Life Insurance (39)
Life insurance (or life assurance) is a contract between an individual (policy owner) and the insurer, where the insurer agrees to pay the beneficiary a sum of money (generally referred to as Sum Assured) upon the death of the individual. In return for this obligation on part of the insurer, the policy owner agrees to pay a stipulated amount as premiums over regular intervals or as a lump-sum amount.
Most contracts have specific exclusions that are included as terms of the contract so as to limit the liability of the insurer.
Simply put, when an individual buys a life insurance policy:
• he is referred to as policy owner / policyholder
• he agrees to pay a certain amount of money (premiums) to the insurer for a certain period of time
• the insurer agrees to pay a certain lump-sum amount to a person nominated by the policy owner upon the death of the policy owner
• in some forms of life insurance products, the insurer also agrees to pay a lump-sum amount on the completion of the term of the policy upon the non-occurrence of the insured event i.e. on the survival of the policy owner
Life Insurance contracts, therefore, can broadly be classified as being:
1. Protection oriented policies: One of the most basic forms of life insurance, these products are primarily designed to cover the life of the insured and provide for a lump-sum benefit on the occurrence of death but do not pay any survival benefits i.e. no payments are made if the policyholder survives the term of the insurance contract.
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. These product, therefore have an associated survival benefit i.e. if the policyholder survives the term of the policy, then a payment is made to the policy owner at the end of the policy term. This payment is usually equal to or more than the sum total of premiums paid by the policy owner to the insurer but may not always be so.
Life insurance provides an individual with means to mitigate risks associated with occurrence of adverse events such as death, critical and /or terminal illness. An individual can choose to provide financial security to self and/or his dependents such that there is a benefit provided by the insurer in case of such events in return for premiums paid by the policy owner.
One of the key reasons why one should consider life insurance is to provide financial support and a means to replace lost income for your dependents and family in the event of your death, especially if you are the primary earner for the family. Life insurance can thus be used, amongst other things, to ensure:
• that your family can continue to lead their lives with a lifestyle they are accustomed to;
• your debts are paid off without adding an additional financial burden on your dependents
• key events and requirements of your family such as children’s education and marriage are provided for
While there can be no replacement for the loss of a loved one, with the right life insurance product you can atleast minimise the financial hardships and strife that your family may be exposed to.
Having provided for adequate financial protection for the family, one should also consider savings oriented life insurance products to augment his savings pool with a view to have a disciplined approach to long term savings to meet various life stage requirements.
The amount that can be considered as an adequate insurance will differ for each individual but the guiding principles are pretty much the same for all.
The key reasons why one should consider life insurance are:
• To provide financial support and a means to replace lost income for your dependents and family in the event of your death, especially if you are the primary earner for the family.
• To ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents.
• To provide for key events and requirements of your loved ones like a Child’s marriage or education.
The adequacy of your life insurance cover should taken into account which of the above needs you are trying to provide for and the amount of insurance that will be appropriate for each need. While some may recommend the use of ‘rules of thumb’ such as 10-15 times of your annual income being the insurance cover that you should consider, such rules may not be suitable under all circumstances and should be used with care. The best way to determine your insurance needs to determine the financial requirements of your dependents for each of the above mentioned needs.
(Please see My Life Insurance calculator to help you determine your insurance need)
Needless to say, the risk cover that you need will be reduced to the extent of any savings / assets that you may already have to offset some of the liabilities you are trying to provide for.
Having decided the amount of insurance that you want, however, is just the first albeit important step. One then needs to figure which product to buy. Here is where one should try and obtain independent, unbiased and factual information about best products from leading insurance companies in India to determine which ones suit your requirements at the lowest cost.
While there can be no replacement for the loss of a loved one, with the right life insurance product you can at least minimise the financial hardships and strife that your family may be exposed to.
Life insurance products can broadly be categorised as being:
1. Protection oriented policies: These products are primarily designed to cover the life of the insured and provide for a lump-sum benefit in case the life insured dies. Such products are generally referred to as ‘Term’ plans. Some key characteristics of ‘Term’ plans can be summarised as:
• Lump-sum benefit paid to designated beneficiaries only in the event of the policyholder’s death
• The lump-sum to be paid on policyholder’s death is significantly higher than what would be payable under a savings oriented plan for the same amount of premium BUT No survival benefits are available i.e. no payments are made by the insurer if the policyholder is alive when the policy completes its term
• If the policyholder stops paying the premiums when due at any time during the term of the policy, the policy ceases to have any value
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. Some key characteristics of these plans can be summarised as:
• These products are primarily savings plans with attached life insurance
• Part of the premiums paid by the policyholder are treated as savings while the remaining amount is used to buy life insurance
• The policy will pay a lump-sum in case the policyholder dies during the term of the policy or will pay out the amounts saved if the policyholder is alive when the policy expires
• The lump-sum to be paid on death of the policyholder is significantly less than what would be available under a ‘Term’ plan for the same amount of premium. This is because a large part of the premium is being treated as savings and only a portion being utilised to buy life insurance
Investments / Savings oriented products can further be classified as being
o Unit Linked Insurance Plans
o Traditional Plans
A joint life policy can be either a term insurance or an endowment / ULIP policy.
A joint life policy essentially provides for coverage for two life’s, typically a person and his/her spouse, where the policy benefits are payable on the first death of one of the two joint life assured.
On survival, the maturity benefits are paid jointly in the names of both life assured.
A joint life policy makes sense when both spouses are dependent on each other and a similar risk cover is required on both to ensure that the family’s financial security is maintained in the event of the unfortunate death of any of the two. In such a case, a joint life policy that makes the benefit payments on the death of any one of the two may turn out to be cheaper than taking two similar and separate life insurance policies.
However, the policy will pay out on the death of the first life assured. In the event of death of both joint life assured, the nominees or next of kin would be paid the benefits only on the first death or of a single sum assured and not twice.
Some policies will offer an Accidental Death Benefit Rider that will cover both Life Assured in the event of death by accident.
The insurance type that best meets your requirements is largely dependent on the need you are trying to fulfil. If securing your family’s financial future is the primary need, then you should actively consider a ‘Term’ plan. From a level of importance perspective, this need is the one that you should make sure is taken care of at the earliest. If however, there is already adequate financial protection available for your dependents and your primary need is long term savings for capital appreciation and / or conservation, available options under savings oriented plans should be considered.
How much you pay for a life insurance policy is primarily dependent on the following:
• Your age at the time of purchasing the policy. Typically premiums or the cost of insurance increases with the age of the individual at the time of purchasing the policy
• Your health condition and family history at the time of purchasing the policy. Life insurance companies evaluate your medical history and current health status through medical questionnaires and / or medical examinations that help determine the associated risk to your health and life. If the evaluation indicates a higher degree or existing or potential risk, then the premiums could be higher.
• Premiums could also depend on your lifestyle and occupation which could again indicate an underlying degree of risk associated with your life. For e.g. insurance companies may charge a higher premium for people who actively participate in Skydiving activities.
Different insurance companies have different methodologies to price risk taking into account the above parameters and not surprisingly one would invariably find a wide range of products available with a wide range of premiums. Click here to compare best life insurance products from leading life insurance companies in India across various life stage needs.
One of the key factors to keep in mind when buying life insurance is tax. Although insurance should not be bought to save tax, the tax savings provided under various sections of the Indian Income Tax Act, make buying insurance “cheaper” as well as an efficient investment for long term savings.
Tax Benefits for Life Insurance:
On Premiums: Section 80C of the Income Tax Act is an effective way for the salaried person to reduce tax liability. Under this section, investments made in the specified instruments are subject to rebate. Currently, the amount available for rebate under section 80C is Rs. 150,000 which can be invested in life insurance premiums, pension superannuation fund, employee provident fund, equity linked mutual fund schemes (ELSS), National Savings Certificates and public provident fund (maximum Rs 100,000). The amount invested in these instruments is eligible for rebate through deduction of the amount from gross taxable income.
The benefits available on eligible categories of investments are as follows:
1. Life Insurance Premium: paid by an individual in respect of
b) his/her spouse, and
c) any of his/her children.
Premium amount paid should not exceed 20% of the sum assured.
2. Pension Plans: Payment made by the individual in respect of a non-commutable deferred annuity (Pension Plan) on the life of:
a) the individual himself,
b) his/her spouse, and
c) any of his children
Note u/s 80CCD(1) Contribution to National Pension Scheme is available for deduction subject to the overall ceiling and maximum10% of salary.
3. Government Employee – deduction for Pension: Sum deducted in accordance with the terms of services from the salary payable by or on behalf of the Government for the purpose of securing a deferred annuity or making provision for his spouse or children.
The sum deducted should not exceed 1/5th of the salary.
4. Provident Fund: Contribution by the employee towards a statutory provident fund or recognized provident fund. Available only to an Individual.
5. Public Provident Fund: Contribution to a public provident fund by an individual or HUF. The contribution may be made to an account standing in the name of:
a) the person himself
b) his/her spouse, or
c) any of his children.
6. Superannuation Fund: Contribution by an employee to an approved superannuation fund
7. National Savings Scheme: Contribution by an Individual or HUF
8. National Savings Certificates: Contribution by an individual or HUF. Any interest accrued on these certificates which is deemed to be reinvested also qualifies for deduction.
9. Annuity Plans: Payment made by an individual or HUF for a notified annuity plan issued by an Insurer.
10. Equity Linked Savings Scheme: Subscription, by an individual or HUF to units of an Equity Linked Savings Scheme notified under section 10 (23D)
11. National Housing Bank: Subscription by an individual or HUF to a deposit scheme or contribution to any pension fund set up by the National Housing Bank.
12. Long term Deposits: Term deposit for a period of at least 5 years with a scheduled bank.
Premiums paid for Health Related Riders: Some of the critical illness, hospitalisation cash and other health related riders attached to a Life Insurance policy may also be eligible for rebate under section 80D of the Insurance Act.
Section 80D provides for deduction in respect of health or medical insurance premium. This deduction is available to both Individuals & HUF. Rs.25,000 is the maximum amount deductible during the year for an individual and Rs 30,000 for a Senior Citizen.
Deduction under section 80D is available for an Individual for insurance premium paid for self, spouse, dependent parents or dependent children. In the case of HUF, deduction is available for premium paid for any member of the HUF.
However, the condition for applicability of deduction is that the premium must be paid by cheque in the previous year out of the income chargeable to tax.
Death Claims and Maturity Benefits: Life Insurance Policies are currently under an EEE regime i.e. that the Premiums Paid, Income earned by the Investments, and payment of Maturity proceeds or claim are all exempt “E” from tax.
Payment by an Insurer on maturity and death claim are exempt from Tax for all eligible Life Insurance policies under section 10(10)(d) of the Income Tax Act. The only policies that are not eligible for exemption on payment on maturity or claim are Single Premium Policies or Policies where the sum assured was less than 5 times the Premium paid.
Pension Plans operate under an EET regime i.e. the Premiums paid for Pension Plans and the income earned by the Investment are exempt from Tax. Pension Plans have three components – a life insurance, a Pension endowment and a Pension annuity. As other Life Insurance Plans, Death benefits paid under a life insurance rider of the Pension Plan are exempt from Tax. A Pension endowment is limited to 1/3rd of the total accumulated amount, and is exempt from tax on maturity. A Pension annuity is clubbed with the individuals other income and is taxable at the normal rates of tax applicable.
However, please note that the provisions of the Income Tax Act given above are applicable for the Financial Year 2017-18; and that these tax provisions change from time to time.
Terms insurance policies are ‘protection oriented policies’ that provide a risk cover on the life of the insured. These policies do not accumulate any cash value, but provide life insurance for a specified period of time for a set amount of premium. There are no survival benefits associated with a Term insurance policy. In other words, the insured amount associated with a Term insurance policy is paid out to the nominees only in the event of policyholder’s death but nothing is payable to the policyholder if he survives the duration of the policy.
Since these policies cover only the risk element and provide no savings or wealth accumulation benefits, Term plans are amongst the cheapest form of insurance and should be actively considered to provide adequate financial protection to your family when you are not around.
It is advisable that when choosing how much insurance or risk cover to purchase, one should ensure that one’s needs for financial protection are adequately met. Please click here to see how to decide the right insurance amount for yourself.
Some of the variants of Terms plans that are available in the market are Level Term Plan, Mortgage Term Plan and Term Return of Premium Plan
As the name suggests, this insurance policy provides a risk cover to people who have mortgaged their property in the unfortunate event of death prior to the loan being repaid. The sum assured is usually the same as the policy holder’s mortgage amount against his property but in some of the more popular variants the Sum Assured reduces as the principal amount of loan gets repaid.
This variant of term plans offers a survival benefit in the form of premiums paid by the policyholder during the term of the policy being returned at the end of the policy term. While this feature may seem attractive, one needs to bear in mind that by virtue of having this feature these plans are more expensive than Term plans and may not be as beneficial as taking a stand alone Term plan together with investing the amount you would save on the reduced premiums.
• One of the key reasons why one should consider Term insurance is to provide financial support and a means to replace lost income for one’s dependents and family in the event of death, especially if you are the primary earner for the family.
• At the same time, it can also be used to ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents if and when you are not around.
• In addition to this you could use it as a tool to provide for financial needs related to key events and requirements of your loved ones like a Child’s marriage or education.
• While there can be no replacement for the loss of a loved one, with the right life insurance product you can at least minimise the financial hardships and strife that your family may be exposed to.
• The lack of survival benefits should not be a deterrent in buying this product since the benefits and financial protection being secured for your family far outweigh the minimal cost of this protection.
• Term Insurance is a ‘must-have’ if you have a family that is financially dependent on you and if you are the primary source of income for your family. There’s never really a good time to die, but dying during one’s earning years is particularly burdensome to those who depend on us for income and support. Not having you around in such a scenario can impose a significant financial burden on your loved ones especially if you have outstanding liabilities as well such as Home Loans, Car Loans etc.
• It may not be as important a product to have if you are single with no financial dependents and limited or no liabilities.
• It is always better to start your coverage at an earlier age. With age, the associated risk to our life only increases, consequently making insurance more expensive with age.
• If securing your family’s financial future is a primary need, then you should actively consider a Term Insurance plan. If however, there is already adequate financial protection available for your dependents you may want to look at enhancing your long term savings and investments portfolio.
The amount that can be considered as an adequate insurance will differ for each individual but the guiding principles are pretty much the same for all. As discussed above, the key reasons for why one should consider Term Insurance are:
- to provide financial support and a means to replace lost income for your dependents and family in the event of your death, especially if you are the primary earner for the family.
- to ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents.
- to provide for key events and requirements of your loved ones like a Child’s marriage or education.
The adequacy of your life insurance cover should be a derivation of which of the above needs are you trying to provide for and what are the associated amounts that will be appropriate for each such need.
While some may recommend the use of ‘rules of thumb’ such as 10-15 times of your annual income being the insurance cover that you should consider, such rules may not be suitable under all circumstances and should be used with care. The best way to determine your insurance needs to determine the financial requirements of your dependents for each of the above mentioned needs.
Needless to say, the risk cover that you need will be reduced to the extent of any savings / assets that you may already have to offset some of the liabilities you are trying to provide for.
• Term Return of Premium (TRoP) plans is a variant of Term Insurance that not only offer financial protection but also return your premium in case you survive the term of the policy. While this feature of ‘return of premiums’ may seem attractive, one should bear in mind that this makes the product more expensive than pure Term Insurance Plans (without any return of premium) and depending on the premium being charged may or may not really be beneficial.
• Take an example of a 35 year old male taking an insurance cover of Rs. 20,00,000 for a term of 20 years. Let us assume his premium for a Term Insurance plan is Rs. 6,000 and for a TRoP plan is Rs. 17,000 (an example that is fairly close to two such products available in the market today).
• In both cases, the risk cover on his life is the same i.e. Rs. 20,00,000 (the amount that would be paid to his dependents in the case of his death). However, if he buys the Term plan, he ends up paying Rs. 6,000 every year for 20 years with no survival benefits while in case of TRoP he pays a higher Rs. 17,000 every year but gets back Rs. 3,40,000 at the end of the 20 year period (17,000 times 20).
• Since there is an additional Rs. 11,000 (17,000 minus 6,000) that is being paid every year when choosing a TRoP, this choice can only make sense if one cannot deploy this additional amount elsewhere to earn more than Rs. 3,40,000 in 20 years. Rs. 11,000 invested at a minimal rate of 4.5% can fetch an amount greater than Rs. 3,40,000 in 20 years time.
• One needs to make sure that the opportunity loss on the extra premium under TRoP is not higher than what will come back as return of premium.
• When choosing between the two, consider various alternate investment options available for the extra amount you are paying for a TRoP. If these options give a return that is lower than what you would get through the ‘return of premiums’, do consider TRoP but if not, then Term Insurance plans should be the preferred option.
Unit linked plans are life insurance plans that combine protection with investments. Although insurance plans that provide investments & savings have long been popular, both for financial planning and tax savings reasons (see Tax Benefits on Life Insurance), Unit Linked Plans are different from the traditional endowment plans. Traditional endowments are restricted in their investments by the Insurance Act to invest predominantly in government and debt instruments. Traditional Endowments have been criticised due to the lack of transparency and lower investment returns.
Unit Linked Plans, or ULIPs, combine protection with investments which are similar in structure to mutual funds. On the death of the life insured, the ULIP plan will provide for the payment of the higher of the sum assured or the fund value of the policy, to the policyholders nominees or next of kin. In the event of maturity of the policy, the ULIP plan will return the fund value to the policyholder.
Like mutual funds, Unit Linked Funds are free to set their own asset allocation and available across the risk-return spectrum including debt funds, balanced, equity funds and index funds. A policy holder thus has far greater control over where his premiums are invested.
A ULIP Plan will provide a policyholder with one or more choices of funds to invest in. The plan will charge a premium towards protection and allocate the balance of the premium paid towards investment by buying units of the fund chosen by the policy holder. These units will be bought at the NAV of the chosen fund; and the value of the policy (the fund value) will be derived by multiplying the number of units accumulated by the current NAV.
ULIP plans offer a far greater degree of transparency to customers on charges, investment allocation and investment performance.
The IRDA has mandated that detailed illustrations should be provided with each policy to highlight customer benefits and returns. The Life Insurance Council has set that the rate of returns for these illustrations at 6% and 10% per annum. Please note that these returns are indicative returns to show a policyholder the impact of investments and charges over the term of the policy at these broad rates. The actual performance of the ULIP Fund will vary depending on the asset allocation and fund type selected by the policyholder e.g. bond / income funds may have lower but more steady returns over a longer period whilst an equity fund may have higher potential reward as well as risk, and higher volatility. It is important that a policyholder select the ULIP funds carefully based on their risk appetite and tolerance.
IRDA regulations have capped charges on Unit Linked Products i.e. limiting the total charges that an insurer can deduct on a policy and limiting the surrender penalties for early withdrawal.
Endowment plans are life insurance plans that provide protection as well as some returns on the premiums paid by the policy holder. The endowment plan provides for payment of the sum assured on the death of the life insured, to the policy’s nominees or the next of kin of the insured. The premium is paid for the defined Sum Assured and term of the policy.
Part of the premium paid is adjusted towards the risk premium or mortality charge for the sum assured; and an amount adjusted for the insurers expenses. The Insurer will invest part of the premium for the policyholder. Investments by traditional plans are governed by the Investment Allocation guidelines of the Insurance Act, which mandates that most of the investment allocation is towards bonds and fixed income. Exposure to equities is limited to a maximum of 35 percent of the funds under management.
Variant to an endowment plan is a money back plan.
There are two types of endowment plans – with profit and without profit.
With Profit plans entitle the policyholder to share in the profits earned by the Insurer. Under Indian insurance regulations the with profit plans are entitled to 90 percent of the profits earned by the Insurer in it’s with profit pool.
There are two variants of with profit policies:
Reversionary Bonus Policies: The insurer will usually announce a bonus rate for the policy at the end of each year. This bonus rate is typically slightly lower than the actual return earned by the Insurer in an effort to smoothen the annual bonus payout during the term of the policy and mitigate any risk from a market downturn. Once declared, it is highly unusual for an Insurer to reduce the bonus declared – although this is possible and provided for in the event of extreme market movement.
Additionally, insurers can at their discretion announce a loyalty addition or a terminal bonus on the policies.
On maturity of the policy (if the life insured survives the policy term) the value of the policy will be paid to the policyholder. The value of the endowment policy is the premiums paid plus cumulative bonus paid by the insurer.
In the event of death of the life insured, the insurer will pay out the sum assured together with accumulated bonuses till date. Since the payout or returns are not guaranteed, these policies are cheaper than guaranteed addition policies.
Guaranteed Additions Policies: These are assured return policies where the insurer will declare at the outset the guaranteed additions to the policies, which is declared as a percentage of sum assured or a fixed amount per Rs 1,000 sum assured. The guaranteed additions will accumulate over the policy term and will be paid out at the time of maturity.
In the event of death of the life insured, the sum assured plus the guaranteed additions accumulated till date will be paid out to the nominees or next of kin.
Guaranteed additions policies are not popular with insurers these days to the higher risk associated with payment of guaranteed additions with investment under performance.
Without profit plans are endowments where the policyholder is not entitled to a share of the insurer’s profits. Therefore, these plans are available for a lower premium compared to with profit plans.
On maturity, the policyholder will receive the sum assured and accumulated loyalty additions as a return on investment. The loyalty addition is a percentage of sum assured paid to the policyholder for continuing with the plan through the term of the policy.
Money back plans are variants to the endowments plans. The key difference is that in an endowment plan on maturity the sum assured and bonuses are paid to the policyholder on maturity; and in a money back plan the benefits are paid out periodically during the term of the policy.
The money back plan may provide for a part of the sum assured to be paid back at regular intervals during the term of the policy.
Any remaining sum assured, after paying the periodic money back payments, and accumulated bonuses are paid at the maturity of the policy.
In the event of death of the life insured, the full sum assured is paid to the nominee or next of kin. That is to say that the sum assured is not reduced by the amount paid during the term of the policy for the purposes of death benefit.
Unit Linked Plans are insurance plans that are market linked and offer customers features combining protection with investments; as well as transparency and flexibility in terms of charges, fund options, etc. For details refer to Unit Linked Plans
Traditional plans are called thus as they refer to Life Insurance plans that were “traditionally” sold before the advent of the Unit Linked Plans. Collectively they refer to the term, endowment and money back plans. For details refer to Term, Endowment and Money Back Plans
Child Insurance Plans may be both unit linked or traditional plans. Child Plans are typically designed to provide both protection (on the life of the parent) and savings elements to assure that the child’s future requirements may be provided for. These plans are usually for a period of 5-20 years, and often used by parents to accumulate an investment / saving for a future need, for example, the child’s education or marriage. The protection element of the plan provides the assurance that the funds (sum assured) will be available even in the event of the parent’s death.
Many child plans will have inbuilt or attached Riders that provide for additional benefits. For example a Waiver of Premium Rider.
Pension Plans are retirement oriented plans that are structured to either help customers accumulate a corpus or fund for their retirement, or an annuity to provide regular income during the retired years.
Pension Plans allow for accumulation for retirement on a tax efficient basis under provisions of section 80CCC and 10(10)(d) of the Income Tax Act. (see Tax Benefits on Life Insurance).
During the accumulation phase of a Pension Plan, Insurance companies invest the pension contributions and manage the investment for a fee. The type of investment depends upon the type of product selected by the policyholder. Both traditional and unit linked pension plans are available.
Use our retirement calculator to see what funds you will need for your retirement to maintain your lifestyle. For retirement, it is advisable to start saving and accumulating for pensions early. This is because starting early can make a very significant difference to how much corpus you will have available on retirement.
Starting early makes your money work longer and the compounding of income can increase your wealth significantly on retirement. You can use our wealth calculator with two scenarios – 20 years to retirement and 30 years to retirement to see how much difference a delay can potentially make to your target corpus.
The end result of a Pension Plan is an Annuity – a sum of money to be paid to the Policyholder every year.
There are two types of Pensions annuities, depending upon the timing of when the annuity will start – a deferred annuity or an immediate annuity.
In an immediate annuity, the policyholder will make a lumpsum payment to buy an annuity which will start in the same year as the policy. The lumpsum amount could be the accumulated pension amount or the superannuation fund or any other sum accumulated e.g. provident fund balance, which the policyholder would like to use to set up a pension annuity. The policyholder will need to decide the periodicity of the annuity e.g. monthly or quarterly or yearly; and the number of years for which the annuity is required.
In a deferred annuity, the annuity payments are deferred for a future date (after a number of years) and the interval time is used for accumulating a pension fund. This is called the accumulation phase of the pension plan. During the accumulation phase, the policyholder will make investments which will grow together with the returns on the investments to provide a lump sum on the maturity of the plan.
In a Pension Plan at least 2/3rd of the accumulated pension amount has to be utilised to buy an annuity. The policyholder is free to withdraw 1/3rd of the accumulated pension amount on a tax free basis under current provisions of the Income Tax Act.
Some pension plans will also provide a life insurance cover during the accumulation phase i.e. with the deferred annuity so that the policyholders dependents are provided the pension in the event of death of the pension policyholder.
There are two types of Deferred Annuity Pension Plans:
Unit Linked Plans
Like mutual funds, Unit Linked Funds are free to set their own asset allocation and available across the risk-return spectrum including debt funds, balanced, equity funds and index funds. A policy holder thus has far greater control over where his premiums are invested.
The pension premiums paid by a policyholder are used to buy units in the Pension Fund selected by the policyholder. These units are bought at the prevailing NAV for the fund; and on maturity the fund value will be paid to the policyholder by encashing the accumulated units multiplied by the then prevailing NAV of the units.
Under revised IRDA regulations, all Unit Linked Pension Plans have to provide a minimum guarantee of 4.5% per annum. This guarantee will apply during the accumulation phase. This is likely to impact on availability of fund choices as insurers will seek to minimise exposure to market risks, and consequently it is likely that investor choice will be severely restricted in Unit Linked Pensions from September 2010.
All Unit Linked Plan also have to offer a compulsory life insurance cover or health insurance cover with the Pension Policy.
The accumulated pension can be used to buy a pension annuity under the terms and conditions as applicable for the annuity at that time. Policyholders are free to buy the annuity from any Insurer.
Traditional or Non Linked Pensions
In a traditional plan, the Insurer will provide a deferred annuity by accumulating the pension contributions in a Pension Fund. The policyholder will not have a choice of funds to invest in and the insurer will invest according to the guidelines set out by the IRDA for traditional pension funds.
The Insurer may provide an annual accumulation of premiums together with bonus or with guaranteed additions. These guaranteed additions may be for the term of the policy or declared annually at the beginning of the year.
Please refer to terms and conditions carefully for specifications of guarantees offered.
Riders are typically additional benefits that you can ‘add-on’ to your basic life insurance policies for a small additional cost. Riders usually provide an additional cover or benefit associated with specific events or contingencies such as Accidental Death, Critical Illnesses, and Surgeries etc. The benefits associated with these riders could vary from an enhanced Sum Assured or risk cover to a Waiver of Premium in some cases.
Whether or not you need a specific rider is largely dependent on the need you are trying to fulfil and the cost of the rider. Different insurance companies have different terms and conditions for benefit payouts, inclusions and exclusions and it is important for you to review these to ensure you opt for the rider that best meets your requirements and is cost effective.
The needs of every individual vary – adding appropriate riders to your base insurance policies can ensure adequate coverage for you and your family at fairly affordable prices.
Accidental Death Benefit Rider: This rider provides you with an additional cover in addition to the Sum Assured of your basic policy payable to your dependents / nominee in case of death due to an accident. Although restricted to death on account of an accident, this rider could be a very cost effective mechanism to make a significant enhancement to your risk cover at a low cost.
Accidental Disability and/or Dismemberment Rider: You could insure against disabilities arising out of an accident by opting for this rider. In case of an accident resulting in total or partial disability/dismemberment during the term of your base policy, a Rider Sum Assured will be paid out to you while your base life insurance policy continues to provide you with a life cover. Though some companies offer a disability benefit only in case of permanent disability; there are riders that offer permanent and partial disability benefit in the event of an accident (with certain clauses that vary for every insurer). This can be an important risk cover to mitigate the financial hardships associated with a sudden and unforeseen accidental disability.
Waiver of the Premium Rider: If a policy holder is under any circumstances unable to pay his premiums (falls seriously ill or dies), the policy still remains active. The time period of premium waiver might vary depending on various product terms and conditions. The premium on this rider is set in accordance with the premium being paid on the base policy and other riders, if any. This rider proves to be most beneficial in case the premium on the base policy is relatively high or in products such as Child Plans where the purpose of the policy is long term savings to secure your child’s future.
Critical Illness Benefit Riders: This rider provides coverage against certain critical illnesses. Though the number and type of diseases covered under these riders are limited, yet the one’s covered, like cancer, coronary artery bypass, heart attack, kidney/renal failure, major organ transplant and paralytic stroke etc.; are those with fairly high associated medical treatment and hospitalization costs.
One of the attractive features under the critical illness benefit rider is that the policy holder gets an amount equal to the sum assured irrespective of the medical expenses on or after the diagnosis of the critical illness.
The critical illness rider is terminated once a critical illness is diagnosed. In some cases, the insurer will make a payment of sum assured for the critical illness rider with the main policy and terminate the underlying base policy. A plan that continues to give an insurance cover while charging a marginally higher premium, is always better than the one’s which terminate the base policy once a claim is made on the rider.
Hospital Cash Benefit Rider: This rider provides coverage for payment of medical bills paid on hospitalisation, subject to conditions and exclusions in the policy. The insurer compensates the insured for a fixed amount for each day of hospitalisation, subject to a maximum sum assured under the rider. Unlike the critical illness rider, the hospital cash benefit rider is not terminated on a claim being made; and can continue subject to the annual limit of the sum assured.
Level Term Cover Rider: This particular rider provides you the option to enhance your risk cover for a limited period up to a maximum sum equivalent to your base policy. It basically offers a death benefit only and helps the survivors to pay any unforeseen expenses or clear off all the liabilities of the policy holders. If you do not have adequate term insurance coverage and are in the process of buying a savings oriented or endowment plan, then you may want to consider this rider.
Double Sum Assured Rider: In case of an ill-fated death of the policyholder, this rider provides for an additional equal amount corresponding to the basic sum assured. As compared to opting for a larger endowment policy, you could double your life cover at a nominal cost with this rider.
Insurance policies are a promise for the insurer to pay a compensation “sum assured” to the nominees of the policy holder in the event of death of the life insured. However, the act of giving insurance is dependent on the Insurer who agrees to carry the risk in return for payment of a premium.
In some circumstances, an insurer may refuse to provide an insurance policy – for example due to medical reasons or due to a high risk occupation; or provide a policy subject to certain exclusions.
High risk occupations are those where the individuals, by the nature of their work, carry a risk of death. These could be armed service professions and professions or hobbies that have a high risk of death such as professional sky diving or mountaineering or motor racing.
Most Insurers do not cover the risk of death by suicide in the first year of the policy. In the event that a life insured commits suicide during the first year of the policy, an insurer can deny to pay the claim under the policy terms and conditions. This clause is designed to protect insurers from fraud.
Please check your policy terms and conditions for exclusions.
The life insurance policyholder has a legal right to appoint a person or persons to receive the policy benefits in the event of death of the life insured. Any policyholder, who is a major and the life insured under a policy, can make a nomination.
A nominee is the person designated by the policyholder to receive the proceeds of an insurance policy, upon the death of the insured.
Yes. A policyholder who is the life assured can change the nomination of the policy at any time till the maturity date. All insurance companies will have a designated form that will need completion and sent to the Insurer for notifying the change in nomination to be registered.
Nomination is an authorisation to receive the policy benefits in the event of death of the life assured. A nomination does not give the nominee an absolute right over the money received to the exclusion of other legal heirs, who may continue to have a legal and valid claim over the money so received by the nominee.
Nomination can be revoked or cancelled at any time by the policyholder at his/her will or by a subsequent assignment.
On the other hand, Assignment of an insurance policy is a legally valid and enforceable transfer or assignment of all the rights in the insurance policy by the policyholder in favour of the assignee.
What should one keep in mind while filing a life insurance claim? What documentation is required for making a life insurance claim?
Here are some key considerations that can help your dependents in the unfortunate event of having to make a life insurance claim:
- At the time of buying insurance policies make sure that you provide all your details to the insurance company truthfully, especially your health related details. Any misinformation or misrepresentation can potentially lead to a rejection of the insurance claim defeating the very purpose for which you bought insurance.
- Do also make sure that you pay your premiums regularly to keep the insurance policies active.
- Since the prime objective of buying a life insurance policy is to provide financial protection for your dependents, do ensure that for all your life insurance policy contracts you have designated the person you wish to receive the claim proceeds as your nominee.
- Policy Contract: One of the main requirements for filing a life insurance claim is the submission of the original policy contract with the life insurance company. Ensure that all your policy contracts are safely maintained and that your nominee is aware of which policies are active and where the policy contracts are being stored or maintained by you.
- While keeping an updated list of your life insurance policies handy, you may also want to consider including your Car Insurance policy details. Your car insurance policy also covers you for a certain amount of Sum Assured (maximum Rs. 200,000) which can be claimed in the event of death on account of an accident involving the car that is insured.
While most insurance companies have their standard claims procedures and documentation requirements and one can get to know about these processes through the company’s websites and / or any of their customer service centres, here is a list of documentation that is usually required in addition to submission of the original policy contract:
- Death Claim form: In the event of death of the insured during the term of a life insurance policy, the first step is to intimate the insurance company to which the policy pertains. Most companies have a ready format for such claim forms that can be obtained either from their nearest branch offices or from their websites.
- Death Certificate: A copy of the death certificate as issued by a local authority
- Nominee ID proof: A copy of the nominee’s identity proof that also establishes the nominee’s relationship with the life insured
- Post mortem report / FIR and Police report: In case of an accidental death, additional documentation in the form of a post mortem report and a copy of the FIR and police report may also be required
- Medical reports and hospitalisation records: In the event of death on account of a medical condition / illness / disease, the insurance company may require copies of all associated medical reports, test reports, hospitalisation records etc.
Buying an insurance policy is the first step towards securing your family’s future and providing them with financial protection. However, it is equally important to ensure that it is not too difficult for your dependents at the time of filing a claim. Do what is required to ensure that you have the right policy with no misrepresentations, it is active and premiums are paid regularly and that your dependents know where to start when it comes to filing a life insurance claim.
A dictionary definition for an Ombudsman would be:
- A man who investigates complaints and mediates fair settlements, especially between aggrieved parties such as consumers and an institution or organization.
The Institution of Insurance Ombudsman was created by the Government of India in 1998 to handle and address customer complaints and grievances related to Insurance. Insurance Ombudsmen are appointed by the Governing Body of Insurance Council.
You could lodge a complaint that you may have against any insurer relating to:
i. any partial or total repudiation (rejection) of claims by the insurance companies,
ii. any dispute with regard to premium paid or payable in terms of the policy,
iii. any dispute on the legal construction of the policy wordings in case such dispute relates to claims;
iv. any delay in settlement of claims and
v. non-issuance of any insurance document to customers after receipt of premium.
The contract of insurance is for an amount not exceeding Rs. 20 lacs.
You need to lodge your complaint in writing addressed to the Insurance Ombudsman of the region under which the office of the insurance company falls. For a list of Insurance Ombudsman in India and their contact details including telephone numbers and email Ids please see the attached link. (http://www.irdaindia.org/ombudsmen/ombudsmenlist_new.htm)
You may lodge a complaint with the Ombudsman if:
- You have already lodged a complaint with the concerned Insurance Company and it has either rejected your complaint or you have received no reply on your complaint within one month of your complaint or even if you are not satisfied with the response or action taken by the insurance company in respect of your complaint
- Your complaint to the Ombudsman is not more than one year later after the reply of the Insurance company
- Your complaint is not pending with any court, consumer forum or arbitrator.
The award of the Ombudsman is binding on the insurance companies but not on the complainant who can choose to approach other bodies such as Consumer forums or Courts of Law.
A detailed note on the functioning of the Insurance Ombudsmen in India is available on the Insurance Regulatory and Development Authority of India (IRDA) website. (http://www.irdaindia.org/brief12aug2003.htm)