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Life Insurance 760 views June 17, 2019
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Buying a life insurance policy involves a lot of introspection about what life insurance really is, its significance and the names of life insurance companies in India selling different life insurance policies according to customers’ need and budget. Listed following are 25 essential terms about life insurance that one must understand before proceeding to choose a life insurance policy and paying for it.
For every transaction to be successful, there has to be a buyer and seller. This is true of life insurance too. In insurance terms, the policyholder is the person who proposes the thought of buying life insurance and shows an inclination to pay for the same. This means that the insurance company charges premiums from the policyholder. However, it is important to understand that the policyholder who proposes the life insurance policy may not be the same as the life assured.
A life insurance policy is bought as an essential financial instrument to secure against the life of the breadwinner of the family. The life assured is actually the insured person against whose life the policy is bought. The idea of buying a life insurance policy against the life of the insured is to alleviate the financial distress that stems from the sudden loss of income due to the death of the insured.
Every customer is asked to choose an adequate amount of sum assured before buying the life insurance policy. This is the amount that the life insurance company is liable to pay to the nominee of the insured in the event of the sudden death of the latter. The sum assured is actually the amount of the life cover that must be evaluated after considering the liabilities, the value of the assets and their liquidity and the amount that would be required by the dependents to meet their daily financial expenses. While some life insurance companies in India offer the sum assured in a lump sum, there are others who also offer a monthly payout in addition to the lump sum amount of life cover.
Life insurance policy is nothing short of financial security, which means that the policyholder or the insured buys this plan to ensure that the current lifestyle of his or her dependents is not hampered. The dependent’s name and details are filled in the nomination form while buying insurance. The insured may opt for a single nominee or more than one nominee while buying the life insurance policy.
The “policy tenure” also called “policy period” is the period beyond which the life insurance policy does not provide coverage. Any life insurance plan bought from any life insurance company in India provides coverage or insures the policyholder (or insured) only till the end of the policy period. The policy tenure may be anywhere between one and 100 years or for the entire life depending on the kind of life insurance policy one has bought. Some life insurance companies in India also refer to “policy tenure” as “policy term” or “policy duration”. If the policyholder has bought a whole life insurance plan, then there is no definite limit to the policy period as the insured (or policyholder) stays covered for the entire life. Some companies allow scope for limited premium payment options in which the policy tenure exceeds the premium payment term, which means that despite having paid premiums for limited periods only, the policyholder continues to remain covered for the entire policy tenure.
This is the age of the life assured beyond which the policy will not be in force. This means that beyond the maturity age, the policy ends or terminates and the insured has to opt for a new policy if he or she wants to stay covered. The maturity age is different across life insurance policies sold by different life insurance companies in India. Every life insurance company declares the maturity age till which the insured can avail life insurance coverage.
This is the amount that the insured must pay to the life insurance company regularly to ensure that the policy stays active throughout the policy tenure. The insurance company ensures complete coverage and seamless claim settlement in return of nominal premium that it charges regularly from its customers. The insured may choose to pay the premium amount monthly, quarterly or yearly depending on their convenience and the premium payment mode allowed by the insurer.
To ensure seamless life coverage throughout the entire policy period, it is important that the policyholder continues to pay the premiums regularly. However, the policyholder may choose to pay premiums either monthly, quarterly or annually. This is also called the premium payment mode wherein the customers may choose to pay the premiums as per their convenience. In some cases, there are some insurance companies that mandate their customers to pay premiums only once a year, i.e., yearly.
Financial security is a subjective concept and some customers may look for ways to enhance it by adding add-on covers to the life insurance policies they want to buy. These add-on covers, also called riders, have to be chosen at the time of buying the policy or at the end of each year during the policy period. These riders are bought to augment the effectiveness of the basic life insurance policy by paying charges over and above the basic premium rates. The different types of riders include Accidental death rider, Critical illness rider, Waiver of premium rider, Permanent & partial disability rider and Income benefit rider.
Death benefits or sum assured is the amount promised by a life insurance company to hand over to the nominee or dependents in the event of the sudden death of the policyholder (or insured). Death benefits are chosen after taking into consideration potential expenses, existing liabilities and the liquidity of current assets so that the dependents continue to remain free of financial strain even after the death of the insured. Most people misconstrue death benefits similar to the sum assured. However, death benefits may be also more than the sum assured as some policyholders pay extra for rider benefits to enhance the policy efficacy.
Some life insurance policies act like fixed savings plans by guaranteeing a fixed maturity amount at the end of the policy period. Also called endowment plans by some, the insurance company pays survival benefits to the policyholder on completion of the predetermined number of years under the policy.
In insurance, the chances of mis-selling are high. The free-look period is the phase that is allowed to customers to decide if they wish to continue the policy or discontinue paying for the same. Furthermore, if a customer may return the policy on finding that the policy is not in sync with the requirement. Post return of the life insurance policy, the insurance company returns the premium paid minus the amount spent on medical examination, if any, charges on stamp duty and other associated charges. As per the Insurance Regulatory Development Authority of India (IRDAI) guidelines, the insurance company has to ascertain that the policyholders have 15-30 days to access the policy document.
Premiums must be paid regularly and on time. However, in some instances, the policyholder may miss out on paying the premiums which further the chances of policy termination. To avoid such a possibility, the insurance company ensures a grace period of 15-30 days to make the premium payment. While customers paying monthly premiums are allowed a grace period of 15 days, those paying premiums in annual mode avail a grace period of 30 days. However, non-payment of the premiums during the grace period may result in policy lapse
Not all plans may seem as attractive as when they were bought. This explains why many policyholders decide to discontinue the plan before the maturity date. The amount that the life insurance pays to the policyholder is called the Surrender Value. However, different life insurance companies in India have varying terms and conditions and, hence, care must be taken to check the amount of maturity amount that would be credited as surrender value.
Not all life insurance policies are terminated on the non-payment of premiums. Some insurance companies allow their customers to convert their existing policies into paid-up plans on non-payment of premiums after a certain date. Also, the insurance company reduces the amount of sum insured in accordance with the number of premiums paid. The additional benefits are added to the reduced amount of sum insured and paid to the policyholder as the paid-up value.
Some life insurance companies allow a grace period to pay premiums that have got missed. Non-payment of the premium charges may result in policy lapse. However, some policyholders may insist on continuing the policy. The insurance company provides an option to the policyholder to re-activate the lapsed policy. However, application for renewed continuity must be done within a specific period post completion of the grace period. This specified period is called the revival period.
Buying a life insurance policy means that the insurance company assumes the risk on your life in lieu of nominal premium charges. The job of evaluating the extent and quantum of risk involved in the insurance is gauged by underwriters. The risk assessment procedure starts before the policy is issued and ends with claim settlement. No policy can be issued without the approval of the underwriters, which further explains their importance. Also, claim benefits are paid after clearance from the underwriters.
One of the benefits of buying life insurance is that it includes tax benefits too. Policyholders paying premiums towards the policies can avail deductions up to Rs 150,000 under Section 80C while the sum assured received by the policyholder or the nominee is exempt under Section 10(10D) of the Income Tax Act 1961.
Not all kinds of claims are admissible under a life insurance policy. This means that a policyholder cannot seek claims against incidents that are listed under policy exclusions. The list of exclusions varies across different life insurance companies in India and must be read carefully before buying the policy. The common exclusions under any life insurance policy are:-
Not all policyholders survive the policy period, which makes the life insurance policy more valuable for the nominee. In the event of the sudden death of the policyholder, the nominee needs to file a claim, fill in necessary papers and submit documents to receive the claim amount. This entire process from the filing of claim until the receipt is called the claim process.
The important steps involved in the claim settlement process include:-
Buying a life insurance policy is futile if the policyholder or the nominee continues to be unaware of claim settlement and associated details. While selecting the right insurance policy is an essential element of risk planning, timely claim settlement is an important element of risk management. This explains why the life insurance companies in India publish their respective claim settlement ratios on their sites. It is always beneficial to opt for a life insurance company with the highest claim settlement ratio. The ease of claim settlement is another deciding factor while choosing a life insurance company in India. While most companies aim at easy and timely claim settlement, the quick and untimely death of the policyholder may cause a company to investigate the cause of death, thus, delaying the claim settlement process.
The importance of buying a life insurance policy is often underestimated. However, increasing awareness of the life insurance concept has resulted in many people opting to pay for life insurance policies sold by various life insurance companies in India. More important is the need to understand the various terms associated with life insurance to ensure the purchase of the right life insurance policy.
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