Life Insurance (4)
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.
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
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.