Endowment insurance plan

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. 

Anand Khemka
+91-9910936925
+91-8287041341

Pure endowment plan

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. 

Anand Khemka
+91-9910936925
+91-8287041341

Return of premium (ROP) plan

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. 

Anand Khemka
+91-9910936925
+91-8287041341

Term insurance plan

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. 

Anand Khemka
+91-9910936925
+91-8287041341

Why a Claim may be Invalid in Life Insurance

Why a claim may be invalid

Once an insurance company has completed its investigations it may conclude that it does not need to make a claim payment because the claim is invalid. There are three main circumstances in which this may arise:

The policy is not in force:

If the policy was not in force when the event occurred, the insurance company will reject the claim.

Example: Ajay has taken out a term plan for 20 years. He pays the annual premium on the 1st of April every year. In the 3rd year he suffers a severe heart attack. Due to financial problems because of huge hospital bills, Ajay is not able to pay the premiums on time. His financial problems continue for a longer time than expected and he is not able to pay the premium even during the grace period. At the same time Ajay’s health deteriorates and he dies on 15th May.

Ajay’s nominee files a claim with the insurance company but the company rejects the claim as the policy was not in force due to premiums not being paid, even during the grace period.

Excluded conditions apply: 

If the death is caused by something excluded from cover under the policy, the claim will not be met.

Example: Insurance policies exclude death due to suicide in the first year of the policy, therefore the death claim for a policyholder who commits suicide during that first year, will be rejected by the insurance company.

The claim is fraudulent: 

If, during its investigations, the insurance company finds out that a material fact was deliberately suppressed by the insured then it will reject the claim.

Example: If the insurer finds out that the age declared by the insured at the time of taking out the policy was wrong or the insured was suffering from some illness that was deliberately not disclosed, then the insurer can reject the claim on the grounds of misrepresentation.

Anand Khemka
+91-9910936925
+91-8287041341

How to Claims In Life Insurance

Introduction

When making a decision on buying life insurance, clients will take a number of factors into account. These include the:

• pricing of the product;

• features of the product;

• likely returns that will be offered by the product compared to other insurance and investment products;
• flexibility offered in terms of plan term, premium payments, liquidity etc.;
• tax benefits offered by the product; and
• level of customer service provided by the company.

All these factors play an important role, but one very important aspect, which few people pay attention to, is how the insurance company handles and settles claims. What good is an insurance product during the lifetime of a policyholder, if the nominee/beneficiary/assignee is not able to receive the claim from the insurance company in a reasonable time and with ease? The real test of an insurance company and an insurance policy comes when the policy becomes a claim. People take out insurance because they worry about the possibility of misfortune. Ultimately, the ‘value’ of insurance will be judged, by most individuals, on the way in which their claim is handled.

While the IRDA has laid down broad guidelines for claims settlement, it depends on individual companies and their claims handling staff how quickly and efficiently they respond to a claim when it arises and how soon they settle it. The claims settlement ratio (how many claims are settled to every 100 claims arising) is also one of the benchmarks on which an insurance company is judged. So claims handling and settling assumes a great deal of significance.

Requirements for a valid claim

Before discussing the requirements for a valid claim let’s look at what a claim is and what the different types of claims are.

What is a claim?

A claim is a demand that the insurer redeem the promise made in the contract. The insurer then has to perform its part of the contract, i.e. settle the claim, after satisfying itself that all the conditions and requirements for the settlement of the claim have been complied with.

We will look at three main types of claim in this section – maturity claims, death claims and rider benefits.

Maturity claims

Some life insurance plans, such as endowment plans and whole life plans, promise to pay the insured a specific amount at the end of the plan, if they survive for the plan’s entire term. This amount is known as the maturity benefit amount or the maturity claim amount. The amount payable on maturity is the sum insured plus any accumulated bonuses, minus any outstanding premiums and interest thereon.

In some cases the premiums paid over the tenure of the plan are returned on maturity. These plans are termed as ‘return of premium’ (ROP) plans by some insurers.

In the case of ULIPs, the insurance company pays the fund value (or in some cases the fund value and sum insured) as the maturity claim, at the end of the plan’s term or, in the case of a money-back policy, minus the survival benefits received during the term of the policy.

Survival benefit payments:

For money-back policies the insurance company makes specific payments to the policyholder at specific times during the term of the policy. These payments are known as survival benefits.

Reduced sum insured (paid-up value):

Sometimes during the tenure of a policy the policyholder may face financial problems and may not be in a position to continue paying the premiums. During such times rather than surrendering the policy, the policyholder has the option to convert it into a paid-up policy. On the maturity of such policies, the proportionate reduced sum insured is paid out by the insurance company.

Discounted claims:

Discounted claims are those options which are exercised by the policyholder within one year of the maturity date of the policy.

Commutation of instalments:

For annuity plans, before receiving regular/periodic annuity payments, the individual can make a lump sum withdrawal. This is known as commutation. Insurance companies normally allow the individual to make withdrawals of up to a third of the accumulated fund. The remaining two thirds must be used to buy the annuity payments for the individual.

Annuity payments at the time of vesting:

In the case of annuities, on vesting, the regular annuity payments start to be made by the insurance company to the annuitant. The payments may be made to the annuitant on a monthly, quarterly, semi-annual or annual basis depending on the plan’s terms and conditions.

Death claim

A death claim is where the life insurance company pays the sum insured to the nominee/ beneficiary on the death of the insured during the term of the plan. For whole life policies, the benefit is paid on death, regardless of when this occurs, i.e. there is no fixed term. If the policy is a participating policy, the insurance company will also pay the bonuses accumulated until then. If the policyholder had taken out any loans, then the outstanding amount of the loan, the interest and any outstanding premium and interest thereon will be deducted before the final amount is paid.

There are certain policies where the benefit is not paid on death but on a specified date as chosen by the life insured when taking out the policy. For example, for a policy where the objective is to provide for a lump sum amount for a daughter’s marriage or a son’s higher education, the amount is not paid on the death of the life insured but becomes payable on the date specified, for example:

• When the son/daughter reaches the age of 18 or 21.

This is, of course, as per the terms and conditions of the policy and the option exercised by the proposer.

Rider benefit

A payment under a rider is made by the insurance company on the occurrence of a specified event according to the rider terms and conditions. For example:

• Under an accidental death benefit (ADB) rider, in the event of the death of the insured, the additional sum insured under this rider is paid;
• Under a critical illness (CI) rider in the event of diagnosis of a critical illness, a specified amount is paid as per the rider terms and conditions. The illness should be covered in the list of CIs specified by the insurance company (the list may differ among insurers);
• Under a ‘hospital care’ rider the insurance company pays the treatment costs in the event of hospitalisation of the insured, subject to the terms and conditions of the rider.

Valid claim

Once an insurance company receives notification of a claim it will want to be sure that the claim is valid before it makes a payment. It will do this by checking the following:

• Was the insurance policy in force when the event occurred? 
• Has the insured event taken place? 
• Have the original policy document, a completed claim form and the other entire required document been submitted? 
• Has the policyholder performed their part with regards to age admission and the discloser of material facts relevant to the policy? These will be investigated by the insurance company as part of its claim settlement process.
• 
  

Anand Khemka
+91-9910936925
+91-8287041341

Identifying client needs in Life Insurane

Who is your client?

Prospective clients

As we have seen, an insurance agent’s main task is to understand their client’s needs and then recommend suitable products. Any individual that an insurance agent comes across and who has any financial need is a prospective client. Prospective clients may have various needs which they themselves may not be aware of. In such a case it is the duty of the insurance agent to make the prospective client realise their needs and recommend suitable insurance protection and/or investment products to meet them. As we have established in the previous three chapters, life insurance companies and other financial institutions offer a range of products which cater for the different needs of an individual. To remind you, some of the most important of those needs are as follows:

The need to:

• Provide sufficient funds for dependants in case of the premature death of the family income provider;
• Build a contingency fund to take care of any emergencies that may arise;
• Save funds for the children’s education, marriage etc;

• Provide protection for family members against home loan and other debts in the absence of the family income provider;

• Save funds for retirement; and

• Address any other requirements that may arise from time to time.

Any individual who has at least one of the above needs is a prospective client for the insurance agent.

Client needs

In this section we will draw together all that has already been said in previous chapters about identifying and satisfying client needs. We will discuss the overall process and so consolidate your understanding of how you should go about the process in order to provide a professional service to your clients.

As we have established, it is the responsibility of the insurance agent to determine the legitimate needs of their clients, prioritise them and then to recommend suitable insurance or savings products. The process

involves the following steps:

Identifying needs- Quantifying needs- Prioritizing needs

1. Identifying needs: an insurance agent needs to collect and analyse the following information:

• details of the client in terms of their financial assets and liabilities;
• marital status;
• future financial goals of the client for themselves and their children;
• number and age of dependants;
• employment status, i.e. their existing grade and scope of promotion within their company;
• income – which includes salary, business income and income from other sources and investments (if any);
• details of health status and heredity medical conditions; and
• existing protection, savings and retirement provision (if any).

2. Quantifying needs: in the financial planning process an insurance agent needs to quantify each of the needs in monetary-terms and then calculate suitable amounts that an individual needs to save and invest for the future.

3. Prioritising needs: the amount available for investment is the client’s income less their living and other expenses, i.e. the monthly surplus available. The client’s needs must be prioritised, as their investment capacity may be limited and the total amount to be spent may be more than the surplus funds available. The insurance agent should suggest the best product mix, where limited funds can be allocated to fulfill the maximum needs of the client. Prioritising these needs helps the client to determine which investment(s) can be deferred, and so the needs which are given highest priority in the ranking are the ones for which investment should be made first.

The typical life stages of a client

Childhood

Children are very unlikely to have protection needs. Children normally do not have any income of their own and are almost entirely dependent upon their parents/guardians.

At this stage there are two basic needs for parents/guardians:

• To secure their children’s financial position, if they themselves die prematurely; and

• To provide for their children’s future expenses, such as primary and higher education, marriage and other living expenses.

Young unmarried

This stage of the lifecycle can be divided into two categories:

• Young unmarried with no dependants – in this case, the individual’s protection need is low as there are no dependants. Instead, the need to invest any surplus income and earn high returns gains priority. So suitable investment plans such as ULIPs – which allow participation in the growth of capital markets along with tax benefits – should be recommended. The ability to change these when other priorities arise (for example marriage and dependants) should be considered. The individual may also look forward to saving money for their marriage, payment toward purchasing a house, providing health insurance for parents (if not already taken out or the parents are unable to fund it themselves).

• Young unmarried with dependants – if an individual is one of the income providers for a family (along with the parents), then the family will be adversely affected if the young person dies prematurely. Hence the individual needs to protect their income. The individual should be recommended to take out a suitable life insurance plan and the sum insured should be sufficient to take care of the family’s financial needs after their death. The remaining money can be invested for long-term wealth accumulation.

Young married

At this life stage the individual gets married. Their financial needs change, as they now start thinking about purchasing a house, starting a family etc. These individuals can be further categorised into two types:

• Double income family – when both the partners work then financial dependency on one person is reduced. Such couples are also commonly known as Double Income No Kids (DINK) couples. In the event of one of the partner’s premature death, the effect on the family’s finances will be considerably lower than compared to a single income family. An individual term life insurance plan for both partners is suitable at this stage so that the loss of income due to the death of one partner can be compensated for to some extent. The couple may also look to invest in products that can offer them high returns and help them with wealth accumulation for the future. Investment in unit-linked insurance plans (ULIPs) is recommended for such couples as ULIPs have the potential to deliver high returns through participation in the capital markets along with insurance protection.

• Single income family – if only one partner is earning and the other partner manages the home then savings are likely to be lower than for the double income family. For such couples the need for income protection assumes priority over other needs. The income earner should buy a term insurance plan so that in the event of their premature death, the surviving spouse will receive a sufficient sum from the insurance company to replace the income provider’s loss of income.

Young married with children

At this stage the responsibility of an individual increases when children are born. This stage can be further classified into two types:

• Double income family – here both the parents are earning, meaning that the effect of the loss of income due to the premature death of one of the partners will be less. Protection of income is important. A suitable individual term life insurance plan for both partners should be recommended so that in the event of the death of one partner an adequate sum is received by the family to replace the loss of income.As both the partners are earning, the investment capacity of such families will also be higher. Investments towards their children’s future can be a high priority for these families. A suitable child investment plan should be recommended after the income protection need has been taken care of. A family floater health insurance plan covering the couple and their children is advisable at this stage. The couple should also start making small contributions towards a retirement plan, which can be stepped up later.

• Single income family – for these families, income protection is very important. A suitable-term life insurance plan should be recommended as the loss of income of the earning member of the family could lead to serious financial problems. In the event of the earning parent’s death, an adequate sum insured will help the family to maintain a decent lifestyle, and the children’s education also will not be affected. Once the income protection need is taken care of, a child investment plan should be given priority. A family floater health insurance plan covering the couple and children is advisable at this stage.

Married with older children

This is the stage where the financial responsibility of the couple towards their children will be in respect of their higher education and marriage. The income of the couple is likely to be higher than previously as they will have gained considerable experience and made progress in their working lives. At this stage the need to protect children against the premature death of their parents is low compared to previous years as the parents will have already made significant investments towards the children’s future needs. However, the couple should review their investments to ensure that there will be sufficient funds to cover the cost of higher education and the marriages of their children.

The need to focus investments towards their retirement fund also gains importance at this stage and as the couple has already made significant investments towards their children’s education and marriage, they can now step up investments towards their retirement fund. As their age increases, the couple will be more vulnerable to sickness and disease and should therefore also look at enhancing their health cover.

Pre-retirement

This is the stage when the children will have completed their higher education, be married and will have become financially independant. The income of the individual/couple will still be high as they will be at the peak of their careers. At this stage the entire focus is shifted towards the retirement fund and health protection as other needs are mostly taken care of. After retirement, the major area of concern for a couple would be meeting day to day financial expenses, regular health checkup expenses, hospitalisation and other medical expenses. The individual will see how the investments already made towards the retirement fund are faring and will consult with his insurance agent on whether there is a need to make any changes. The couple should also review the health cover and see if it is adequate.

Retirement

This is the stage where the income of an individual/couple is limited to the returns on investments that they made in the earlier stages of their working life. In the case of salaried employees, their regular monthly income will have stopped. If the returns from their investments are not sufficient to meet their financial liabilities little can now be done. The individual can use their accumulated retirement fund and their employee benefits amount from provident fund, gratuity, leave encashment etc. to buy an annuity plan from an insurance company. This will provide a regular monthly income to take care of living expenses for the rest of their lives. This is also the age when individuals are most prone to illness and disease. The individual should review the health cover for themself and their spouse to see if it is adequate to meet the couple’s healthcare requirements.

In the case of self-employed professionals and businessmen, there is no defined retirement age. If they and their insurance agent feel that they have accumulated enough money in their retirement fund to take care of their expenses for their remaining lifespan then they can retire. With the retirement fund they can buy an annuity plan from an insurance company which will give them enough regular income to meet their expenses.

But if the individual and their insurance agent feel that the retirement fund is insufficient to sustain the post-retirement years, then the businessman must continue to work and the self-employed professional continue with his profession until sufficient money is accumulated. The retirement fund proceeds can then be used to buy an annuity plan from an insurance company for regular annuity payments to meet retirement expenses. At this stage the individual should also review the health cover for self and spouse to see if it is adequate to meet their healthcare requirements.

Anand Khemka
+91-9910936925
+91-8287041341