The need and importance of having adequate financial cover in the form of life insurance has been talked and written about enough over the last few years in India. While more and more people are realising the importance of securing their families’ future, one cannot but help get the feeling that there is still a bit of a gap as far as understanding the fundamentals involved in life insurance products, their structure and terms and conditions are concerned.
Here are 7 key concepts every policy owner (or would be policy owner) must know and understand:
1. Sum Assured/Insured
Life insurance is a contract between the insurance company and the individual buying insurance. Sum Assured refers to the amount of money for which the individual buys insurance. It is the amount that will be paid by the insurer to the nominees/dependents of the life insured in the case of death of the insured provided the premiums associated with the insurance policy have been duly paid on time. Life insurance is a meant to provide financial protection and a means to replace lost income for one’s dependents and can help meet any outstanding liabilities and future financial needs if you are not around. How much Sum Assured to opt for should take into account these needs and factors.
2. Policy Tenor/Tenure/Term
A life insurance policy is typically bought for a defined period of time. This time period is generally referred to as the Policy Term/Tenor/Tenure. Simply put this is the time period for which you wish to purchase a life cover. For e.g. if you take a life insurance policy for a Sum Assured of Rs. 50 lacs with a policy term of 25 years, you agree to pay applicable premiums at regular intervals during this 25 year period.
In return for the payment of premiums, the insurance company will provide a life cover during these 25 years. The policy cover will cease at the end of 25 years.One should try and insure himself for the maximum duration possible and go for the highest tenure available for your age and Sum Assured; if not, at least cover yourself till your ‘income earning years’.
There are typically two kinds of benefits associated with life insurance policies. Death Benefit is the amount that will be payable to the insured’s dependents if the insured dies during the term of the policy. This is benefit is typically equal to the Sum Assured in most cases while in some products it can be Sum Assured plus any bonuses added on as per the product structure and terms.While death benefit is a common feature across all types of life insurance products, some forms of life insurance also offer a Maturity/Survival Benefit. In such 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.
Protection oriented policies like Term Insurance offer only Death Benefit while other savings oriented products such as Money-Back, Endowments and Unit Linked Plans offer both Death and Survival Benefits. It is because of this difference in benefit structures that term insurance is far cheaper than any other form of insurance and should be the first product in your life insurance portfolio. 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.
4. Free-look period
The guidelines issued by the Insurance Regulatory and Development Authority of India (IRDA) allow for a 15 day period to customers an option to review their decision to purchase a particular life insurance policy and return the policy if they so choose and have their premium refunded. This period starts from the date of receipt of the policy documents by the customer.
During this period, customers can review in greater detail the policy they have bought, go through its terms and conditions, policy wordings and the like to satisfy themselves of having made the right purchase. This gives you an opportunity to cross check your understanding of the product and what you thought if offers basis your interaction with any sales personnel or intermediaries with the actual document(s) which detail the product features, benefits and costs.
In case you reach the conclusion that the product is not what you thought it was for any reasons whatsoever, including having been mis-sold the policy, you can return the policy to the insurance company and ask for a refund of your premium.Since the free-look period is available for only 15 days from the date of receipt of policy, it is important to review your policy documents at the earliest. If you take a decision to return the policy under the ‘free-look’ period you need to contact the insurance company to communicate your decision to cancel the policy as a free-look cancellation.
A life insurance policy is said to be active or in-force till the time the premiums due on the policy are being paid on time. The risk cover associated with the policy continues only as long as the policy is active. Typically all life insurance products have a ‘grace period’ after the premium due date during which policyholders can pay the premium that is due.
The regulatory framework defines ‘grace period’ as the time granted by the insurer for the payment of premium from the due date of the premium without any interest or penalty during which the policy is considered to be in-force. This grace period is 15 days in case the premium payment frequency is monthly and is 30 days in all other cases. If the premium is still not paid after the completion of the grace period, then the policy stands lapsed as of the date on which the grace period expires.
Simply put, when a life insurance policy lapses, the insurance coverage under the contract ceases to exist. Therefore, if anything were to happen to the insured, the insurer is not obliged to pay any benefits to the nominees/beneficiaries of the insured.
One needs to ensure that his/her life insurance policy remains active so as make sure that the life cover can continue uninterrupted. If your policy lapsation happened on account of missing out on premium payments inadvertently or due to any temporary financial hardships, you should try and find out about your options and revive your policy at the earliest.
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. Nomination can be changed by the policy owner at any time during the term of the policy any number of times.
While nomination is an authorisation to receive the policy benefits in the event of death of the life assured, it 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.
Assignment is the process through which you transfer the rights of a life insurance policy and its benefits to a person (Assignee). On assignment, the assignee has complete and absolute rights over the policy and its benefits. One needs to be careful while assigning a policy. Unlike a nomination, an assignment once made cannot be cancelled. An assignee can, however, further assign the policy to another person since he now is the owner of and holds the rights to the policy.
It is important to note that in case of endowment or money back policies that have a survival benefit, rights to even the maturity benefits will be with the assignee on you surviving the term of the policy. Whether to choose between assignment or nomination will depend on what you think best suits you and your dependents keeping in mind the characteristics of each.
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