LIFE INSURANCE PRODUCTS Basic Elements A life insurance product has, essentially, two basic elements: —Risk cover - i.e. benefit payable in the event of death. —Savings - i.e. the benefit payable in the event of survival. Life insurance plans, which provide only risk cover during a specified period without any survival benefit, are called TERM INSURANCE plans. Whole Life plans are effectively Term Insurance plans. Life insurance plans, which provide for payment of policy monies only on survival of the specified period, are called PURE ENDOWMENT plans. All plans of life insurance are combinations of both term insurance element and pure endowment element in different proportions. An endowment plan stipulates that a specified Sum Assured (SA) would be paid if the life assured dies within the term selected or survives that term. The death benefit is paid by term assurance and the survival benefit is paid by the pure endowment. An annuity plan is a pure endowment plan with the condition that the SA is payable in instalments over a specified period of time. Term Life Insurance In the case of a Term life insurance contract, the sum assured is payable only in the event of death during the term. In case of survival, the contract comes to an end at the end of term. There is no refund of premium. These policies are usually non-participating. Since only death risk is covered, the premium is low and the contract is simple.Some companies do offer participating policies under term insurance plans or return of premiums at the end of maturity. They help to provide collateral security for loans. Some insurers offer term insurance policies for longer terms of 3, 5 or 6 years with fixed (level) premium payable each year. Such contracts can be renewed for further equal periods till the life assured reaches the age of 65 years.
Type of Term Insurance Policies Mortgage Redemption Policies: Term insurance policies can also be for decreasing sum assured. The SA in a decreasing term insurance plan would go on reducing to match the outstanding principal, if taken in connection with a loan arrangement. These are called Mortgage Redemption Policies. Increasing term insurance plans: These plans are not issued as separate contracts. Often they are provided as riders (additional conditions) to endowment or whole life policies. Under Money Back Plan although parts of sum assured are paid on survival of 5, 10, 15 or 20 years, the full sum assured continues to be payable on death. In other words, there is an effective increase in SA cover on death, which is provided by increasing term insurance cover to the extent of the survival benefits paid. Benefits of Term Insurance Plans There is always a need for risk cover as protection against loss due to death. Many insurance needs are of temporary or terminating nature (Example: Mortgages) which can be protected with temporary or terminating insurance. Few men can be adequately insured for even the minimum level of their real life values without the advantage of low premium Term insurance. Persons having low income can provide for meeting family obligations, at low cost. Persons on the thresholds of new careers or business can avail of term insurance policies to save on costs, so that they can utilize their balance income or capital for developing their career or business. Persons, who have invested substantially in new ventures by borrowing at heavy interest rates or mortgaging their property, can cover the risk of serious loss to the investment through term insurance at low premium. Term insurance is also useful as supplement to endowment or whole life policies with a view to get higher risk cover. In modern business, indemnifying the loss to business, due to the death of the key person responsible for the running of the business, can be done through term insurance plan.
Insurers are careful while considering proposals for large amounts of term insurance. Some people who are not in good health may tend to take term insurance plans for large Sum Assured. That would be unfair advantage, contravening the principle of utmost good faith. As a result, there would be adverse selection against the interests of the insurance company and the community of policyholders. Convertible Term Assurance Policy A convertible term assurance policy, as currently offered by L.I.C., is a term assurance policy of specified term 5, 6 or 7 years, which includes a provision for convertibility. The insured can convert the policy at the end of the term into an endowment type of contract, without having to undergo a medical examination to satisfy the insurer on the acceptability of the life for insurance afresh. On conversion, the premium will change suitably. Such an option can be exercised any time during the term of the policy except in the last two years, thereby obviating adverse selection against the insurer during the last two years. If conversion of the policy to whole life policy or endowment assurance policy is not exercised, then it continues as a term assurance plan. Convertible term assurance plan would be most useful for those who are initially unable to pay the high rates of premium required for whole life or endowment insurance plan but hope to be able to do so in the future. Whole Life Insurance Under whole life plans, life insurance protection is available throughout the lifetime of the life assured. It is effectively a long term insurance plan with a level premium. The sum assured is payable only on the death of the insured. Premiums are, payable till death In the early years of life insurance, a whole life policy was deemed to have matured once the life assured reached the age of 100. The sum assured was paid to him at the age of 100. Mortality tables were available only upto age 100. Nowadays, insurance companies waive payment of further premiums under whole life plan, if the premiums are paid for say, 35 or 40 years or the life assured has attained the age of 75 or 80 years.
Limited Payment whole Life Plan Under the limited payment whole life plan the premium paying term is fixed, although the sum assured is payable only on death. Similar to convertible term insurance plans discussed earlier a whole life policy can have a provision for conversion into an endowment assurance plan at the end of a fixed period, usually 5 years. If the conversion is not exercised as specified, the policy continues as a whole life policy. The decision for conversion can be made at the very inception of the whole life plan in which case the conversion is automatically effected at the end of the specified period. A decision once made cannot be changed. Endowment Insurance Endowment insurance plans provide for the payment of the S.A. in case of death during the term, or on survival of the term. This plan is a combination of term level premium plan and pure endowment plan. Since the sum assured is payable on death or on survival, the premium charged under endowment plans are higher than term insurance plans. There are many variations in endowment insurance linked with the SA payable or premium paying term. For example- the SA payable on survival can be fixed as twice the amount payable on death. The LIC's double endowment plan is of this kind. On the contrary, the SA on death can be fixed as twice the amount payable on survival. The LIC's Jeevan Mitra and Bima Kiran policies have such provisions. The term insurance component is more than the pure endowment component. Generally, premiums are payable during the entire term of an endowment policy. But under limited payment endowment plans, premium paying period is fixed as less than the term of the policy. The payment of premiums stops at the end of this period but the S.A is payable on survival of the term or on earlier death. Joint Life Endowment Plan Under this plan, two lives can be insured under one contract. The sum assured is payable at the end of the endowment term on survival of both
the lives insured, or on the earlier death of either of the two. Married couples can take such a policy covering the risk on both the lives, when both are having incomes of their own. Partners in business can also do the same. Money Back Endowment Plan Some persons may need a lump sum amount even before the expiry of the term of the policy. If they take loans under the policies, the risk cover (amount payable on death) comes down and interest payable on the loan accumulates as a debt on the policy. To meet this need, insurers have devised endowment plans wherein part of the S.A is made payable periodically during the term of the policy. Notwithstanding the payments at periodic intervals, the S.A at risk (payable at death), continues to be the same till the end of the term. In some professions like film artistes and sportsmen, earnings would be high but only for a short duration. They can afford to pay greater amounts as premium, for short periods. To meet the needs of such persons, the special endowment plan is devised where the premiums charged are very high for a few initial years, followed by lower premiums subsequently. Benefits and Limitations of Endowment Plans Endowment plans were the most popular, consisting of more than 70% to 80% of the total business done. They are known and easily understood by people. There are no complications. The SA is payable on death or on survival. One of the reasons for the popularity of the endowment assurance plans was its advantage as savings plan. In almost all savings plans or investment schemes, like bank deposits or shares, the total savings is equal to the amount already set aside plus interest and appreciation. In an endowment plan, however, the total SA (target amount to be accumulated or saved) is assured from the beginning, to be paid for in installments over the remaining lifetime. Marriage Endowment Plan The Marriage endowment Plan has the specific condition that the sum assured is payable only after the expiry of the term even if death of the life assured takes place earlier. The term is fixed corresponding to the likely period when the daughter may get married. Premium ceases on the death of the life assured. The object of earmarking the insured sum for the marriage of the child is taken care of.
Education Annuity Plan In the Educational Annuity Plan the sum assured is paid in instalments spread over a specified period, say 5 years after the expiry of the term of the policy. This is normally paid in 10 half-yearly instalments. The concept is that this policy should meet the expenses of higher education.
Children's Deferred Assurance Plan These are insurance plans where the father or mother proposes for insurance on the life of the minor child and pays premiums. However, the risk on the life of the child will begin only after the child reaches, a specified age. The period during which there is no risk cover is called the Deferment period. The day on which the risk commences is called the Deferred Date. The risk may continue after the deferred date for a predetermined term, either as a Whole Life or an Endowment Policy. The original policy covers the entire term including the deferment period. The risk will commence without medical examination on the deferred date, unless the deferment period is less than 10 years. The main advantage of this plan is that a policy for a relatively large amount can be taken for a relatively low premium. This premium will continue even after the deferred date, irrespective of the state of health of the children. The proposer has the option to say that the policy will not continue after the deferred date. In that case, the policy terminates on that date and cash payment is made to the proposer. With a view to making the life assured, viz. the child, the absolute owner of the policy after the deferred date, a special provision is made by which the policy automatically vests in the life assured on the deferred date. Thereafter, the life assured becomes the absolute owner of the policy. The policy is deemed to be a contract between the insurance company and the life assured. That is' why the vesting age has to be at least 18 years. Otherwise, the assured would remain a minor and there cannot be a valid contract with the assured.
Under Children's Assurance Plans, there are special provisions to cover contingencies before the deferred date. Premiums may be waived if proposer dies before vesting date. The proposer, different from the life assured, can terminate the policy, in which case the premium will be refunded, subject to conditions. If the life assured dies before the deferred date, the benefits (return of premiums) follow different specifications. Participation in surplus normally will commence after the deferred date but can be effective retrospectively from an earlier date. There are variations in these matters between different policies.
ANNUITIES An Annuity may be defined as a periodic repayment made during a fixed period or for the duration of a designated life or lives. If the payments are made with reference to life contingencies, the contract is known as a life annuity. Liquidation of the capital is the basic mission of the annuities. Life Insurance has as its principal mission the creation of an estate on both its decreasing term assurance and its investment sides the annuity, on the contrary, has as its basic function the systematic liquidation of that which has been created either along life insurance on non-life insurance lines In one sense the life annuity may be described as the opposite of insurance protection against death, In its pure form a life annuity whereby for a cash consideration one party (the insurer) agrees to pay the other (the annuitant) a stipulated sum (the annuity) periodically throughout life. The purpose of the annuity, it is seen, to protect against a Risk the outliving of one's income^ which is the opposite of the purpose a person, who desires life insurance as protection against the loss of income through premature death, is seeking. Classification of Annuities: There are two categories immediate annuity and deferred annuity. An immediate annuity is one under which the first benefit payment is the one payment interval (monthly, annually or otherwise), from the date of purchase. This type of Life Annuity must always be purchased with a single premium The annuity is payable till the annuitant lives (simple life annuity) or for a period certain (5, 10, 15 or 20 years) and thereafter till the annuitant is alive. These annuities are not issued for yearly annuities of less than Rs. 100/- or monthly annuities of less than Rs. 20/-.
The deferred annuity, may be purchased with either a single premium or a periodic level premium. Under a deferred life annuity, there must be a period longer than one benefit payment interval before benefit payments begin.This period is called as the defferment period . The mode of deferred annuity payment is similar to that under immediate annuity, with a further condition that deferred annuities are not issued for cash option less than Rs. 1000/'. Cash option is the sum receivable at the end of premium payment or deferment period in lieu of annuity and is payable only if this period is 10 years or more. In case of death of the annuitant during deferment period certain percentage of premiums paid are refunded.
COMBINATION OF TERM INSURANCE AND PURE ENDOWMENT PORTION-EXAMPLES OF A FEW EXISTING PLANS : life cover the same is not given to all individuals. It is given only to an insurable person Combination Plans : The insurer (LIC OF INDIA in our country) offers various insurance contracts (plans of insurance) according to the specified needs of the insuring public. It should be noted that all these are combination of four basic contracts as discussed above. Other combinations found in the following plans of insurance offered by the LIC are : a) Double Endowment Plan (Table No.18) : This plan is a combination of Pure Endowment for the sum assured and ordinary endowment (i.e. 2 Pure Endowment + Tern Assurance). b) Jeevan Mitra (Table No.88) & Jeevan Griha (Double Cover) (Table No.104) It is a combination of Term and ordinary + Endowment, i.e. = ordinary endowment + term = 2 Term + Pure Endowment. c) Money Back Policies (Table No. 75 & 93) : These are composed of ordinary term and pure endowments of different terms and amounts. d) Jeevan Dhara (Table No.96) : It is a combination of a sort of Pure Endowment and Immediate Annuity and Whole Life. e) A Deferred Annuity Plan (Table No.45) can be viewed as consisting of a Pure Endowment coupled with return of premiums and immediate annuity.
ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.
Unit Fund The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. What is a Unit? It is a component of the Fund in a Unit Linked Policy. Different types of Fun s offered under ULIP Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available General Description
Nature of Investments
Risk Category
Equity Funds
Primarily invested in company stocks with the general aim of capital appreciation
Medium to High
Income, Fixed Interest and Bond Funds
Invested in corporate bonds, government securities and other fixed income instruments
Medium
Cash Funds
Sometimes known as Money Market Funds Low — invested in cash, bank deposits and money market instruments
Balanced Funds
Combining equity investment with fixed Medium interest instruments
Benefit payable on death during the term of the policy The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.
benefit payable on the maturity of the policy The value of the fund units with bonuses, if any is payable on maturity of the policy. SWITCH” option SWITCH” option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number.
Unit Linked Insurance Polices (ULIPS) Unit linked guidelines were notified by IRDA on 21st December 2005. The main intent of the guidelines was to ensure that they lead to greater transparency and understanding of these products among the insured, especially since the investment risk is borne by the policyholder. It is the endeavor of IRDA to enable the buyer to make the most informed decision possible when planning for financial security.. What is a ULIP? ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR.
Unit Fund The allocated (invested) portions of the premiums after deducting for all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. What is a Unit? It is a component of the Fund in a Unit Linked Policy. Different types of Fun s offered under ULIP Most insurers offer a wide range of funds to suit one’s investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund. The following are some of the common types of funds available General Description
Nature of Investments
Risk Category
Equity Funds
Primarily invested in company stocks with the general aim of capital appreciation
Medium to High
Income, Fixed Interest and Bond Funds
Invested in corporate bonds, government securities and other fixed income instruments
Medium
Cash Funds
Sometimes known as Money Market Funds Low — invested in cash, bank deposits and money market instruments
Balanced Funds
Combining equity investment with fixed Medium interest instruments
Are Investment Returns Guaranteed in a ULIP? Investment returns from ULIP may not be guaranteed.” In unit linked products/policies, the investment risk in investment portfolio is borne by the policy holder”. Depending upon the performance of the unit linked fund(s) chosen; the policy holder may achieve gains or losses on his/her investments. It should also be noted that the past returns of a fund are not necessarily indicative of the future performance of the fund.
Charges, fees and deductions in a ULIP ULIPs offered by different insurers have varying charge structures. Broadly, the different types of fees and charges are given below. However it may be noted that insurers have the right to revise fees and charges over a period of time. Premium Allocation Charge This is a percentage of the premium appropriated towards charges before allocating the units under the policy. This charge normally includes initial and renewal expenses apart from commission expenses. Mortality Charges These are charges to provide for the cost of insurance coverage under the plan. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc
Fund Management Fees These are fees levied for management of the fund(s) and are deducted before arriving at the Net Asset Value (NAV) . Policy/ Administration Charges These are the fees for administration of the plan and levied by cancellation of units. This could be flat throughout the policy term or vary at a pre-determined rate. Surrender Charges A surrender charge may be deducted for premature partial or full encashment of units wherever applicable, as mentioned in the policy conditions. Fund Switching Charge Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge. Service Tax Deductions Before allotment of the units the applicable service tax is deducted from the risk portion of the premium. Investors may note, that the portion of the premium after deducting for all charges and premium for risk cover is utilized for purchasing units
How much of the premium is used to purchase units? The full amount of premium paid is not allocated to purchase units. Insurers allot units on the portion of the premium remaining after providing for various charges, fees and deductions. However the quantum of premium used to purchase units varies from product to product. The total monetary value of the units allocated is invariably less than the amount of premium paid because the charges are first deducted from the premium collected and the remaining amount is used for allocating units. One seek refund of premiums if not satisfied with the policy, after purchasing it? The policyholder can seek refund of premiums if he disagrees with the terms and conditions of the policy, within 15 days of receipt of the policy document (Free Look period). The policyholder shall be refunded the fund value including charges levied through cancellation of units subject to deduction of expenses towards medical examination, stamp duty and proportionate risk premium for the period of cover.
Net Asset Value (NAV) NAV is the value of each unit of the fund on a given day. The NAV of each fund is displayed on the website of the respective insurers. Benefit payable on death during the term of the policy The Sum Assured and/or value of the fund units is normally payable to the beneficiaries in the event of risk to the life assured during the term as per the policy conditions.
benefit payable on the maturity of the policy The value of the fund units with bonuses, if any is payable on maturity of the policy. It possible to invest additional contribution above the regular premium as per their choice subject to the feature being available in the product. This facility is known as “TOP UP” facility. SWITCH” option SWITCH” option provides for shifting the investments in a policy from one fund to another provided the feature is available in the product. While a specified number of switches are generally effected free of cost, a fee is charged for switches made beyond the specified number. Partial Withdrawal “Partial Withdrawal” option which facilitates withdrawal of a portion of the investment in the policy. This is done through cancellation of a part of units. if payment of premiums is discontinued? 1a) Discontinuance within three years of commencement – If all the premiums have not been paid for at least three consecutive years from inception, the insurance cover shall cease immediately. Insurers may give an opportunity for revival within the period allowed; if the policy is not revived within that period, surrender value shall be paid at the end of third policy anniversary or at the end of the period allowed for revival, whichever is later. 2b) Discontinuance after three years of commencement -- At the end of the period allowed for revival, the contract shall be terminated by paying the surrender value. The insurer may offer to continue the insurance cover, if so opted for by the policy holder, levying appropriate charges until the fund value is not less than one full year’s premium. When the fund value reaches an amount
equivalent to one full year’s premium, the contract shall be terminated by paying the fund value. Information related to investments is provided by the Insurer to the policyholder The Insurers are obliged to send an annual report, covering the fund performance during previous financial year in relation to the economic scenario, market developments etc. which should include fund performance analysis, investment portfolio of the fund, investment strategies and risk control measures adopted.