to the
customer’s requirements - they come at a nominal additional premium.
 They cover risk in the areas otherwise not permissible, such as accident/ health
insurance.
 Accident death benefit allows double the Sum Assured if death happens due to accident.
 Permanent disability benefits covers loss of limbs, eyesight etc.
 Premium Waiver – Policy continues and no premium is required to be paid in case of
death, disability or sickness of the policy holder. This rider is useful in child plans where
payor is the parent and death of payor would endanger payment of future premiums &
subsequently the planned benefits for the child.

 Critical illness cover – Provides additional payments in case life assured contracts a
critical illness.
 Extended Term Cover – Cover to continue beyond maturity age for SA or higher SA

3.11 NEEDS AND LIFE INSURANCE

The needs that are met by insurance products (figure 3.4) are as under:

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Protection
 Death / Accidental Death
 Disability / Accidental Disability
 Critical Illness
 Medical Expenses
Accumulation of Wealth
 For retirement
 For education
 For marriage
 For planned expenses
 For unplanned expenses
Maintenance of Wealth
 Real growth in capital
 Availability of money/ liquidity
Release of Wealth
 Pension after retirement
 Pension after disability
 Pension to dependents
 Part withdrawals

Needs met by products

Protection

Wealth Wealth Wealth

Accumulation Maintenance Release

time

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Figure 3.4 shows the needs that can be met through various life insurance products

3.12 SUMMARY

 All insurance products are a combination of two basic Plans: Pure Term Assurance
plans & Pure Endowment plans. In case of Pure term plan, benefit is payable only in
case of Death of insured within the term. Under pure endowment plan benefit is
payable only in case of survival of insured for the full term. Endowment Plan is a
combination of Pure Term Insurance, and Pure Endowment Plans. Money back plan
is a combination of one term insurance and few pure endowment policies. With
profit (participating) plans offer bonus in addition to sum assured.
 Convertible plans are plans that can be changed to another plan after, or within, a
certain period after commencement. In case of whole life policies, the cover extends
for whole life of the insured or up to certain maximum ages as specified by insurers.
In case of Money back plans, survival benefits (fixed % of SA) are paid after some
fixed terms, and finally maturity benefits are paid along with total vested bonus, for
with-profit plans. An annuity is a series of periodic payments made by insurer to
annuitant.

 Riders are the additional, optional features added with the basic plan according to
the customer’s requirements - they come at a nominal additional premium, but offer
huge benefits. ULIP’s offer a combination of life insurance and investment features
to the consumer. Traditional plans differ from ULIP’s in the sense that they offer life
insurance cover only (as in the case of pure term plans), or a combination of life
cover and savings element (as in endowment plans).
 ULIP’s are a category of goal-based financial solutions that combine the safety of
insurance protection with wealth creation opportunities. There are many types of
ULIP’s depending on the requirements of the clients. For example, there are
retirement plans, wealth creation plans, children’s education plans, health plans,
goal-based savings plans, and custom-made plans that cater to every need of a
customer.

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  Charges include Policy administration charges, Premium allocation charges,
Mortality charges and Fund management charges. Charges are also levied for
services such as top-ups, switching between funds, riders, and surrender of policy.

3.13 KEYWORDS

 S.A. –Sum Assured i.e. the amount payable by insurance contract on happening of the
insured event; i.e. on death of life assured, or on maturity of policy; as the case may be.
 Annuity: A life insurance product that pays periodic income benefits for a specific period
of time or over the course of the annuitant’s lifetime. There are two basic types of
annuities: deferred and immediate. Deferred annuities allow assets to grow over time
before being converted to payments to the annuitant. Immediate annuities allow the
payments to begin within about a year of purchase.
 Claim: An insurance contract is a promise to pay certain sums under certain conditions.
Making a claim is invoking that promise and if it is in accordance with what is set out in
the contract then it is admissible and can be payable if all other terms and conditions in
the contract are met.
 Cover continuance option: An option that ensures that your policy continues in case you
are unable to pay premium, any time after payment of first three year’s premium
 Endowment Policy: A life insurance policy that pays out a lump sum after specific period
of time or on the death of the policy holder.
 Group Life Insurance: A number of lives insured on the one policy called as “Master
Policy”. A multi-life policy.
 Regular premium policy: A regular premium contract is a contract where the
policyholder accepts to pay a premium at regular intervals over a number of years. Also
known as recurring or annual premium contract
 Renewal Premiums: Premiums that are payable after the initial premium and that are a
condition for the continuation of the policy.
 Rider: Additional or supplementary benefits that are bought together with a main life
policy on the same file and are combined for the purposes of collecting one premium.
They ride on and are considered as part of the main policy. They could be added,
amended or deleted from the main policy, any time, subject to risk assessment.

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 Single premium policy: A single premium contract involves the payment of one
premium at inception with no obligation for the policyholder to make subsequent,
additional payments.
 Surrender value: The amount of money that will be paid to a policy holder if they
discontinue a policy before it matures.
 Switch: An option which enables you to transfer your money from one fund to another .
 Pure Term Insurance: Policy under which the benefit is payable only if the life insured
dies before a specified age or date.
 Top Up: Any additional premium payment over & above regular premium
 Unit linked policy: An unbundled policy where investment benefits are expressed in
units, each representing a share in an investment portfolio. The unit price fluctuates
with market-values and allows for investment income.
 ULIP: Unit Linked Insurance Plan.
 NAV: Net Asset Value.
 FMC: Fund Management Charges.
 Vesting: Passing on the title of the policy to the insured child when he becomes major.
 Deferment Period: The time span between date of commencement of the policy & the
commencement of the risk is called as Deferment period.
 Deferred Date: The date of commencement of risk is called as Deferred Date.
 Survival Benefit: Periodical pay-backs as a particular percentage of S.A. on survival of
the life assured during the policy term.

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