Insurance is said to be the subject matter of solicitation. The insurance agent gets a commission for selling a policy. Some agents undertake to pay certain number of premiums out of their commission as an incentive for you to buy and also to incentivise to keep the policy alive. Insurance contract requires an offer, an acceptance of the offer and consideration for the contract by way of premium. The instrument of insurance is called the policy. Life insurance is not a substitute for investments as the returns are not comparable with other instruments available in the market. You have to make a trade off between yield and the comfort provided against risks in life. This comfort can be provided only by life insurance.
How much life insurance do you need?
Insurance on life is also called as assurance. Death is certain but when it will claim a life is uncertain. You also cannot put a value on life as life is precious. Hence life insurance can be bought from multiple insurance companies for unlimited sum. By taking a life insurance policy, you are taking an assurance from the life insurance company that in the event of death of the insured or on the maturity of the policy, the insurance company will pay the sum assured to the life assured or the nominee as the case may be. This is different from general and miscellaneous insurance where you insure for the fortuitous loss and insurance value is limited to the value of the loss which can be quantified. That is, you cannot buy multiple insurance for an unlimited value in the case of general and miscellaneous insurance. For example, you cannot take multiple insurance on your motor car for unlimited value.
Various types of life insurance products
There are so many different types and variations offered by life insurance companies that it is impossible to be covered in an article of this type. There are basically 3 types of life insurance. Whole life, term and endowment with some variations like money back, group insurance, unit linked insurance plan, annuity riders etc. Different companies have same product but under different names. These policies, by whatever names called, have to be selected by you based on suitability to your requirement. For that, you should know the basic differences in these policies although all fall under the life insurance category. Term life insurance is the basic coverage that generally does not build life insurance policy cash value. Consumers typically buy term life insurance to provide death benefit protection for the dependents for a specific period of time, while whole life cover is for an indefinite period and builds cash value for the nominee on the death of the life assured. The more popular cover is endowment policy which provides life cover plus cash value accretion by way of periodic bonus. Endowment policy can be taken for selected period.
Insurance contract needs concurrence of both insurer and insured
The entry age for life insurance contract is not standard. It differs from company to company and scheme to scheme. However, since insurance is a contract, your minor child cannot be sold a policy. But he can be a nominee in the policy. Similarly a company may not entertain a proposal if you are a super senior citizen. The insurance contract requires utmost good faith, and if vital information is not declared at the proposal stage or false information is provided, your contract may become void or voidable as the case may be. Medical check up on record is always helpful in settling insurance claims especially when claims are made within 2 years of taking a policy.
Life insurance policy can be transferred only through assignment
The main covenant relating to the insurance contract are incorporated in the policy document in fine print. The insurance company may deny a claim if the conditions are violated. The policy document is your proof of contract and an important document to be kept safely along with other valuables with receipts for periodic premium payments. The policy is not a negotiable document but is assignable. Assignment can be done through a deed of assignment duly registered with the insurer. Assignment cancels out the nomination.
Surrender value explained
You can take a loan against the life insurance policy from your bank provided the policy has acquired a surrender value and can be assigned in their favor. A whole life policy, for example, does not acquire a surrender value, as it acquires cash value only on the death of the life assured. In simple English, surrender value is the amount you will receive from the insurance company if you want to surrender the policy now, before its maturity date. So, banks keep a margin on the surrender value and give a loan. In case of default in repayment of loan, they surrender the assigned policy to the insurer and get the loan cleared. If you have not defaulted in loan repayment, on clearance of loan, the policy is re-assigned to you, by the Bank and you should ensure that the insurer has duly registered the re-assignment in your favor. However, re-assignment does not restore the nomination, and you need to register a fresh nomination.
Factors that influence your insurance premium
Life insurance premiums are not arbitrarily set. Many company portals have calculators available for different schemes. If entry age is to the maximum permitted under the scheme and tenure is also maximum permitted, the premium will be high, but maximum policy amount will be restricted and low. Factors like entry level age, tenure, additional cover for accidents or riders, existing diseases, medical fitness, habits like chronic drinking and smoking etc. will influence the premium rates. In other words, the premium amount has a linkage to the apparent risk the insurer is taking by assuring your life. Non-payment of premiums may entail the lapsing of the policy. But a lapsed policy can be revived subject to the conditions set by the insured.
Please be sure that you will be able to afford the insurance premiums and tweak the amount and tenure according to your paying capacity. Many companies provide flexible premiums. Discuss with your financial advisor before making any commitment. Go through the proposal document, understand the queries and fill up carefully and honestly. Keep a copy of the filled-up proposal as a permanent record.
IRDA is a regulatory authority for all insurance matters including ULIP. They have taken a lot of initiative for consumer protection and education. Please browse through their website to know your rights and obligations.
Tax benefits of life insurance
Insurance premiums paid can be deducted from your taxable income under section 80C upto ₹1.5 lakhs per financial year as per latest finance bill. The amount of claims settled under the policy are also tax free under section 10 (10D). More than tax benefits, life benefits for your loved ones in the event of any unfortunate event should be the guiding principle for taking life insurance.
PS: One important aspect: which type of insurance policy to select is deliberately not covered in this article. You need to make a comprehensive analysis before you can decide with the help of your financial advisor.