The Facts & The Fine Print
Most of us buy life insurance driven by the need of the hour, especially when it is time to get the benefit of tax exemption or in cases like the present one when the world has been gripped in the clutches of the pandemic. This is not an ideal scenario. You must understand the nitty-gritty of an insurance policy before investing in one. The article shows the way
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Life insurance needs no introduction. This is because most of you must have in possession at least one life insurance policy if not more, and if not you then one of your family members. All thanks to the Life Insurance Corporation of India (LIC) that has sold a whole lot of polices ever since its inception and has become one of the most trusted brands in the life insurance space. However, things are changing now and many private life insurers have also stepped up to tap a market that still remains under-penetrated. The life insurance industry in India has seen a plethora of changes since the private sector players were allowed to engage in life insurance business since 2000. Though there were some setbacks and hiccups in the initial stages, over the last 20 years the industry as a whole has grown multi-fold.
Even the distribution models have evolved substantially with the large bank-backed private insurers increasingly gaining substantial market share. Post the digital revolution in India, there has been increasing digital adoption by customers which means insurers now need to possess strong technological capabilities. And even though the pandemic has dampened growth projections for economies across the globe, the growth story for life as well as health insurance remains intact. In fact, most people have realised the importance of life and health insurance due to the pandemic. Yet, there still remain many doubts in the minds of both existing policyholders and the potential buyers. Therefore, through this article we have answered some of the most common questions about life insurance.
✓Conventional life insurance is nothing but insurance that is not market-linked. For instance, term insurance, whole life insurance, endowment plans and money-back plans.
✓ Unit-linked insurance plans (ULIP) are those that are market-linked and the volatility in the market does affect the performance of your investments. Here, there are no guaranteed returns.
Conventional life insurance
Here are some of the most common queries:
What should I look for before buying a policy?
The first and foremost thing one needs to understand is the purpose of buying a policy. If your purpose is protection then you should opt for a protection plan but if the purpose is saving then you can go with traditional life insurance policies such as endowment and money-back policies. Once you have decided the policy, you must check its lock-in period, details of premium that you would be paying, implications of premium default, policy revival conditions, charges that would be deducted, whether loan is available or not, etc.
What is the importance of a proposal and the disclosures made therein?
Most times people feel that the policy document that they receive is of no use. However, many a times not reading the proposal and disclosures made therein create a lot of problems. Usually, the disclosures made in a proposal are the basis for underwriting a policy and therefore any wrong statements or disclosures can lead to denial of a claim.
What are the medical reports required to be submitted for life insurance?
In case of certain proposals, depending upon the age of entry, age at maturity, sum assured, family history and personal history, special medical reports may be necessary for consideration of a risk. Say, for instance, if the proposer is overweight, special reports like electrocardiogram, glucose tolerance test, etc. might be required, whereas underweight proposers might require X-ray reports of the chest and lungs.
What is meant by paid-up value?
If you pay premiums for or beyond a defined period but you do not pay the subsequent premiums, then the sum assured gets reduced to a proportionate sum, bearing the same ratio to the full sum assured as the number of premiums actually paid bears to the total number originally stipulated in the policy. Confused? Let us understand this with the help of an example. If the sum assured is Rs 1 lakh and the total number of premiums payable is 20 (20 years’ policy assuming mode of premium is yearly) and the default occurs after paying premiums for 10 years, then the policy acquires the paid-up value of Rs 50,000.
Now how do we get to this value? Paid-up value is equal to number of premiums paid divided by the number of premiums payable multiplied by the sum assured. This means that the policy is effective as before but as the 11th premium remains due, the sum assured now is Rs 50,000 instead of the original sum assured of Rs 1 lakh. Moreover, you are also entitled to receive the bonus already accrued before the policy lapsed.
How is surrender value calculated?
Surrender value is calculated as per the surrender value factor and this depends on the premiums paid and elapsed duration. If in case you wish to surrender the policy, then you can ask your insurance agent or respective insurance company who will help you get this value. Usually, in the initial period of the policy, your surrender value is around 30 per cent of your total premiums paid. However, as you near the end of your policy, this percentage increases and goes to 90 per cent.
How is the loan on policy calculated?
If your policy conditions permit grant of loan, then loan is sanctioned as a percentage of the surrender value.
What are the things that need to be done in case of a maturity claim?
Usually your insurer will send you intimation attaching the discharge voucher at least two to three months in advance of the date of maturity of the policy, intimating the claim amount payable. You need to duly sign along with the witness on the policy bond and discharge voucher which then need to be returned to the insurance company immediately following which they will be able to make the payment.
What documents are required to be submitted in case of the death of the assured while the policy is in force?
The basic documents that are generally required include death certificate, claim form and policy bond. However, other documents such as medical attendant’s certificate, hospital certificate, and employer’s certificate, police inquest report, post-mortem report, etc. might also be called for, as applicable. The claim requirements are usually disclosed in the policy document.
Unit-Linked Life Insurance
Here are some of the most common queries:
How is the surrender value calculated in ULIPs?
The surrender value in ULIPs is usually expressed as fund value less the surrender charge.
What types of funds do ULIPs offer?
Most life 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. Here is a list of the common types of funds that are offered by life insurers.
1) Equity funds
2) Fixed income funds
3) Cash funds
4) Balanced funds.
Are investment returns guaranteed in a ULIP?
Investment returns from ULIP are not guaranteed. Depending upon the performance of the funds under the chosen ULIP, the policyholder may achieve gains or losses on his investments depending upon the performance of the underlying securities and market action. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.
What are the charges, fees and deductions in a ULIP?
ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However, it may be noted that insurers have the right to revise fees and charges over a period of time.
1) Premium allocation charge
2) Mortality charges
3) Fund management fees
4) Administration charges
5) Surrender charges
6) Fund switching charge
7) Deductions related to Service Tax
Investors should note that post deducting all charges and premium for risk cover, the remaining amount is utilised for purchasing units.
What is net asset value (NAV)?
NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers.
What is the benefit payable on the maturity of the policy?
The value of the fund units along with bonuses accrued, if any, is payable on maturity of the policy.
Is it possible to invest additional contribution above the regular premium?
Yes, one can invest additional contribution over and above the regular premiums subject to the feature being available in the product. This facility is known as top-up facility.
Can one switch the investment fund after taking a ULIP policy?
Yes, a switch option is available and it aids shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally affected free of cost, a fee may be charged for switches made beyond the specified number.
Can a partial encashment or withdrawal be made?
Yes, products may have the partial withdrawal option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units.