Life Insurance

The basic customer needs met by life insurance policies are protection and savings. Policies that provide protection benefits are designed to protect the policy holder (or his dependents) from the financial consequence of unwelcome events such as death or long term sickness / disability. Polices that are designed as savings contracts allow the policyholder to build up funds to meet specific investment objectives such as income in retirement or repayment of a loan. In practice, many policies provide a mixture of savings and protection benefits.

Types of Policies:

The common types of life insurance policies are:

1) Endowment assurance
2) Money Back Plan
3) Whole Life Assurance
4) Unit Linked Plan
5) Term Assurance
6) Immediate Annuity
7) Deferred Annuity
8) Riders

Endowment Assurance: There are basically two variants of this policy: (1) Non participating (Without Profit) Endowment Assurance (2) Participating (With Profit) endowment Assurance.

Non-Participating Endowment Assurance: This policy offers a guaranteed amount of money (the sum assured) at the maturity date of the policy in exchange for a single premium at the start of the policy or a series of regular premiums throughout the term of the policy. If the policyholder dies before the maturity date then usually the same sum assured is paid on death. Of course, the policy could be structured with a sum assured paid on death, which is different from that paid at maturity.

The policy holder may be allowed to surrender the policy before maturity and receive a lump sum (surrender value or cash value0 at the time, on guaranteed or non- guaranteed terms. If the policy holder wishes to keep the policy in force but without paying further premiums, a reduced sum assured (paid up value or paid up sum assured) may be granted. There is usually a provision to take a loan up to 90% of the surrender value.

Participating Endowment assurance: The structure of this policy is similar to that of the non-participating policy except that the initial sum assured under the policy is expected to be enhanced by payment of bonuses (distribution of the profits made by the insurance company) to the policy holder. In the Indian context, bonuses usually take the form of additions to the initial sum assured and become payable in the event of the occurrence of the insured event i.e. survival up to the maturity date or earlier death. However some life insurance companies provide bonuses (dividends) as regular cash payments. In this case, the policyholder may have the option of using the cash bonus to offset the future premiums payable.

Money Back Plan:

This is a popular savings cum protection policy because it provides lump sum at periodic intervals. For example, given an initial sum assured of Rs 1000 and a term of 20 years, the policy may provide for part payment of the sum assured as follows:

1) 20% at the end of 5 years
2) 20% at the end of 10 years
3) 20% at the end of 15 years
4) 40% at the end of 20 years

This policy is usually sweetened by providing a guaranteed addition to the initial sum assured every year. Continuing with the above example, if the guaranteed annual addition is say Rs 100 per 1000 sum assured, then the policy holder gets 400 of the initial sum assured plus guaranteed addition of Rs 200 [ = 100 x 20] at the end of the 20 year term. In the event of death of the policy holder within the specified term, the entire (initial) sum assured plus the accrued guaranteed additions (accrued up to that point of time) become payable.

The money back policy illustrated above is a non-participating policy. The policy can also be offered in the participating format in which case the guaranteed additions will be replaced by bonuses.

As with endowment assurance a surrender value on guaranteed or non-guaranteed terms may be paid if the policy holder chooses to withdraw from policy. Alternatively the policyholder may have the option of converting the policy into a paid up policy. Usually there is no loan facility attached to this policy.