Basic life insurance products

Basic elements of a life insurance plan

Life insurance companies offer various plans covering the risk of dying early and the risk of living too long. Most insurance plans offered by insurance companies in India have two basic elements: 

• Death cover – this amount is paid to the nominee/beneficiary in the event of death of the life insured
  during the term of the policy. 
• Maturity benefit – this amount is paid on the maturity of the policy if the life insured survives through the term of the policy. Some policies like money-back policies also make periodic payments to the life insured during the term of the policy before maturity, known as survival benefits. Money-back policies will be discussed in detail in section B2M of this chapter.

Basic life insurance plans

The main types of life insurance plans offered by the insurance industry are discussed below. 

Term insurance plan

This is the most basic plan and simplest form of insurance offered by the life insurance industry. In this plan the life insurance company promises to pay a specified amount (sum insured) if the insured dies during the term of the plan. If the life insured survives the entire duration of the plan then they will not be entitled to anything, meaning that there is no maturity benefit with such policies.

So in short, this plan offers only death cover in the event of the death of the life insured during the period of the plan.

Key points: 

• Term insurance plans offer only death cover. 
• They are the simplest form of insurance plans offered by insurance companies. 
• Term insurance plans are the cheapest insurance plans available in the market. For a small premium an individual can take out a big protection cover against their liabilities. 
• Tenure: as the name suggests these plans offer protection only for a specified term. Normally the term starts from 5 years and runs to 10, 15, 20, 25, 30 years or any other term chosen by the insured and agreed by the insurer. 
• Protection against liabilities: to cover larger liabilities like home loans or car loans, term insurance cover is the best solution. 
• Insurance companies, under some term plans, allow the life insured to increase or decrease the death cover during the term of the plan. 
• Minimum and maximum sum insured: for most term plans the insurance company specifies the minimum and maximum sums insured. For some insurance companies the maximum sum insured is subject to underwriting. 
• Minimum and maximum age: most insurance companies specify the minimum and maximum age at entry and exit for term plans. 

Return of premium (ROP) plan

Some insurance companies also offer variants of term insurance plans in the form of return of premium plans. If the life insured dies during the term of the plan, the insurance company pays the specified amount (sum insured) to the nominee/beneficiary. If the life insured survives the entire policy tenure then on maturity the insurance company returns part of the premium, or the entire premium, to the life insured according to the terms of the policy.

In another variant of term insurance plans, some companies also pay some interest along with the premium on the maturity of the plan if the life insured survives until maturity. 

Pure endowment plan

A pure endowment plan is the opposite of a term insurance plan. In this plan the life insurance company promises to pay the life insured a specified amount (sum insured) only if they survive the term of the plan. If the life insured dies during the tenure of the plan then they will not be entitled to anything.

So in short, this plan offers only maturity benefit in the event of the life insured surviving the entire tenure of the plan. There is no death cover. 

Endowment insurance plan

An endowment insurance plan is basically a combination of a term insurance plan and a pure endowment plan. It offers death cover if the life insured dies during the term of the policy or survival benefit if the life insured survives until the maturity of the policy. 

Key points 

• Endowment insurance plans pay a specified amount on maturity of the plan if the life insured survives the entire term of the plan. 
• Death cover: these plans also have a death cover element. If the life insured dies before the maturity of the plan then the death cover benefit is paid to the nominee/beneficiary. 
• Savings element: these plans, apart from the death cover, also have a savings element. After deducting the death cover charges and administration charges from the premium, the remaining amount is invested by the insurance company on behalf of the life insured. The returns earned are later paid back to the life insured in the form of bonuses. 
• Goal-based investment: these plans can also be bought for accumulating money for specific plans like a child’s higher education or marriage etc. 
• Some insurance companies also allow partial withdrawal or loans against these policies. 
• This plan also comes in different variants. Some plans have a higher death cover than the maturity benefit and vice versa. 
• In some plans the maturity benefit is double the death cover. This type of plan is known as a double endowment insurance plan. 

Whole life insurance plans 

• A term insurance plan with an unspecified period is called a whole life plan. Some plans also have a savings element to them. The insurance company declares bonuses for these plans based on the returns earned on investments. 
• As the name of the plan specifies, this plan covers the individual throughout their entire life. 
• On the death of the life insured, the nominee/beneficiary is paid the sum insured along with the bonuses accumulated up until that point in time. 
• During the individual’s lifetime they can make partial withdrawals to meet emergency requirements. An individual can also take out loans against the policy. 

Convertible insurance plans

As the name suggests, this insurance plan can be converted from one type to another. For example, a term insurance plan can be converted into an endowment plan or a whole life plan or any other plan as allowed by the insurance company.

A convertible plan is useful when the life insured cannot initially afford to pay a higher premium. They can therefore start with a term insurance plan with a lower premium and then later convert it into an endowment plan or a whole life plan with a higher premium. Also, at the time of the plan conversion the life insured is not required to undergo a medical check-up.

Another advantage of convertible plans is that at the time of conversion there is no further underwriting decision to be made. 

Joint life insurance plans 

• Joint life insurance plans offer insurance coverage for two persons under one policy. This plan is ideal for married couples or partners in a business firm. 
• With some joint life insurance plans the death cover (sum insured) is payable on the death of the first joint policyholder and then again on the death of the surviving policyholder, along with the accumulated bonuses up to that date, if the death of both the policyholders happens during the tenure of the policy. 
• If both the joint policyholders survive until maturity or one of the joint policyholders survives until the maturity of the policy, then the maturity benefit along with the bonuses accumulated until that date is paid. 
• For some joint life policies the premiums have to be paid until the selected term or premium payment ceases on the death of the first joint policyholder. 
• In the case of joint life policies each life will be underwritten separately.

Annuities
An annuity is a series of regular payments from an annuity provider (insurance company) to an individual (called the annuitant) in return for a lump sum (purchase price) or instalment premiums for a specified number of years.
According to the manner in which the purchase price is paid, annuities can be either: 

• an immediate annuity; or 
• a deferred annuity.

An annuity is the reverse of a life insurance policy. In life insurance the insurance company takes on the risk, but with an annuity the annuitant takes on the risk that they won’t die in a very short space of time after paying the purchase price.

There are a number of different types of annuity available (such as a joint life, last survivor/life annuity with return of purchase price/increasing annuity) and we will look at these in detail in chapter 7. 

Group insurance plans 

• A group insurance policy provides insurance protection to a group of people who are brought together for a common objective. 
• The group of people can be: 

1. employees of an organization; 
2. customers of a bank; 
3. members of a trade union; 
4. members of a professional body like an association of accountants; or 
5. any other group of people who have come together with a commonality of purpose or are linked to each other for a common objective. 

• In a group insurance policy the insurance company issues one master policy covering all the members of the group. For example, the insurance company will issue a master policy to an employer covering all the employees of the company. The employer would be known as the ‘master policyholder’. 
• The contract of insurance is between the master policyholder and the insurance company. The employees are not a direct party to the insurance contract. 
• Group insurance schemes are also used by the Government as instruments of social welfare to provide insurance cover to the masses (people who are below the poverty line). 
• In July 2005 the insurance industry regulator (IRDA) issued guidelines on group insurance policies.

Micro-insurance plans 

• In November 2005 the IRDA issued guidelines for micro-insurance through the IRDA (Micro-insurance) Regulations 2005. Micro-insurance aims at providing insurance cover to low income groups. 
• The IRDA has specified that the life cover provided under micro-insurance products should range from Rs. 5,000 to Rs. 50,000. 
• A life insurer may offer life micro-insurance products as well as general micro-insurance products and vice versa. (This is only allowed for micro-insurance products, and no other types of general insurance products.) 

Unit-linked insurance plans (ULIPs) 

Unit-linked policies carry a higher risk than with-profit policies and contain fewer guarantees. However, they are much more flexible. Unit-linked policies are suited to people prepared to undertake some investment risk to obtain the benefits of flexibility. Returns are subject to movements in the capital markets where investments such as equities (shares) are traded (shares will be discussed fully in chapter 6). 

Key points 

• Unit-linked insurance plans (ULIPs) offer the benefits of both life insurance and returns on investment. 
• In traditional plans the insurance company takes a decision on the investments to be made on behalf of the insured. However, in a ULIP the insured has a variety of funds to choose from like equity funds, debt funds, balanced funds and money market funds etc. for their investments. 
• ULIPs give the insured the option to participate in the growth of the capital markets. 
• On the death of the insured the sum insured or the market value of the investment (fund value), whichever is higher, is paid. 
• On maturity of the plan the fund value is payable. 
• Settlement option: instead of taking a lump sum amount, some plans provide the policyholder with the option to receive the maturity benefit amount as a structured payout (periodic instalments) over a period of time (say, 5 years or any time up to 5 years) after maturity. This is known as the settlement option. If the policyholder wishes to take the settlement option they need to inform the insurance company well in advance.

 Child plans 

• Child insurance plans help parents to save for their children’s future financial needs such as education, marriage etc. 
• Child insurance plans offer the dual benefit of savings along with insurance. 
• It is important to note that the child does not have any income of their own. Instead, they are entirely financially dependent on their parents. The parent pays the premium to the insurance company towards accumulating money for the child’s future financial needs. 
• The child is the beneficiary who is entitled to receive the benefit on the maturity of the policy. 
• In these plans, risk on the life of the insured child will begin only when the child reaches a specified age as stated in the policy. The time gap between the policy start date and the date of commencement of risk is called the deferment period. 
• The date on which the risk will commence at the end of the deferment period is known as the deferred date. The deferred date will be a policy anniversary. 
• There is no insurance cover during the deferment period. 
• When the child reaches the age of majority (18 years old) the title of the policy will be automatically passed on to the insured child. This process is known as vesting. The date on which the policy title passes to the child is known as the vesting date. 
• After vesting the policy becomes a contract between the insurer and the insured person (the child in this case).
• Some child insurance plans come with a built-in ‘waiver of premium’ rider, whereas in the case of other child insurance plans the parent can opt for the waiver of premium rider for a small additional premium. In this case if the parent dies during the policy term the insurance company will continue to pay the premiums on behalf of the parent (until the child reaches the age of majority) and the policy is left intact. The child receives the benefit at the end of the policy term according to the policy terms and conditions. More details on riders will be discussed in chapter 7. 
• Child insurance plans can be taken out in the form of endowment plans, money-back plans or ULIPs. 

Money-back policies 

• Money-back policies combine the dual benefits of savings and insurance, and are somewhat similar to endowment plans in terms of features. 
• In an endowment plan, the policyholder receives the maturity benefit at the end of the policy term. However, in money-back policies ‘partial survival benefits’ are paid to the policyholder during the term of the policy at specific intervals.
• The policyholder may receive the survival benefits in fixed proportions or variable proportions during the policy term as per the terms and conditions of the policy. 
• The benefits received by the policyholder at specific intervals are tax-free according to prevailing tax laws. 
• If the policyholder dies during the policy term, the nominee or beneficiary receives the entire sum insured along with the accrued bonus (if any) without the deduction of survival benefits that have already been paid to the insured.

Salary saving schemes (SSS) 

• Salary saving schemes (SSS) are intended to cater to the needs of the working classes.
• In these schemes the insurance company has an arrangement with the employer, whereby the employer deducts the premium from the employee’s salary and passes it on to the insurance company every month. 
• As the premium is deducted from their salary before it reaches the employee they do not need to worry about defaulting on the premium. 
• The insurance company also benefits as it receives the consolidated premium from the employer for all the employees who have enrolled on the scheme. 
• The employer makes the deduction for the premium from the employee’s salary based on an authority letter signed by the employee, which is collected with the proposal form and is sent to the employer by the insurer, when the policy is accepted. 
• A demand list containing the list of employees, their designation along with the amount to be deducted is sent to the organisation periodically by the insurance company. 
• A salary saving scheme is not a specific insurance plan. It is just a convenient arrangement to collect the premium. It can be used for a term plan, an endowment plan or any other plan as offered by the insurer under the SSS arrangement.

Anand Khemka
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