Chapter 5 – Life Insurance Products I
- Life insurance is a product that is intangible. A life insurance agent has the responsibility to enable the customer to understand the features of a particular life insurance product, what it can do and how it can serve the customer’s unique needs.
- Protection against the loss of economic value of an individual’s productive abilities is the primary purpose behind a life insurance product.
- Life insurance products also offer savings and investment.
- A life insurance policy, at its core, provides peace of mind and protection to the near and dear ones of the individual in case something unfortunate happens to him. The other role of life insurance has been as a vehicle for saving and wealth accumulation. In this sense, it offers safety and security of investment and also a certain rate of return.
- Rider in Life Insurance: A rider is a provision typically added through an endorsement, which then becomes part of the contract.
- Insurance riders are additional benefits added to insurance policies
- Insurance rider is a clause added to the base plan by paying an extra premium
- Insurance riders are options that allow the individual to enhance risk cover as per the terms and conditions of the policy
Types of Riders:
- Accidental Death Benefit (ADB) Rider: In the event of the death of the insured due to an accident, this rider provides for an additional amount over and above the normal sum insured, as specified at the time of taking the rider.
- Critical Illness Rider: This rider provides payment of a specified amount on the diagnosis of a critical illness
- Term Rider: This rider can be used to enhance the death cover amount in a policy at a nominal cost. Suppose an individual wants a savings policy like an endowment policy or money-back policy. Along with this, the individual also wants to increase the death cover without buying a separate term insurance policy. Then he/she can choose this rider.
- These riders may be availed of by the policyholder by opting for them and paying an additional premium for the purpose.
All Life Insurance plans have two basic elements:
- Death benefit: Provides for the benefit being paid on the death of the insured person during the term of the policy.
- Survival Benefit: Provides for the benefit being paid on survival of a specified period
- Term Insurance Plans: Term Insurance Plans are examples of temporary assurance. Here, the protection is available for a temporary period.
- The term can range between one year and 40 years. There is no savings or cash value element accruing to the insured. The plan only provides death benefit and there is no survival benefit.
Variants of Term Plans:
- Decreasing Term Assurance: Death benefit decreases in amount with the term of coverage. The premium payable each year, however, remains at level.
- Mortgage Redemption: Death amount corresponds to the decreasing amount owed on a mortgage loan. Typically in such loans, each equated monthly instalment (EMI) payment leads to a reduction of the outstanding principal amount. The insurance may be arranged such that the amount of death benefit at any given time equals the balance of principal owed.
- Credit Life Insurance: Designed to pay the balance due on a loan, if the borrower dies before the loan is repaid. Like mortgage redemption, it is usually decreasing term assurance.
- Increasing Term Assurance: Provides a death benefit, which increases along with the term of the policy. Premium generally increases as the amount of coverage increases.
- Term Insurance with Return of Premiums: The plan leaves the policyholder with the satisfaction that he/she has not lost anything in case he/she survives the term. Obviously the premium paid would be much higher than that applicable for an equivalent term assurance without return of premiums.
- Normally a term insurance policy covers only death. However, when it is purchased with a disability protection rider on the main policy and if someone were to suffer such a catastrophe during the period of term.
- Convertible term insurance policies allow a policyholder to change or convert a term insurance policy into a permanent plan like “Whole Life” without providing fresh evidence of insurability.
- The unique selling proposition (USP) of term assurance is its low price.
- Whole Life Policies: A whole life policy is a good plan for one who is the main income earner of the family and wishes to protect the loved ones from any financial insecurity in case of premature death.
- Whole life policies are also term plans.
- A whole life policy is a good plan for one who is the main income earner of the family and wishes to protect the loved ones from any financial insecurity in case of premature death.
- Endowment Assurance Plans: Endowment Assurance comes with both the death benefit and the survival benefit. The contract is a combination of decreasing term insurance and an increasing investment element. Shorter the policy term, larger is the investment element.
- People buy endowment plans as a sure method of providing security in the old age or for meeting specific purposes like having an education fund at the end of, say 15 years or a fund for meeting marriage expenses of one’s daughters
Variants of Endowment Plans:
- Money Back Policy: A Money Back Policy for 20 years may provide for 20% of the sum assured to be paid as a survival benefit at the end of 5, 10 and 15 years. The balance 40% need to be paid at the end of the full term of 20 years. Full death protection is available.
- Par and Non-Par Schemes: The term “Par” implies policies, which are participating in the profits of the life insurer.
- “Non- Par”, represents policies, which do not participate in the profits.
- Participating (Par) or With-Profit Policies: Unlike without profit or guaranteed plans, these plans have a provision for participation in profits. With-profit policies have a higher premium than others.
- Reversionary bonuses are declared as a proportion of the sum assured (e.g. Rs. 70 per thousand sum assured) and are payable as additional benefits on a reversionary basis (at the end of the tenure of the policy, by death or maturity or surrender).
- Terminal bonuses: These are contingent upon the life insurer earning some windfall gains and are not guaranteed.
- IRDA’s New Guidelines for Traditional Products
- Death Cover: New traditional products will have a higher death cover.
- For single premium policies, it will be 125% of the single premium for those below 45 years and 110% of single premium for those above 45 years.
- For regular premium policies, the cover will be 10 times the annualised premium paid for those below 45 years and seven times for others.
- Minimum Death Benefit will be at least the amount of sum assured and the additional benefits (if any).
- For participating policies the bonus is linked to the performance of the fund and is not declared or guaranteed before. But, the bonus once announced becomes a guarantee. It is usually paid in case of death of the policyholder or maturity benefit. This bonus is also called reversionary bonus.
- Bonus/Additional Benefits as specified in the policy and accrued till date of death shall become payable on death if not paid earlier.
- In case of non-participating policies, the return on the policy is disclosed in the beginning of the policy itself.
- Term insurance can be bought as a stand-alone policy as well as a rider with another policy.
- In decreasing-term insurance, the premiums paid remain constant over time.
- The higher the premium paid by you towards your life insurance, the higher will be the compensation paid
- to the beneficiary in the event of your death.