Life Insurance Products: Elements & Contracts

• Life insurance products provide cover for the life of the insured.

Elements of Life Insurance Products

• Life insurance benefits include death cover, paid upon the insured's death within a specified period.
• Survival benefits are paid when the insured survives a specified period.
• Term insurance policies offer only death benefits, while investment-cum-insurance policies combine both death and survival benefits.

Insurance Contract Elements

• The insured is the person whose life is being insured, which can include individuals, minors, or joint lives.
• The proposer or policyholder buys the policy for the insured and must have an insurable interest in the insured.
• The term of the contract specifies the period during which insurance cover is available; it may have an upper age limit.
• The sum assured is the amount being insured; regulations require a minimum sum assured based on the policy term and the individual's age.
• Payment of the sum assured occurs upon a specified event like death or policy expiry.
• Premium payable depends on the sum assured and policy term, with payment modes like monthly, quarterly, or annually.
• Non-payment within the grace period leads to policy lapse, but revival is possible with pending premiums and penalty.
• Bonus is added to the sum assured for investment-cum-insurance policies, announced periodically, and paid on maturity or the insured event.
• Guaranteed bonus is paid for the initial policy years as a percentage of the sum assured and is received at the end of the term.
• Reversionary bonus is based on the insurer's performance and declared for participating policies after the guaranteed bonus period.
• Policy lapse occurs if the premium is unpaid, even within the grace period, voiding claims.
• A policy that has been in force for a certain number of years may acquire a cash or surrender value, which is returned to the policyholder.
• Surrendering a ULIP policy before 5 years incurs a discontinuation charge, with the balance transferred to a discontinuation policy fund.
• Insurers may pay an amount based on the current asset value held against the policy.
• In unit-linked insurance plans, the surrender value is paid only after a 5-year lock-in period.
• Policies can be made paid-up, reducing the sum assured proportionally to the premiums paid versus total premiums due.
• Nomination allows the policyholder to designate who receives policy money upon death, which can be done or changed anytime.

Life Insurance Needs Analysis

• Human Life Value (HLV) is the economic value attached to a human life to determine the required life insurance cover.
• HLV represents the present value of the expected income available for dependents over the individual's working life.

Estimating Life Insurance Coverage

• One approach estimates HLV using current annual income, retirement age, return on investment, and inflation rate.
• HLV calculations depend on the income increase rate and post-tax return on the sum assured.
• The needs-based approach uses insurance proceeds to meet the insured's expenditure needs and liabilities, subtracting existing assets to determine the insurance requirement.

Income Replacement Method

• It involves calculating the current income value to be provided, the corpus needed for this income, and deducting existing investments to arrive at the required insurance amount.
• HLV calculation will always be higher than insurance requirement calculated as per the needs-based approach, as overall expenditure cannot exceed income.

Types of Life Insurance Products

• Life insurance policies can be categorized based on their benefit patterns and payment of benefits upon death or maturity.
• Term insurance is a pure risk cover product that pays a benefit only if the policyholder dies during the insured period.
• Term insurance provides coverage for a specified term at a specified premium, with low premiums and no investment component.
• Key considerations for term insurance include the sum assured, premium cost, and coverage term or length.

Term Insurance Variants

• Term insurance has different payout options, including a lump sum amount or fixed regular monthly payments.
• Some companies offer coverage up to 85 or 100 years.
• Term insurance with return of premium variants has higher premiums than regular term policies with the difference invested to return the premium at term end.

Endowment Policies

• Endowment policies are investment cum insurance plans where the insurance company returns the investment portion of the premium with actual returns upon surviving the plan tenure.
• Actual returns are calculated and declared annually as accrued bonus, paid at the end of the tenure.
• If death occurs during the policy term, the sum assured and any accrued bonus are paid out.
• Inherent investment returns are calculated using official illustrations from the insurance company.

Whole Life Insurance

• Whole Life insurance policies provide cover for the insured's entire life or up to a specified age, with fixed premiums and variations like shorter premium payment periods.
• On traditional whole life policies, the sum assured and bonuses are paid on the policy holder's death.

Unit-Linked Insurance

• Unit-linked insurance policies allow the insured to decide on the managed portfolio (asset mix), that the insurer maintains for the savings portion.

Loan against Insurance Policy

• Most insurance companies offer a loan against the surrender value of Investment cum Insurance policies.
• Taking a loan from a bank/NBFC against Investment cum Insurance policies can help rebuild a credit score after past defaults.

Nominations

• Nomination is a right of a policy holder to identify a person to receive the policy money in the event of policy claim by death.
• Nomination can be made or changed any number of times

Policy Assignment

• Assignment means transferring the interests in the policy.
• Assignment normally done for taking loan against the policy but can also be done for other reasons.
• An assignment cancels an existing nomination in the policy.

Insurance under Married Women's Property Act (MWPA)

• MWPA ensure financial security of family members, for women and children.
• Nominations cannot be changed after the policy has been bought

Claims from Multiple Insurers

• Premiums are telescopic, meaning that premiums do not increase in the same proportion as the sum assured.

Evaluating Life Insurance

• Online vs offline Term Plans comes down to long term comittment, availability of the amount of risk cover, premium payable, availability of riders, and the claim settlement numbers.
• Traditional Life Insurnace vs Unit Linked Plans comes down to choosing the type of investment for returns.

Global Coverage

• Defined benefit policies such as life insurance, critical illness policies, accidental death policies will pay wherever the covered risk occurs
• Residents can use their Liberalised Remittance Scheme (LRS) entitlement of up to USD 2,50,000 per annum to buy life Insurance policies of foreign companies.
• Policies and grievance redresses are governed by regulations of countries where issued, so caution should be exercised.