Nmims Raip Lecture 5

Life Insurance ProductsLife Insurance Products

� 3 types of life insurance policies

– Pure Insurance (Risk Cover): provides life insurance protection for a specific period of time

– Combination of Insurance + Investments: in – Combination of Insurance + Investments: in addition to life insurance protection, it also builds internal cash values

– Pure Investments(Annuities): insurer pays fixed sum of money periodically, while insurer will give provide regular pension in return


�Pure Insurance

–Term Insurance Plans

�Level term

�Decreasing term�Decreasing term

�Increasing term

�Renewable term

�Convertible term

�Term insurance with return of premium

Life Insurance ProductsLife Insurance Products�Level term: Sum Assured (SA) same and uniform throughout term of policy, in case of death anytime during term, SA is payable.

�Decreasing term: Premium remains �Decreasing term: Premium remains constant, but benefit payable decreases with time: for mortgage

� Increasing term: premium and benefit increases with time, wherein the increase could be linked to inflation index or fixed %


�Renewable term: policy is issued for fixed term, with option to policy holder to renew without providing proof of health status

�Convertible term: policyholder has option to convert his term insurance to a to convert his term insurance to a permanent insurance plan without undergoing medical test

� Term insurance with return of premium: same as level term, except policyholder on survival gets back full premium paid


� Insurance + Investments: provide insurance protection as long as policy remains in force and it also builds cash value (surrender value)

–Whole life policy–Whole life policy

�Ordinary life insurance:

�Limited paying life insurance

– Endowment Policy

– Money Back Policy

– Unit Linked Policy


� Whole life policy: Cover is provided for your entire life, regular premiums paid until death, used more for estate planning

� Ordinary life insurance: provides

protection till age 100, constant protection till age 100, constant

premiums throughout life of term,

investment element

� Limited paying life insurance: provides

lifetime protection, premiums only for

limited term


� Endowment Policy: SA is payable either on death or on survival at end of policy term, low returns

– Without profit: on maturity/death, SA + loyalty

bonus is paid, loyalty bonus is one time paid as a

% of SA for staying in the plan through its term, % of SA for staying in the plan through its term,

relatively lower premium than with profit

– With profit: SA + reversionary bonus is paid(share

of profits declared every year) + loyalty bonus is

one time paid as a % of SA for staying in the plan

through its term. Note that reversionary bonus are

of 2 types: Assured, Non- assured:


� Money Back Policy:

– Survivor benefit paid periodically (every 4 or 5 years) + maturity benefit if insured survives. On death full SA is paid to insured.

� Unit Linked Policy:

– Combination of term and mutual fund, – Combination of term and mutual fund, insured can decide where his premium is to be invested, on death/maturity either:

1) SA + value of units at the prevailing NAV is paid to insured OR

2) SA or value of units at the prevailing NAV whichever is higher is paid to insured


� Pure Investments

–Annuities/Pension plans:

�Can be immediate annuity or a

deferred annuity plandeferred annuity plan

�Premium can be paid regularly or as

lumpsum one time

�Can be traditional policy or ULIP

�May or may not offer life cover


�Riders: Special provisions or group of provisions that may be added to policy to expand or limit the benefits otherwise payable.the benefits otherwise payable.

–Policy rider

–Benefit rider


� Policy rider: gives additional benefits that supplement basic benefit of SA

�Days of grace: allows additional grace time to policy holder to pay premium

�Revival of policy: many policies allow �Revival of policy: many policies allow revival of lapsed policy on payment of outstanding premium along with interest, some times with medical test also

�Non-forfeiture regulation: even if all premiums have not been paid, but sufficient premiums paid such that policy acquires surrender value


� Benefit riders: extra benefit by paying enhanced premium

1. Critical illness cover rider: Additional

cover for risk of contracting critical

illness. Mostly extra cover is equal to illness. Mostly extra cover is equal to

or 50% of SA of policy and is paid on

diagnosis. 80D deduction


2. Medical expenses rider: covers risk towards hospitalization other than critical illness. Tax deduction under 80D

� Hospital cash benefit rider: SA + daily � Hospital cash benefit rider: SA + daily compensation (restricted to max of sum assured). Premium payable depends on SA + age of insured

� Major surgical assistance rider: financial assistance in case of surgery (20-50%) of riders SA.


3. Disability benefit rider:

� Disability/dismemberment rider: Benefit

on permanent disability due to accident.

Paid in installments to provide a stream

of income. of income.

� Waiver of Premium (WOP): gets

activated when policy holder becomes

disabled or unemployed due to injury or

sickness. Premium is waived till he

becomes employed again.


4. Miscellaneous riders:

� Accident death benefit: on death due to accident. In case of death in mass transit system twice the accident cover is paid, 80C deduction

� Level term cover rider: option to increase life cover in non-term plan upto SA on base policy. Offers death protection alone, useful when carrying Offers death protection alone, useful when carrying large debt and to insulate dependents from financial liability, 80C deduction

� Guaranteed insurability option rider: insures one’s insurability at different life stages without undergoing medical checkup at original premium rate. Does not qualify for any tax rebate or deduction

Life Insurance Terms/ConceptsLife Insurance Terms/Concepts– Review of Concepts:

1. Nomination

2. Loans on policies

3. Surrender value

4. Non-early death claimNon-early death claim

5. Early death claim

6. Maturity

7. Contribution clause

8. Settlement relaxations

9. Policy revival

10. Grace period

Life Insurance Terms/ConceptsLife Insurance Terms/Concepts

–Loan on policies:

�usually 85% of surrender value is given as loan

�Loan can be paid anytime during term of policy

Interest rates vary as per company�Interest rates vary as per company

�if loan not repaid during term or early claim, outstanding will be deducted from claim

�If due to non-payment of premiums, if loan and interest becomes > surrender value, foreclosure action is taken


–Surrender Value:

� a policy can be surrendered if kept in force for atleast 3 years

�For bonus eligibility, policy should be in force for atleast 5 years

–Non-early death claim: claim after 3 –Non-early death claim: claim after 3 years from commencement of policy, minimal documents required

–Early death claim: death within 3 years from commencement of policy, additional documentation required.


–Maturity:

�if the Assured survives policy, then to

claim maturity amount you need to

submit policy document, assignment, if

any, age proof if not submitted earlier

–Contribution:

�same policy taken from multiple insurers,

loss occurs, insurers split the claim

amount in proportion to their share


– Settlement relaxations:

Within 3 years from date of commencement

no claim acceptable in respect of lapsed

policy or death of the assured Except:

� Premium paid for >= 3 years & then not � Premium paid for >= 3 years & then not

paid, nominees get proportionate paid up

value.

� Event of death <= 3 years & policy under

lapsed position, nothing payable.

Life Insurance Terms/ConceptsLife Insurance Terms/Concepts� If min. 2 yrs premiums are paid and if death

occurs:

– Within 3 months from date of first unpaid premium: full SA with bonus payable subject to recovery of premium already fallen due and premium falls during policy anniversaryanniversary

– Between 3 – 6 months from fully unpaid premium: only 50% of basic SA is payable. No bonus is paid and no arrears of premium are recovered

– 6 months – 1 year: only notional paid up value is given


– Policy Revival: Can be done within 5 years from date of first unpaid premium.

Five revival schemes:

1. Ordinary revival scheme

2. Special revival scheme

3. Revival by installment method

4. Loan-cum-revival scheme

5. Survival benefit-cum-revival scheme

Tax Benefits of InsuranceTax Benefits of Insurance

– Section 80C deduction: Upto 1 lac for premium paid on life of self, spouse, children including adult children and married daughter,

– Section 80D deduction: for medical insurance and all health riders upto 15000 pa (Rs. 20000 for senior citizens)

– Section 80DDA: <= when contribution of Rs. 40000 – Section 80DDA: <= when contribution of Rs. 40000 for is made for maintenance of a handicapped dependent (LIC’s Jeevan Aadhar plan).

– Section 10(10D): Any sum received under insurance policy including maturity bonus etc is exempt. If annual premium is > 20% of SA on maturity, then differential between SA & Premium paid is taxable

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Nmims Raip Lecture 5