Life Insurance
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What Does Basic Life Insurance Mean?
Life Insurance is a contract between the insurance company and the insured that the insurance company will pay a lump sum amount to the beneficiary nominated upon the death of the insured, i.e., the policyholder in exchange to a premium paid. The premium is paid either on a monthly, quarterly, half-yearly, or yearly basis.
Life Insurance Policy is a legal contract. The terms of the contract explain describe the limitations to the insured events. These excluded events limit the liability of the insurer in respect of the claims. Claims relating to suicide, to quote an example, is one of the exclusions. Others are war, riots, and natural calamities.
Insurance policies in modern times have branched out their products to retirement plans, i.e., annuities.
Important Life Insurance Terms That You Must Know
The important Life Insurance terms that you must know are:
- Accident: This is an unexpected occurrence that causes injury or damage to the person insured
- Age limit: The minimum and maximum age stipulated by the insurance company which will not entertain applications below the minimum age and above the maximum age and also will not renew the policy.
- Agent: He is the mediator between the insurance company and the insurer. He sells and services the insurance contracts to the insurer. He is basically the representative of the insurance company.
- Application/Proposal form: This is the initial requirement to get a policy. Normally the representative of the insurance company fills the form and the medical examiner adds the information given by the prospective policyholder. This has to be signed by the proposer or the one who is seeking the insurance policy.
- Assignment: Assignment is the transfer of the interest of the policyholder to another entity. An assignment can be by way of an endorsement or by way of a separate document. The assignment can either be conditional or absolute.
- Policyholder: The owner of the policy, i.e., the person who purchases the policy and pays the premium is the policyholder. The policyholder need not necessarily be the life assured.
- Life assured: The person whose life is insured against the risk of untimely death is the life assured. The life assured need not be the policyholder.
- Sum assured: This is the amount that the insurance company agrees to pay a sum of money on the untimely death of the insured or on any other insured event that happens. The sum assured is decided while purchasing the policy and the premium is fixed accordingly.
- Policy tenure: The policy tenure is the period until which the insurance company covers the risk of death for a person. It could be for one year or for a whole lifetime. If it is for a whole lifetime then the risk is covered till the life assured is alive.
- Premium: Premium is the amount you have to pay the insurance company to keep the policy active and enjoy the insurance cover. If you delay the payment of the premium beyond the grace period of 13 days, the policy will be terminated.
- Premium payment mode: It is the various ways of paying the premium. You can choose to pay the premium regularly throughout the period of the policy or choose to pay only for a limited period. The option for payment for a limited period is that you need not pay the premium for the whole term of the policy but only for a limited period, i.e., maybe for 10 years, 15 years, or 20 years. The tenure of the policy may be for 20 years, but the premium will be paid only for 10 years.The next option is to pay the premium for the entire term of the policy in one single payment in a lumpsum.
- Maturity age: This is the age of the person insured when the policy term ends. This will be defined when the policy is being purchased. For instance, if you’re 25 years old and opt to take the policy until the age of 65 years. The policy term will end when you attaint the age of 65 years, i.e., you will have the risk coverage for 40 years. In other words, the maximum policy tenure for a 25-year old is 40 years.
- Riders: Riders are features added to the base policy. The permitted riders differ for each insurance company. The added features will attract an additional premium. The riders give a wider scope of coverage. Riders can be included at the time of initial purchase of the policy or during the renewal of the policy. The following are some of the riders:
- Critical illness
- Benefit on permanent disability or total disability due to an accident
- Benefit on accidental death
- Premium waiver
- Hospital cash
- Death benefit: Death benefit is the amount paid to the nominee on the untimely death of the insured during the tenure of the policy. Sum assured and the death benefit is not the same. The death benefit will be much higher than the sum assured as they include certain benefits that have been laid out in the policy like the rider benefit, etc., except in the case of term plans where there is no bonus or other added benefits.
- Maturity/Survival benefit: The survival benefit is the amount paid when the life assured completes the pre-defined term mentioned in the policy whereas maturity benefit is the amount paid when the life assured lives beyond the term of the policy. However, this aspect is not found in term insurance plans.
- Free-look period: This is the period within which you can choose to return the policy if you are not comfortable with the terms and conditions. The free-look period normally will be 15 to 30 days within which the policy has to be returned. The expenses incurred for medical check-up and the stamp duty charges will be deducted and the balance of the premium paid will be refunded.
- Grace period: This is the period which is given to make the payment of the premium if you are not able to pay the premium on time. If the premium is paid monthly, then the grace period offered is 15 days and if it is paid yearly, then the grace period offered is 30 days. If the payment is delayed beyond the grace period, the policy will be terminated.
- Surrender value: The amount that is paid if the policy is closed before the maturity date. All Life Insurance policies do not have the provision of payment of surrender value. So before purchasing a policy, you should ensure if there is the surrender value concept and what will be the amount paid.
- Paid-up-value: There is an option given by the insurance company to reduce the sum assured in proportion to the premiums paid if the policyholder discontinues payment of the premium after some time. If there are any benefits associated with the sum insured, the same will be reduced in proportion to the revised sum assured. Then this policy will be termed as the reduced paid-up-value policy.
- Underwriters: Underwriters are the ones who assess the risk involved in an insurance policy. The insurance policy will not be issued without the consent of the underwriters and the claim will not be settled without the consent of the underwriters. In brief, the role of the underwriters begins with the issuance of the policy and ends with the claim settlement of the policy.
- Revival period: The policy will lapse if the premium is not paid beyond the grace period. However, if the policyholder intends to reactivate the policy, the same can be done within a time limit. This period offered for the reactivation of the policy is the revival period. The revival of the policy also has to be done with the consent of the underwriters.
- Exclusions: There are certain risks that are not covered in the insurance policy and claims submitted against these risks will be rejected. You should look for the exclusions in the insurance plan before purchasing the policy. For instance, any damage due to riots, natural calamities, etc., may not be covered and in that case, these become the exclusions.
- Nominee: Nominee is the person assigned to receive the death benefit on the death of the policyholder during the tenure of the policy. The nominee could be the wife, children, or parents. The nominee has to submit a claim for the death benefit as mentioned in the policy to avail the benefit.
- Claim process: In the event of the death of the policyholder, the nominee has to place a claim request to avail the death benefit as described in the policy.
- Tax benefit: All the premiums paid towards the Life Insurance policies are eligible for deduction under Section 80C of the Income Tax Act 1961. The maximum benefit that can be availed is up to Rs. 1.50 Lakhs.
How to Decide on the Best Life Insurance Plan That Suits Your Needs?
Before deciding on the best Life Insurance plan, you should understand some basic steps that will lead you to make the right decision.
- Need-based policy: The policy should be need-based. It means you should assess the number of dependants in your family, the source of income, and the monthly commitments before you decide on the Life Insurance policy. You should also draw a list of goals that you have set for yourself like education of your children, marriage of your children, retirement plans, buying a dream house, etc., and plan the investment accordingly.
- Seek the help of an advisor: There are insurance advisors who can help you with your decision. They will consider all the angles like the source of income, monthly expenditure as per your lifestyle, the number of dependents, your assets and liabilities, etc., and will arrive at a sum assured. They will be able to advise you on which plan to choose. They will help you choose the plan that would give you optimum returns for your investment. The plans could be a term plan, unit-linked plan, endowment plan, or a combination of the plans. So, it is necessary to seek the advice of these insurance advisors if you are confused about the best plan for you.
- Compare products: There are a lot of players in the market giving various benefits with varied premium levels. Compare the products and choose the one that would give you optimum benefit for the least investment.
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