Life Insurance Policies

Introduction
Life insurance is a contract that pledges payment of an amount to the person assured (or his
nominee) on the happening of the event insured against. The contract is valid for payment of the
insured amount during:
− The date of maturity, or
− Specified dates at periodic intervals, or
− Unfortunate death, if it occurs earlier.

Among other things, the contract also provides for the payment of premium periodically to the
insurance company by the policyholder. Life insurance is universally acknowledged to be an
institution, which eliminates ‘risk’, substituting certainty for uncertainty and comes to the timely
aid of the family in the unfortunate event of death of the breadwinner.

Life insurance, in short, is concerned with two hazards that stand across the life-path of every
person:
− That of dying prematurely, leaving a dependent family to fend for themselves.
− That of living till old age without visible means of support.

Types of life insurance policies

Life insurance may be divided into two basic classes – temporary and permanent.

Temporary life insurance

This type of insurance is characterized by its defined time period that is named when the
contract is initially put into force.

1. Term life insurance

Term Insurance is the simplest form of life insurance. Term life insurance provides for life
insurance coverage for a specified term of years for a specified premium. It pays only if death
occurs during the term of the policy, which is usually from one to 30 years. Term life policies
cover risk only during the selected term period. If the policyholder survives the term, the risk
cover comes to an end.

Most term policies have no other benefit provisions. The policy does not accumulate cash value.
Term is generally considered “pure” insurance, where the premium buys protection in the event
of death and nothing else.

The three key factors to be considered in term insurance are:

− Face amount (protection or death benefit),
− Premium to be paid (cost to the insured), and
− Length of coverage (term)
Various insurance companies sell term insurance with many different combinations of these
three parameters. The face amount can remain constant or decline. The term can be for one or
more years. The premium can remain level or increase. A term plan is designed to meet the
needs of people who are initially unable to pay the larger premium required for a whole life or an
endowment assurance policy, but hope to be able to pay for such a policy in the near future.
Hence, they may leave the final decision regarding the plan to a later date, when a better choice
can be made. No surrender, loan or paid-up values are granted under these policies because

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reserves are not accumulated. If the premium is not paid within the grace period, the policy will
lapse without acquiring any paid-up value.

However, a lapsed policy may be revived during the lifetime of the life assured but before the
expiry of the period of two years from the due date of the first unpaid premium, on the usual
terms. Accident and/or disability benefits are not granted on policies under the term plan.
Generally, the premium for the policy is based on the insured person’s age and health at the
policy’s start, and the premium remains the same (level) for the length of the term. So,
premiums for 5-year renewable term can be level for 5 years, then to a new rate reflecting the
new age of the insured, and so on every five years. Some longer term policies will guarantee
that the premium will not increase during the term; others don’t give that guarantee, enabling the
insurance company to raise the rate during the policy’s term.

Most companies will not sell term insurance to an applicant for a term that ends past his or her
80th birthday. There are two basic types of term life insurance policies—level term and
decreasing term.

Level term means that the death benefit stays the same throughout the duration of the policy.
Decreasing term means that the death benefit drops, usually in one-year increments, over the
course of the policy’s term.

Common types of level term are:

− Yearly- (or annually-) renewable term
− 5-year renewable term
− 10-year term
− 15-year term
− 20-year term
− 25-year term
− 30-year term
− Term to a specified age (say 65)

If a policy is “renewable,” that means it continues in force for an additional term or terms, up to a
specified age, even if the health of the insured (or other factors) would cause him or her to be
rejected if he or she applied for a new life insurance policy.

A common type of term is called annual renewable term. It is a one year policy but the
insurance company guarantees that it will reissue a policy of equal or lesser amount without
regard to the insurability of the insured and with a premium set for the insured’s age at that time.
Guaranteed renewability is an important policy feature for any prospective owner or insured to
consider because it allows the insured to acquire life insurance even if they become
uninsurable.

Special features in Term policies

(a) Mortgage Insurance: There is also another type of term insurance called mortgage
insurance, which is usually a level premium, declining face value policy. The face
amount is intended to equal the amount of the mortgage on the policy owner’s
residence; so the mortgage will be paid if the insured dies.
(b) Convertible Term: Some term policies are convertible. This means that the policy’s
owner has the right to change it into a permanent type of life insurance without additional
evidence of insurability.

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 (c) Return of Premium policy: Another variant of term insurance is “Return of Premium”.
In most types of term insurance, including homeowners and auto insurance, if you
haven’t had a claim under the policy by the time it expires, you get no refund of the
premium. Your premium bought the protection that you had but didn’t need, and you’ve
received fair value. Some term life insurance consumers have been unhappy with this
outcome, so some insurers have created term life with a “return of premium” feature.
The premiums for the insurance with this feature are often significantly higher than for
policies without it, and they generally require that you keep the policy in force to its term
or else you forfeit the return of premium benefit. Some policies will return the base
premium but not the extra premium (for the return benefit), and others will return both.

Permanent life insurance

Permanent life insurance is life insurance that remains in force until the policy matures, unless
the owner fails to pay the premium when due. The policy cannot be cancelled by the insurer for
any reason except fraud in the application, and that cancellation must occur within a period of
time defined by law (usually two years). Permanent insurance builds a cash value that reduces
the amount at risk to the insurance company and thus the insurance expense over time. This
means that a policy with rupees one lakh face value can be relatively inexpensive to a 70 year
old because the actual amount of insurance purchased is much less than one lakh rupees. The
owner can access the money in the cash value by withdrawing money, borrowing the cash
value, or surrendering the policy and receiving the surrender value.

The basic types of permanent insurance are:

1. Endowment Assurance
2. Whole Life Policies with Profits
3. Whole Life Limited Payment Plan
4. Whole Life Single Premium Plan
5. Convertible Whole Life Plan
6. Universal Life
7. Variable Life Insurance
8. Variable Universal Life Insurance
9. Limited Pay Life Insurance
10. Money Back with Profit Scheme
11. Joint Life Policies
12. Survivors Life
13. Children’s deferred Assurance Plan
14. Pension Plan
15. Women’s Policy
16. Special Plans
17. Group Insurance
18. Family Policy
19. Family Income Policy
20. Family Maintenance Plan
21. Credit Life
22. Single Premium Life
23. Living Insurance
24. Unit Linked Insurance Plans (ULIP)

1. Endowment assurance policy

This is the most popular plan. The premiums under the plan are paid for a fixed term. In case
the death takes place during the term, the sum assured alongwith accumulated bonus is paid to

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the nominee. If the policyholder survives the term of the policy, he gets sum assured in addition
to bonuses profits accrued. The plan offers the advantage of making a provision for the family of
the life assured in case of his early death and also assures a lump sum amount at any desired
age. The plan is available with-profit and without-profit option. The premium of the with profit
policy would be more than the premium of the without profit policy.

2. Whole-life policy (with profits)

This is a policy at lower rates of premium. The premiums are payable throughout the life time of
the assured and the sum assured becomes payable on the death of the life assured or attaining
of 85 years of age whichever earlier. Bonus addition is at a higher rate compared to endowment
policies.

3. Whole life limited payment plan

The plan is suitable for persons who are in employment. It enables the life assured to pay the
premiums during the productive years of his life. The premium is moderate in comparison with
endowment plan. The plan is available both with and without profits. The plan with profit
continues to participate in profits even after the completion of the premium paying term, until the
death of the life assured.

4. Whole life single premium plan

Single premium is paid at the start of the policy. The policy is available both with and without
profits.

5. Convertible whole life plan

The plan is useful to young persons who are at the start of their careers and their present
income is low. The object is to provide maximum protection at minimum cost. It is a whole life
without profit plan, premiums payable upto age 70 years of the assured. The premium charged
is that of whole life without profits and therefore sufficiently low. The risk is however covered for
the full sum assured.

After 5 years, the life assured can convert it into an endowment with or without profits choosing
the term without having to go in for a medical examination. If no option is exercised at the end of
5 years, the policy continues on original terms as whole life without profits with the premium
ceasing at the age of 70 years.

6. Universal life insurance

Universal life insurance (UL) is a relatively new insurance product intended to provide
permanent insurance coverage with greater flexibility in premium payment and the potential for
a higher internal rate of return.

A universal life policy includes a cash account. The savings vehicle (cash account) generally
earns a money market rate of interest. Premiums increase the cash account. Interest is paid
within the policy (credited) on the account at a rate specified by the company. This rate has a
guaranteed minimum but usually is higher than that minimum. Mortality charges and
administrative costs are charged against (reduce) the cash account. The surrender value of the
policy is the amount remaining in the cash account less applicable surrender charges, if any.
After money has accumulated in your account, you will also have the option of altering your
premium payments – provided there is enough money in your account to cover the costs. This
can be a useful feature if your economic situation has suddenly changed. However, you would
need to keep in mind that if you stop or reduce your premiums and the saving accumulation
gets used up, the policy might lapse and your life insurance coverage will end.

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With all life insurance, there are basically two functions that make it work. There’s a mortality
function and a cash function. The mortality function would be the classical notion of pooling risk
where the premiums paid by everybody else would cover the death benefit for the one or two
who will die for a given period of time. The cash function inherent in all life insurance says that if
a person is to reach the age of 95 to 100 (the age varies depending on country and company),
then the policy matures and endows the face value of the policy.

Naturally, it’s easy to see that out of a group of 1000 people, if even 10 of them live to age 95,
then the mortality function alone will not be able to cover the cash function. So in order to cover
the cash function, a minimum rate of investment return on the premiums will be required in the
event that a policy matures.

Universal life policies basically guarantee you the death function, but not the cash function -
thus the flexible premiums and interest returns. If interest rates are high, then the dividends help
reduce premiums. If interest rates are low, then the customer would have to pay additional
premiums in order to keep the policy in force. When interest rates are above the minimum
required, then the customer has the flexibility to pay less as investment returns cover the
remainder to keep the policy in force.

Interestingly enough, UL’s are closely linked to relatively stable markets, such as the 3 year
Treasury bill. What’s interesting is not what ULs closely follow - but due to how they’re linked,
you’ll notice that when people are happy about how little they’re paying for life insurance with a
UL, they’re at the same time complaining about how expensive their variable rate mortgages are
getting. The universal life policy addresses the perceived disadvantages of whole life. Premiums
are flexible. The internal rate of return is usually higher because it moves with the financial
markets. Mortality costs and administrative charges are known. And cash value may be
considered more easily attainable because the owner can discontinue premiums if the cash
value allows it. And universal life has a more flexible death benefit because the owner can
select one of the two death benefit options, Option A and Option B.

Option A pays the face amount at death as it’s designed to have the cash value equal the
death benefit at age 95.
Option B pays the face amount plus the cash value, as it’s designed to increase the net death
benefit as cash values accumulate. Option B does carry with it a caveat. This caveat is that in
order for the policy to keep it’s tax favored life insurance status, it must stay within a corridor
specified by the laws that prevent abuses such as attaching one lakh rupees in cash value to a
ten rupee insurance policy. The interesting part about this corridor is that for those people who
can make it to age 95-100, this corridor requirement goes away and your cash value can equal
exactly the face amount of insurance.

But universal life has its own disadvantages which stem primarily from this flexibility. The policy
lacks the fundamental guarantee that the policy will be in force unless sufficient premiums have
been paid and cash values are not guaranteed.

7. Variable life insurance

Variable life insurance policy combines death protection with a savings account that you can
invest in stocks, bonds and money market mutual funds. In a variable life policy, the portion of
premium payments that would be placed in a savings plan in other types of cash value policies
is instead placed in an equity investment fund. The policy owner can determine the kind of
investment — a choice among a variety of mutual funds, for example. The policy owner can also

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change the choice of investments one or more times each year, depending upon the provisions
of a particular company.

Unlike the savings element of other policies, the value of the investment portion of a variable life
policy will increase or decrease like the market value of any other equity (ownership) or
investment. Because of this market risk, the policy amount payable at death and the amount
available for a policy loan, vary over time depending on the performance of the investments. A
minimum death benefit (face amount) is usually guaranteed, but the cash surrender value is not.
The premium remains the same over the duration of the policy.

8. Variable Universal Life Insurance

Variable Universal Life Insurance (VUL) is not the same as Universal Life, but has the features
of variable and universal life insurance policies. You have the investment risks and rewards
characteristic of variable life insurance, coupled with the ability to adjust your premiums and
death benefit that is characteristic of universal life insurance.

They both have cash values attached to them. These differences are in how the cash accounts
are managed; thus having a great effect on how they are treated for taxation.

9. Limited-pay life insurance

Another type of permanent insurance is Limited-pay life insurance, in which all the premiums
are paid over a specified period after which no additional premiums are due to keep the policy in
force. The most common kind of limited pay is twenty-year limited pay. Another kind is paid-up
when the insured is sixty-five.

10. Money back (with profits) scheme

These are fixed term policies. The premium is paid till the end of the term or till the death of the
policyholder whichever earlier. A part of the sum assured is returned to the policyholder once in
5 years or 4 years according to the plan. The risk cover continues for the full sum assured even
after payment of instalments to the policyholder. The bonus also is payable for the full term.

An illustrative scheme of money back plan for a policy for 20 years

At the end of:
5 years 20% of sum assured
10 years 20% of sum assured
15 years 20% of sum assured
20 years 40% of sum assured + bonus

11. Joint life policies

Joint life is a policy that covers two lives. The policy pays off when the first dies. It costs less
than two separate policies for the same amount. A policy that offers contingent coverage is
similar to joint life but can be written on more than two lives. Joint life policies are similar to
endowment policies in that they too offer maturity benefits to the policyholders, apart from
covering risks like all life insurance policies. But joint life policies are categorized separately as
they cover two lives simultaneously; thus offering a unique advantage in some cases, notably,
for a married couple or for partners in a business firm.

12. Survivor Life policies

Survivor life (sometimes known as survivor joint life) covers two lives with one policy. The policy
is paid up at the first death, but the face value is not paid until the second death.

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13. Children’s deferred assurance plan
This plan enables a parent or a legal guardian or a relative of the child to provide a sum for the
child by way of a very low premium. It is an endowment assurance plan with profits the risk for
which commences at a selected age.

The policy is in two stages, one covering the period from the date of commencement of the
policy to the deferred date (the date of commencement of risk on the child’s life) and the other
covering the period from the deferred date to the date on which policy emerges as a claim either
by death or on maturity of the policy. A combined policy is issued covering both the stages. The
plan offers two options as regards the age of commencement of the risk which may be 18 or 21
of the child.

14. Pension plans or annuities

An annuity is an investment that you make, either in a single lump sum or through instalments
paid over a certain number of years, in return for which you receive a specific sum every year,
every half-year or every month, either for life or for a fixed number of years.

After the death of the annuitant or after the fixed annuity period expires for annuity payments,
the invested annuity fund is refunded, perhaps along with a small addition, calculated at that
time. Annuities differ from all the other forms of life insurance discussed so far in one
fundamental way – an annuity does not provide any life insurance cover but, instead, offers a
guaranteed income either for life or a certain period. If the insured dies during the term of the
policy, his nominee would receive the benefits either as a lump sum or as a pension every
month.

Typically, annuities are bought to generate income during one’s retired life, which is why they
are also called pension plans. Annuity premiums and payments are fixed with reference to the
duration of human life. Annuities are an investment, which can offer an income you cannot
outlive, and provide a solution to one of the biggest financial insecurities of old age- namely, of
outliving one’s income.

Hence, the advantages of annuity plans are:

− To accumulate long term savings
− To provide guaranteed life-long income
− To supplement other retirement savings
− To increase income in retirement
− To take advantage of tax deferral options

15. Women’s policy

Women’s policy provides funds for women in times of need like education, marriage or sickness,
with Guaranteed and Loyalty Additions during the policy term period and after maturity.

16. Special plans

Special plans are insurance policy plans available from the national insurance providers to
serve the needs of citizens who cannot be commonly classified or segregated. These special
plans are designed to satisfy needs ranging from debt-clearance in the event of the death of the
insured to financial aid in the event of a medical mis-hap. Special plans also provide financial
assistance for handicapped dependants as well as emergency surgery required if and when a
medical condition arises.

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17. Group insurance
Group insurance offers life insurance protection under group policies to various groups such as
employer-employees, professionals, co-operatives, weaker sections of society, etc. It also
provides insurance coverage for people in certain approved occupations at the lowest possible
premium cost. Besides providing insurance coverage, it also offers group schemes to employers
that allow the funding of the gratuity and pension liabilities of the employers.

18. Family Policy

Coverage on all family members is included in one contract. Usually this type of a policy
provides whole life insurance on the primary insured person and term insurance on the spouse
and children. All children are covered, even if born or adopted after the policy is issued. The
premium does not change if any of the children die or if more children are born or adopted. If the
insured dies, the insurance on the surviving spouse and children remains in force without further
premium payments.

19. Family Income Policy

This is designed to provide a surviving family with a specific monthly income for a specific time
period after the death of the insured. It may be sold as a rider on a cash value policy or as a
separate policy. If sold as a separate policy, the insured buys a policy that guarantees a monthly
income for a guaranteed income period. The period of the guarantee begins with the date the
policy is purchased and is in force only for the specified number of years. So it is, in effect, a
form of decreasing term insurance. Payments are made to the beneficiary for the remainder of
the specified period following the death of the insured. If the insured dies during the family
income period, the proceeds of the whole life coverage are held at interest until the end of the
family income period. Then the proceeds are paid to the beneficiary. In the meantime, the
interest on the proceeds provides part of the family income payments, and the proceeds from
the decreasing term insurance rider provide the rest.

20. Family Maintenance Plan

Typically, this policy (or rider) consists of a whole life policy plus level term insurance (instead of
decreasing term as used in the family income policy). The level term insurance provides income
for a stated number of years beginning at the insured’s death, provided this occurs within the
period designated in the policy. The face value of the whole life portion is also paid to the
beneficiary.

21. Credit Life

This type of life insurance is a decreasing term insurance and is offered when a person buys on
credit or takes out a loan, such as a mortgage. The intent of the policy is to pay off the loan, plus
interest, if the policyholder dies. Credit life tends to be over-priced compared with conventional
life insurance products. A well-planned, overall life insurance program should cover present as
well as foreseeable debts. If you need more life insurance to cover a debt, you should compare
the cost of decreasing term policies before purchasing a credit life insurance policy from a
lender.

22. Single Premium Life

With a single premium the insured has a paid-up insurance policy. Some of the premium
money, pays for a minimal amount of protection, but most goes to an investment account. In
most policies, the interest starts building up immediately, tax deferred. The face value (death
benefit) depends upon the age of the insured when the policy is purchased and the amount that
may have been borrowed from it. Whole life and variable life are the two most common types of

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insurance sold as single premium life policies. In a single premium, whole life policy, the return
rate on the investment portion is fixed and may be adjusted periodically.
Many policies have guaranteed minimum returns. A single premium variable life usually does
not guarantee a rate of return because returns are based on the performance of the
investments.

23. “Living” Insurance

In recent years, a new type of life insurance has become available. Basically, this is a whole life
plan that will pay a portion of the face value if the insured suffers a catastrophic illness and
needs the money.

Although each plan is different, generally the plans will pay a portion of the face value if the
insured is confined to a nursing home or diagnosed as being terminally ill. Many companies
offer this provision as a rider to other policies at an additional cost. These policies should not be
purchased as a form of health insurance. They were created for the terminally ill who have no
other means of paying medical bills. Payouts prior to death, of course, reduce the amount
available to survivors.

24. Unit linked insurance

The Unit Linked Insurance Plan (ULIP) is a fairly reasonable life insurance cover available. Unit-
linked life insurance products are those where the benefits are expressed in terms of number of
units and unit price.

They can be viewed as a combination of insurance and mutual funds. The number of units,
which the customer would get, would depend on the unit price when he pays his premium. The
daily unit price is based on the market value of the underlying assets (equities, bonds,
government securities etc.) and computed from the net asset value. Even people who do not
need the cover can benefit by going in for ULIP rather than PPF or Tax Saving Bonds. Unit
Linked Insurance Plans offer a tax-free dividend and the benefit of long-term capital gains after
maturity. The yield is fairly high if the age at entry is young and it descends slowly along with the
age of the holder. Launched nearly 20 years ago, ULIP is available in two term periods, one for
10 years and the other for 15 years. It provides numerous benefits for its investors such as life
insurance cover at a nominal premium, accident cover, decent rate of returns and concessions
under Sections 80C and 48(2).

ULIP’s annual contribution towards life insurance premium is a tenth and a fifteenth of the target
amount for the 10 and 15 year plans respectively. Insurance is limited only to premiums paid if
death occurs due to natural causes within 6 months of the policy’s first year. During the latter
part of the year, the cover is provided at 50 percent of the Sum Assured. However, this
restriction is not enforced if death occurs in an accident. A maturity bonus of 5 percent and 7.5
percent is also granted on the 10 and 15 year plans respectively. Obviously, no bonus is
granted on premature withdrawals. Strangely, though the bonus in not available after premature
death also unless it occurs after the payment of the last contribution. Prevalent sale prices are
applied on the contributions and accrued dividends for crediting units to the account. At
maturity, the total units to the credit of the account are repurchased at the then-prevailing
repurchase price. ULIP does not offer any life as well as accident cover to minors. These covers
are not available even after a minor attains majority during the policy term period. Consequently,
no premium is payable to LIC by UTI and to that extent, the redemption price would be higher.
Since ULIP has no nomination facility, the option to include a second profile is included within
the application form. In case, the investor wishes to terminate his scheme after 5 years, then
only 0.5 percent of the target amount is deducted. In case premature withdrawals are made

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within 5 years, the rebate enjoyed in the year of contribution will be Included in the total income
during the year of withdrawal for the purpose of Income tax. Basically, ULIP provides a unique
utility by which an investor can obtain insurance cover as well as earn attractive returns.

Advantage offered by ULIPs

The advantage of Unit linked plans are that they are simple, clear, and easy to understand.
Being transparent the policyholder gets the entire upside on the performance of his fund.
Besides all the advantages they offer to the customers, unit-linked plans also lead to an efficient
utilisation of capital. Unit-linked products are exempted from tax and they provide life insurance.
Investors welcome these products as they provide capital appreciation even as the yields on
government securities have fallen below 6 per cent, which has made the insurers slash payouts.
According to the IRDA, a company offering unit linked plans must give the investor an option to
choose among debt, balanced and equity funds. If you opt for a unit-linked endowment policy,
you can choose to invest your premiums in debt, balanced or equity plans. If you choose a debt
plan, the majority of your premiums will get invested in debt securities like gilts and bonds. If you
choose equity, then a major portion of your premiums will be invested in the equity market. The
plan you choose would depend on your risk profile and your investment need.

The ideal time to buy a unit-linked plan is when one can expect long-term growth ahead. This is
especially so if one also believes that current market values (stock valuations) are relatively low.
So if you are opting for a plan that invests primarily in equity, the buzzing market could lead to
windfall returns. However, should the buzz die down, investors could be left stung. If one invests
in a unit-linked pension plan early on, say 25, one can afford to take the risk associated with
equities, at least in the plan’s initial stages. However, as one approaches retirement the
quantum of returns should be subordinated to capital preservation. At this stage, investing in a
plan that has an equity tilt may not be a good idea.

Even if one views insurance as a long-term commitment, investments based on performance

over such a short time span may not be appropriate.

New guidelines for ULIPs

The Insurance Regulatory & Development Authority (IRDA) has asked life insurance companies
to completely rework their unit-linked insurance plans (ULIPs) by June 30,2006, so that these
products are sold transparently and conform to “the medium and long-term investment
characteristics of insurance products. ULIPs are today’s hottest selling insurance products,
accounting for nearly a third of premium incomes collected.

The new guidelines, stipulate that ULIPs must henceforth have a minimum policy term of five
years. No loans can be granted under such policies. The regulator has also decreed that the
minimum sum assured for single-premium ULIPs in case of death should be 125% of the
premium. In the case of non-single premium policies, the minimum sum assured has to be five
times the annualised premium, or half the annualised premium multiplied by the policy term
chosen, whichever is higher.

Under the new guidelines, investors can make a first partial withdrawal only after the fifth policy
anniversary for all regular premium contracts and single-premium contracts. In other words, the
lock-in period for investors in ULIPs has been fixed at five years (earlier it was 3 years).

The key features of ULIPs are

− Premiums paid can be single, regular or variable.
− The payment period too can be regular or variable.

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 − The risk cover (insurance cover) can be increased or decreased.

As in all insurance policies, the risk charge (mortality rate) varies with age. However, for an
individual the risk charge is always based on the age of the policyholder in the year of
commencement of the policy.

These charges are normally deducted on a monthly basis from the unit value. For instance, if
there is an increase in the value of units due to market conditions, the sum at risk (sum assured
less the value of investments) reduces and so the risk charges are lower.

The maturity benefit is not typically a fixed amount and the maturity period can be advanced
(early withdrawal) or extended. Investments can be made in gilt funds (government securities),
balanced funds (part debt, part equity), money market funds; growth funds (equities) or bonds
(corporate bonds). The policyholder can switch between schemes (for instance, balanced to
debt or gilt to equity). The investment risk is transferred to the policyholder.

The maturity benefit is the net asset value of the units. The value would be high or low
depending on the market conditions during the period of the policy and the performance of the
fund manager.

Thus there is no capital protection on maturity unless the scheme specially provides for it. There
could be policies that allow the policyholder to remain invested beyond the maturity period in the
event of the maturity value not being satisfactory.

The charges usually attached to this type of policy are:

First-year charges: Usually, a minimum of 15 per cent. However, high premiums attract lower
charges and vice versa. Charges can be as high as 50 per cent if the scheme affords a lot of
flexibility.
Subsequent charges: Usually lower than first-year charges. However, some insurers charge
higher fees in the initial years and lower them significantly in the subsequent years.
Administration charges: This ranges between Rs.15 per month to Rs.60 per month and is
levied by cancellation of units.
Risk charges: The charges are broadly comparable across insurers.
Asset management fees: Fund management charges vary from 0.6 per cent to 0.75 percent
for a money market fund, and around 1.5 per cent for an equity-oriented scheme. Fund
management expenses and the brokerage are built into the daily net asset value.
Switching charges: Some insurers allow four free switches in every year but link it to a
minimum amount. Others allow just one free switch in each year and charge Rs.100 for every
subsequent switch. Some insurers don’t charge anything.
Top-ups: Usually attracts 1 per cent of the top-up amount. Top-up normally goes directly into
your investment account (units) unless you specifically ask for an increase in the risk cover.
Surrender value of units: Insurers levy certain charges if the policy is surrendered
prematurely. This levy varies between insurers and could be around 75 per cent in the first year,
60 per cent in the second year, and 40 per cent in the third year and nil after the fourth year.
One could check out the performance of similar schemes (balanced with balanced; equity with
equity) across insurance companies. Look at NAV performance over a period of at least two to
three years. This can only give you some indication about the credibility of the fund manager
because past performance is no guarantee to future returns, especially in insurance products
where the emphasis is on long-term performance (10 years or more).

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Life Insurance Policy Provisions
There are three parties in a life insurance transaction; the insurer, the insured, and the owner
of the policy (policyholder), although the owner and the insured are often the same person. For
example, if Mr. Kumar buys a policy on his own life, he is both the owner and the insured. But if
Mrs. Kumar, his wife, buys a policy on Mr. Kumar’s life, she is the owner and he is the insured.

Another important person involved is the beneficiary. The beneficiary is the person or persons
who will receive the policy proceeds upon the death of the insured. The beneficiary is not a
party to the policy, but is designated by the owner, who may change the beneficiary unless the
policy has an irrevocable beneficiary designation.

This apart there are several terms and provisions linked with an Insurance contract. An inclusive
but not exhaustive list of terms (arranged alphabetically) are discussed hereunder:

1. Addition to Cash Surrender Value

With this option, dividends are left with the insurer to increase the cash surrender value of the
policy by accumulating at a minimum guaranteed rate of interest. If the insurer earns more than
the guaranteed rate, dividend accumulations may participate in the excess earnings.
2. Annuity Option
Under this option, the beneficiary elects to have the proceeds paid for the rest of his/her life, or
for the lifetime of one or more beneficiaries. Once payments begin, the option cannot be
changed.
3. Application to Premiums
This option is a convenient one for the policyholder and involves leaving the dividends with the
company to help pay future policy premiums.
4. Assignment Clause
A life insurance contract is personal property and, as such, is freely transferable (assignable) by
the owner to someone else, provided the policy does not state otherwise. The right to assign a
life insurance policy can be a valuable one in both personal and business transactions.
5. Automatic Premium Loan (cash value insurance)
This provision guarantees that if a policyholder fails to pay a premium when due, the premium
will automatically be paid out of the policy loan value. Many life insurance companies do not
include this provision in the policy except at the policyholder’s request. There is generally no
charge for this provision, so it’s a good idea to be sure that it is included, as it’s easy to overlook
a premium payment.
6. Beneficiary Designation
The person (or persons) named by the insured to receive the death benefits from the insurance
policy is called the beneficiary. The beneficiary designation is termed revocable if the insured
reserves the right to change the beneficiary. If the insured does not reserve the right to change
the beneficiary, the designation is irrevocable. It is usually advisable to name a secondary
beneficiary in case the first (primary) beneficiary dies before the insured. If no secondary
beneficiary is named, the proceeds normally would go to the insured’s estate.
7. Cash Dividends
This option is most frequently used when a policy is paid-up; the insured receives periodic cash
payments of dividends.
8. Cash Value
The cash value of a permanent life insurance policy is accumulated throughout the life of the
policy. It equals the amount a policy owner would receive, after any applicable surrender
charges, if the policy were surrendered before the insured’s death.
9. Cash Surrender Value

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When the policyholder surrenders a policy for its cash value, life insurance protection ceases
and the insurer has no further obligation under the policy.
10. Conversion from Term to Permanent
When in need of temporary protection, individuals often purchase term life insurance. If one
owns a term policy, sometimes a provision is available that will allow her to convert her policy to
a permanent one without providing additional proof of insurability.
11. Death Benefit
The primary feature of a life insurance policy is the death benefit it provides. Permanent policies
provide a death benefit that is guaranteed for the life of the insured, provided the premiums
have been paid and the policy has not been surrendered.
12. Delay Clause
This permits an insurance company to postpone payment of the cash (loan) value of a policy, if
necessary, for up to six months after it has been requested by the policyholder. Insurers, by law,
must include this provision in their contracts. This provision is designed to protect the insurer
against losses that might develop from excessive demands for cash loans in times of economic
crises. Only during the most severe economic circumstances would this clause be invoked by
the company.
13. Dividends
Many life insurance companies issue life insurance policies that entitle the policy owner to share
in the company’s divisible surplus.
14. Dividend options
Participating insurance is a form of insurance in which the owner receives dividends — a
patronage refund, essentially. When a policy dividend is due, the policy owner has several
choices regarding how it will be used.
15. Extended Term Life Insurance
This option allows the policyholder to exchange the cash value of a policy for term insurance for
the full face amount of the original insurance contract. The duration of the term coverage
depends on the face value of the policy, the amount of cash value available, and the age of the
insured when this option is exercised.
16. Fixed Payment or Amount Option
With this option, the funds are left with the insurance company and periodic payments of a
specified amount are made to the recipient until principal and interest are exhausted.
17. Fixed Period or Time Option
The funds are left with the insurance company and are paid to the recipient in periodic
payments, including both principal and interest, over a specified period of time.
18. Grace Period
This is a period (commonly 31 days), after the premium for a life insurance policy is due, during
which the policy remains in full force even though the premium has not been paid. This
provision protects the policyholder against inadvertent lapse of the policy.
19. Incontestability Clause
This clause provides that after a life insurance contract has been in force for a certain length of
time, (normally two years) the insurer agrees not to deny a claim because of any error,
concealment, or misstatement on the part of the insured.
20. Interest Option
Under this option, the funds are left with the insurer and interest is paid to the beneficiary. The
principal stays with the insurer until requested by the beneficiary.
21. Joint and Last Survivor Life Income Option
This is one variation of the annuity option. Under this option, the proceeds are paid during the
lifetimes of two or more recipients. This option can be set up to have the same income continue
to the death of the second person or the annuity payments may be higher while both are alive
and reduced upon the death of the first deceased.

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When considering an option other than the lump sum option, look at how much the life
insurance proceeds could earn in alternative, secure investments before making the choice.
22. Lump Sum
This option allows the recipient to receive the proceeds from the life insurance in one payment.
Thus, if the policy is for Rs.100,000, the beneficiary simply receives the Rs.100,000 as a single
payment.
23. Medical and non-medical schemes
Life insurance is normally offered after a medical examination of the life to be assured.
However, to facilitate greater spread of insurance and also to avoid inconvenience, insurance
companies have been extending insurance cover without any medical examination, subject to
certain conditions.
24. Non-forfeiture provisions options
Non-forfeiture provisions are available when the insured stops making premium payments on a
policy with a cash value.
25. Nomination
When one makes a nomination, as the policyholder you continue to be the owner of the policy
and nominate the beneficiary or nominee of the policy. The nominee does not have any right
under the policy so long as you are alive. The nominee has only the right to receive the policy
monies in case of your death within the term of the policy.
26. Paid-Up Additions
This option uses the dividends to buy paid-up insurance at net single premium rates. The
amount of the additional coverage depends on the amount of the dividend and the age of the
insured person.
27. Policy Loan (cash value insurance)
This provision in a life insurance contract allows the policyholder to take a loan up to an amount
that, with interest, will not exceed the cash value (loan value) of the policy at the next
anniversary date. The rate of interest that can be charged is stated in the contract. When a loan
is outstanding against a life insurance policy, the death benefit due the beneficiaries will be
reduced by the amount of the loan.
28. Renewability Provision (term insurance)
This provision guarantees that a company will renew the policy at the end of its term without
evidence of insurability.
29. Reinstatement Clause
This provision gives the insured the right to reinstate a lapsed policy within a specified period
(usually three years after default in premium payment), subject to furnishing evidence of
insurability and payment of back premiums.
30. Reduced Paid-Up Life Insurance
This option permits the policyholder to elect to use the cash value to purchase paid-up
insurance of the same type as the original policy, but for a reduced face value. One situation in
which this option is appropriate is when a policyholder is approaching retirement and wants to
stop paying premiums but still wants some insurance coverage to remain in force for the rest of
his/her life.
31. Settlement options
Settlement options are applicable under three conditions:
− when the insured dies and the policy proceeds are payable to the beneficiary
− when an endowment policy matures; and
− when the insured decides to let a cash value policy lapse and withdraws the cash value
32. Suicide Clause
Life insurance contracts generally contain a clause stating that if the insured commits suicide
during a certain period of time after the policy date (often one year), the insurer is liable only to
return to the beneficiary the premiums paid (with or without interest), but not to pay the death

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benefit. After the stipulated period, suicide becomes a covered risk and is treated like any other
cause of death.
33. Term Insurance Additions
The dividend is used to purchase one-year term insurance at net rates. The amount of one-year
term insurance that can be purchased with dividends is again dependent on the amount of the
dividend and the age of the insured, and is generally limited to the amount of cash value in the
policy.
33. With profit and without profit plans
An insurance policy can be ‘with’ or ‘without’ profit. In the former, bonuses disclosed, if any, after
periodical valuations are allotted to the policy and are payable along with the contracted
amount.
.
In ‘without’ profit plan the contracted amount is paid without any addition. The premium rate
charged for a ‘with’ profit policy is therefore higher than for a ‘without’ profit policy.

Life Insurance Policy Riders

Riders are modifications to the insurance policy added at the same time the policy is issued, for
a cost. Riders provide a means of adding benefits or special features to a policy in order to meet
a policyholder’s specific needs.

A common rider is accidental death, which used to be commonly referred to as “double

indemnity”, which pays twice the amount of the policy’s face value if death results from
accidental causes, as if both a full coverage policy and an accidental death policy were in effect
on the insured. Another common rider is premium waiver, which waives future premiums if the
insured becomes disabled.

The four most frequently sold riders are:

1. Waiver of Premium
This rider frees the policyholder from the obligation to pay premiums on the policy when he or
she is disabled for a long period of time (this time period is specified in the rider). The benefits in
the contract continue uninterrupted until the policyholder recovers and resumes payment of
premiums. The extra cost for this rider is sometimes built into the basic premium; more often it is
optional at an extra cost. The clauses for this rider vary considerably from company to company
and must be read carefully. Especially important is the definition of “totally disabled,” the age
requirement for eligibility, and the waiting period before the rider takes effect.

2. Guaranteed Insurability
This option permits the insured to purchase additional life insurance at certain specified dates
without evidence of insurability. This option generally ends when the insured reaches a certain
age and is available only with cash value policies.

3. Accidental Death Benefit (multiple indemnity)

This rider provides that double (or triple or quadruple) the face amount of the policy is payable if
the insured’s death is caused by an accident. Usually death must occur within 90 days after
injury and prior to a specified age for this rider to be effective. From an economic standpoint,
there seems little justification for the multiple indemnity provision. The economic impacts of
death by accidental means are no greater than those resulting from death by natural causes. In
fact, the spouse is likely to have less expense in the case of a sudden accidental death than if
the insured died of an extended illness.

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4. Disability Income Protection
Some life insurance companies allow disability income benefit guarantees, based on the face
amount of the policy, to be added to cash value life insurance policies for an extra premium.
This rider provides benefits that are payable if the insured becomes totally disabled beyond a
specified waiting period (usually six months). The amount of the income payment is often 1
percent of the face amount of the policy or Rs. 5,000 per week restricted to 104 weeks.

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