LIFE INSURANCE PRODUCTS
LIFE INSURANCE PRODUCTS (Part 1)
- Definition: Life insurance products provide cover for the life of the insured, offering benefits such as death cover and survival benefits.
- Elements of Life Insurance Products:
- Death cover: The benefit is paid only on the death of the insured within a specified period.
- Survival benefit: The benefit is paid when the insured survives a specified period.
- Term of the contract: The time period during which the insurance cover is available to the insured.
- Sum assured: The amount being insured, with minimum sum assured requirements based on the IRDAI Regulations.
- Payment of sum assured: The payment of sum assured will be on the occurrence of a specific event such as death of the life insured or expiry of the term of the policy.
- Premium payable: The premium depends on the sum assured and the term of the policy.
- Bonus: An amount added to the sum assured, announced periodically as a percentage of the sum assured, relevant to investment cum insurance policies.
- Guaranteed bonus: Paid for the first few years of the policy period, forms part of the benefits of the policy, and is generally received at the end of the term.
- Reversionary bonus: Based on the performance of the insurance company, declared for policy holders at the discretion of the insurer, applicable to participating policies.
- Policy lapse: If the premium due on a policy is not paid, even within the applicable grace period, then the policy lapses, and no claim is payable on a lapsed policy.
- Nomination: The right of a policy holder to identify the person(s) entitled to receive the policy money in the event of the policy becoming a claim by death.
Life Insurance Needs Analysis
- Human Life Value (HLV): The economic value attached to human life, calculated as the present value of the expected income over the working life of the individual.
- Estimating life insurance coverage: Insurers use techniques such as the income replacement method and the needs-based approach to estimate the required life insurance coverage.
- Income Replacement Method: Calculates the current value of the income required to be provided for the dependents, then calculates the corpus required to generate this income, and adds other obligations or needs to arrive at the total funds required.
- Needs-based approach: Assumes that the insurance proceeds will be used for expenditure needs and meeting liabilities, and calculates the insurance requirement based on these needs and the value of existing investments and assets.
LIFE INSURANCE PRODUCTS (Part 2)
- Need-Based Approach: This approach calculates the insurance requirement based on the individual's needs, taking into account factors such as income, expenses, and loans.
- Calculation of Insurance Need: The calculation involves determining the corpus required to generate the desired income, adjusting for inflation and investment returns, and deducting existing insurance cover and investments.
- Key Factors: The key factors to consider in the need-based approach include:
- Current income to be replaced
- Adjusted rate (inflation and investment returns)
- Period over which income has to be provided
- Corpus required
- Loan outstanding
- Existing insurance cover and investments
Types of Life Insurance Products
- Term Insurance: A pure risk cover product that pays a benefit only if the policyholder dies during the specified term.
- Key Features:
- Sum Assured: The death benefit payable to the beneficiary.
- Premium: The cost of the insurance coverage.
- Term: The length of time for which the policy provides coverage.
- Variants: Term insurance policies can have various combinations of sum assured, premium, and term, including level premium, increasing premium, and return of premium options.
Endowment and Whole Life Insurance
- Endowment: An investment cum insurance plan that returns the investment portion of the premium along with actual returns realized on them if the insured person survives the tenure.
- Whole Life Insurance: An investment cum insurance policy that provides life insurance cover for the entire life of the insured person or up to an upper age limit, with a fixed premium amount.
- Key Features:
- Sum Assured: The death benefit payable to the beneficiary.
- Premium: The cost of the insurance coverage.
- Bonuses: Accrued bonuses that are paid out at the end of the tenure or on death.
Unit-Linked Insurance
- Definition: A type of insurance policy that allows the insured to decide on the investment portfolio for the savings component.
- Key Features:
- Risk Cover Charges: Deducted from the regular premium.
- Investment Portfolio: The balance of the premium is invested as per the agreed asset allocation.
- Net Asset Value: The value of the investment portfolio that changes in line with the market.
- Benefits: Unit-linked insurance policies provide flexibility in investment choices and transparency in charges and returns.
LIFE INSURANCE PRODUCTS (Part 3)
- Introduction to Life Insurance Products: The section discusses two options for life insurance products: a term life policy with a mutual fund investment and a Unit Linked Insurance Plan (ULIP) of type II.
- Option 1: Term Life Policy plus Mutual Fund Investment:
- Premium: Rs. 1,100 per month for term life policy
- Investment: Rs. 25,000 per month in a mutual fund scheme
- Key Features:
- Completely divisible insurance contract from investment contract
- No lock-in period for mutual fund investment
- Easy movement between schemes of one provider to another
- Transparent information and regulatory infrastructure
- Option 2: Unit Linked Insurance Plan (ULIP) of Type II:
- Premium: Rs. 26,100 per month
- Sum Assured: Rs. 100 lakhs
- Policy Term: 25 years
- Key Features:
- Indivisible insurance contract from investment contract for the first 5 years
- Lock-in period of 5 years for investment portion
- Limited movement between schemes of one provider to another
- Less transparent information and regulatory infrastructure
- Comparison of Options:
- Divisibility of Insurance Contract: Option 1 is completely divisible, while Option 2 is indivisible for the first 5 years
- Liquidity of Investment Portion: Option 1 has no lock-in period, while Option 2 has a 5-year lock-in period
- Risk in Investment Portion: Both options have various investment options to meet different risk profiles
- Transparency of Information: Option 1 has more transparent information and regulatory infrastructure
- Tax on Maturity Value: Option 2 has tax benefits if the sum assured is at least 10 times the annual premium
- Mortgage Insurance:
- Definition: A special kind of insurance policy where the sum assured decreases over time
- Suitability: Suitable for covering a housing loan that reduces with loan repayments
- Limitations: Reducing balance mortgage insurance may not be cheaper than level term insurance plans
- Riders:
- Double Sum Assured Rider: Provides twice the amount insured in case of death before the term of the policy
- Critical Illness Rider: Provides a pre-specified sum on diagnosis of a life-threatening illness
- Accident Death Benefit or Disability Rider: Enables the insured to receive a periodic payout if temporarily disabled
LIFE INSURANCE PRODUCTS (Part 4)
- Waiver of Premium Rider: A rider that waives the premium payment if the policyholder becomes disabled or loses income, making it difficult to pay premiums.
- Guaranteed Insurability Option Rider: A rider that allows the policyholder to increase their insurance cover without undergoing further medical examinations, useful for young individuals who expect increased income in the future.
- Income Benefit Rider: A rider that provides a fixed income to the policyholder's nominee in the event of the policyholder's death, instead of a lump sum payment.
Facilities available under Life Insurance Policies
- Loan against Insurance Policy: Most insurance companies offer loans against the surrender value of investment-cum-insurance policies, with lower interest rates than banks or NBFCs.
- Nomination and Change of Nomination: The policyholder has the right to nominate individuals to receive the policy money in the event of their death, which can be changed at any time.
- Policy Assignment: The transfer of interests in the policy, which can be done for taking a loan or other reasons, and cancels existing nominations.
Insurance under Married Women’s Property Act (MWPA)
- Purpose: To ensure that the benefits of the insurance policy stay with the nominees (spouse, children, or both) despite any claims on the assets of the insured by creditors.
- Declaration: The policyholder must declare that the policy is being bought under the MWPA at the time of purchase, which cannot be changed later.
- Benefits: The nominees acquire all rights to the claims in the policy, and the insured person cannot lay any claim to the amounts payable under the policy.
Benefits, Limitation, and Provisions when insurance is taken from multiple companies
- Telescopic Rates: Life insurance premiums do not increase in proportion to the sum assured, making it beneficial to buy policies from the same company.
- Insurance Proposal Form: The form should list all existing insurance policies and pending proposals to enable the insurance company to take an informed view of the risk cover being sought.
Criteria to evaluate various life insurance products
- Online versus Offline Term Plans: Consider factors such as brand faith, availability of risk cover, premium payable, and claim settlement ratio.
- Traditional Life Insurance Policy or Unit-Linked Plans: Consider factors such as investment returns, flexibility, and risk profile.
- Investment Linked Insurance Plans or Pure Term Insurance: Evaluate the primary goal of risk coverage and consider investment products separately.
- Online Insurance Plans and Offline Insurance Plans: Consider factors such as convenience, cost, and instant policy issuance.
Global coverage for different Life Insurance Products
- Defined Benefit Policies: Normally pay wherever the covered risk occurs, regardless of the location of the incident.
- Verification: It is relatively easy to verify that the covered risk has occurred and the circumstances surrounding the incident are ascertainable wherever in the world they happen.
LIFE INSURANCE PRODUCTS (Part 5)
- Eligibility: Resident Indians are allowed to buy life insurance policies from companies not registered in India using their Liberalised Remittance Scheme (LRS) entitlement.
- LRS Entitlement: The entitlement is up to USD 2,50,000 per annum for buying life insurance policies denominated in foreign currency.
- Policy Characteristics: These policies can be used for goals such as children's education that may be denominated in foreign exchange, and some policies are investment cum insurance products.
- Regulations and Redressal: The policies and grievance redressal mechanisms are governed by the regulations of the countries where they are issued, requiring caution when using this option.
- Evaluation Criteria: When buying an insurance cum investment policy, it should be evaluated like any other such policy, with:
- Protection needs being covered first.
- The investment portion considered for risk profiling and suitability.
- Comparison with similar foreign exchange denominated investment instruments available under the Liberalised Remittance Scheme.