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Everything you wanted to know – Life Insurance

1. What is Life Insurance?

Life Insurance is a financial cover for a contingency linked with human life, like death, disability, accident, retirement etc. Human life is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is loss of income to the household.

Though human life cannot be valued, a monetary sum could be determined based on the loss of income in future years. Hence, in life insurance, the Sum Assured (or the amount guaranteed to be paid in the event of a loss) is by way of a 'benefit'. Life Insurance products provide a definite amount of money in case the life insured dies during the term of the policy or becomes disabled on account of an accident.

2. Why should you buy Life Insurance?

All of us face the two risks of dying too soon or living too long.

  • Life Insurance is needed to ensure that your immediate family has some financial support in the event of your demise and to finance your children’s education and other needs.
  • To have a savings plan for the future so that you have a constant source of income after retirement
  • To ensure that you have extra income when your earnings are reduced due to serious illness or accident.
  • To provide for other financial contingencies and life style requirements
3. Who needs Life Insurance?

Primarily, anyone who has a family to support and is an income earner needs Life Insurance. In view of the economic value of their contribution to the family, housewives too need life insurance cover. Even children can be considered for life insurance in view of their future income potential being at risk.

4. How much Life Insurance is needed?

The amount of Life Insurance coverage you need will depend on many factors such as:

  • Life Insurance is needed to ensure that your immediate family has some financial support in the event of your demise and to finance your children’s education and other needs.
  • Dependents you have
  • Amount of Debts or mortgages
  • Lifestyle you want to provide for your family
  • Provision for children’s educational needs
  • Investment needs

You could use the Human Life Value calculator to calculate the amount of life cover (link to calculator)

5. When does the coverage on the policy begin?

Coverage under a life insurance policy begins once the proposal made to the life insurance company is accepted and communicated and the person making the proposal has paid the first premium. Most companies provide some temporary conditional coverage during the application process assuming certain conditions are met. This temporary coverage is limited in time and amount. The availability, amount and conditions are described in the application and vary from company to company. If you are replacing existing coverage, you should never drop your existing coverage until your new policy has been approved, and your first premium has been paid.

6. When could a person cover the lives of spouse and children?

There is no single guidance or rule for this. Initially, life insurance for appropriate amounts should be effected on the family breadwinner(s). It is of utmost importance that the income earning capacity of the primary breadwinner be fully protected, through the purchase of the required amount of life insurance before contemplating the purchase of life insurance on children or on a non-wage earning spouse. In a dual-earning household, it is important to protect the income earning capacity of both spouses. Life insurance on a non-wage earning spouse is often recommended for the purpose of paying for household services lost at this individual's death.

7. What is a life insurance policy?

A written document issued by a life insurance company to a policyholder, which expresses the insurance contract between the company and the policyholder.

8. Who is a proposer?

The person who proposes to enter into a contract of insurance with a life insurance company to insure himself or another life on whom he has insurable interest.

9. Who is a life insured?

The person whose life is covered under the contract of insurance.

10. What is premium?

Premium is the consideration (price) payable periodically to the life insurance company for the risk undertaken by it under the insurance policy.

11. What is underwriting?

Underwriting is the process through which a life insurance company takes a decision whether to accept the risk and if so at what rate of premium, after considering relevant facts disclosed to it.

12. What should I look for before I decide to buy a policy?

You must check and see whether or not there is availability of guarantee of return, what the lock in period is, details of premium to be paid, what would be implications of premium default, what the revival conditions are what the policy terms are, what are the charges that would be deducted, would loan be available etc.

13. What is the importance of a proposal and the disclosures made therein?

The disclosures made in a proposal are the basis for underwriting a policy and therefore any wrong statements or disclosures can lead to denial of a claim.

14. Who is a policyholder?

A person who has entered into a contract of insurance with the insurance company.

15. Can you have more than one insurance policy? Why would you need multiple policies?

Yes. When one is purchasing an insurance policy to cover the entire risk, it might be prudent to break the policy into smaller units. Though this increases the cost of insurance, as the discount in premium for larger sum assured may not be available, the benefit may offset this cost. Having multiple policies allows you to discontinue some policies while continuing the others, in case there is a financial crisis because of which you suddenly find yourself in a tight spot. After the financial crisis is over, you may reactivate the other discontinued policies, subject to the terms of those policies.

16. Is money payable under a life insurance policy free from attachment?

Section 60(1)(kb) of the Code of Civil Procedure, 1908 states that all moneys payable under a policy of insurance on the life of the judgment debtor will be free from attachment. This places an assigned policy outside the reach of the creditors.

17. What is lapse of policy?

The termination of policy caused by the policy holders failure to pay the premiums within the stipulated period.

18. What is a paid up policy?

Once the premium on a life insurance policy for a specified period is paid in full, the policy may not lapse even if no subsequent premiums are paid. Such policies are known as paid-up policies. In such cases, the sum originally assured is reduced to a sum bearing the same ratio to the sum originally assured as the number of premiums actually paid to total number of premiums originally stipulated as payable under the policy.

By way of example, if 6 out of the originally stipulated 30 premiums are paid, the sum assured under a paid-up policy could still be 20 percent of the original sum assured by the policy.

19. What is maturity date?

The date on which the policy comes to on end and the date on which the survival benefits are payable.

20. What is maturity value?

The amount payable under a life insurance policy on its maturity date.

21. What is a claim?

Demand presented for payment of the benefit due under the terms of an insurance policy.

22. What is group insurance policy?

An insurance policy that provides coverage for a number of people under one contract, called a master contract. In a Group insurance policy, the policy holder is usually the employer who contributes premium which is a certain percentage of the salary of the employees in the Employers organization. However, the employees are the beneficiary in such Group insurance policies. In general, in a group insurance policy the insurance company ordinarily cannot turn down any applicant that is a member of the defined group.

23. What are "with profit" policies?

With Profit Policies are policies where the policyholders receive bonuses, upon the insurance company generating surplus and declaring them to the policyholder. Only a "with profit" policy is eligible to bonus. The bonus that may be receivable may vary year to year according to the surplus generated by the insurance company. 'With profit' policies are more popular because of the possibility of getting increasing bonus every year even though the premium payable is higher than the premium paid in 'without profit' policies.

24. What is reinsurance?

The practice of insurance companies insuring the risk insured by them is called reinsurance.

25. What categories of facts have to be disclosed?
  • Facts, which show that the particular risk represents a greater exposure than normal. By way of example, someone working at heights or underground would be required to disclose this information, as it will add to the risk undertaken
  • External factors, those situations, which make the risk greater than would normally be expected. For e.g. a person with a dangerous hobby
  • Any refusal (declinature) or special terms imposed on previous proposals by other life insurers;
  • The existence of other life insurance policies on the life of the life to be insured
  • Full facts relating to the health of the life to be insured
  • Generally, to disclose fully and completely all information as required in the proposal form
26. Are there are some circumstances which are material but it is not necessary to disclose. What are the such areas?

The areas concerned could be:

  • Facts of law. The insurer is deemed to know the law of the land
  • Facts of common knowledge. An insurer is deemed to know about such things as normal processes within a particular trade. For example, the work done by a military personnel
  • Facts, which lessen the risk. The fact that the proposer undergoes regular health checks
  • Facts, which could be discovered by reasonable diligence. This occurs where an insurer has been put on inquiry by a statement on a proposal form. The most common example of this would be where a proposer inserts a phrase see your records instead of completing fully the previous claims history
27. Who all have Insurable Interest?

By way of example,

  • Every person has unlimited insurable interest in his own life. It must be noted that life insurance contracts are not contracts of indemnity
  • Husband and wife have unlimited insurable interest in each others life
  • A creditor has insurable interest in the life of a debtor to the extent of the amount involved plus a reasonable amount of interest
  • Surety has insurable interest in the life of the principal to the extent of the surety amount involved
  • Partners in a business have insurable interest in the lives of their co-partners
  • A company has insurable interest in the lives of the key employees of the company
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