How to read a life insurance policy document – Forbes Advisor INDIA

Life insurance is a product that offers protection against the risk of death or permanent disability depending on the characteristics of the product chosen. This makes understanding your life insurance policy document a crucial activity.

If you are a salaried family member and are considering purchasing an insurance policy, your liability is not limited to purchasing and receiving the policy document. To understand the myriad of terms used in a life insurance policy, it is important to first know a few fundamentals.

Benefits of a life insurance policy

protection

In the event of death, the entire sum insured is made available under a life insurance contract provided that all premiums due are paid on time.

Economy

Life insurance can also be used as a way to save for your future, be it your child’s education, retirement, etc.

The discipline

Life insurance allows for disciplined savings, as the payment of life insurance premiums is periodic and becomes a habit. The termination of a life insurance policy by the policyholder usually results in a substantial loss of benefits under the policy for the policyholder. One is thus encouraged to remain committed to the goals and uncompromising promises made to those close to them and to fully enjoy the benefits of the chosen product.

Parties to a life insurance policy

Life insurance policies have a holder, the insured and the beneficiary (ies). The “applicant” or simply “owner” is the person who applied for the policy and pays the premium on it (also known as the policy owner).

Proponent: Only the applicant has access to the information on the policy and can modify the beneficiaries listed in the policy.

Insured: The insured or the insured is the person in whose name the policy is underwritten and the person on whose death the policy will issue payment. This is the person whose lifestyle, age and medical information are assessed to determine the premium and acceptance of a proposal.

Beneficiary: The beneficiary or nominee is the person (s) who will receive the death benefit on the death of the insured.

The applicant and the insured are often the same person. In some cases, they may be different, provided an insurable interest can be established. For example, a husband can purchase a policy for his wife. In this case, the husband will be both owner and beneficiary, but the wife will be insured for life.

Benefits of a policy document

Technically, a policy document is an insurance contract between the insurance company and the policyholder containing the main features, terms and conditions.

Acts as a promise: For your dependents, the policy document is your promise to your loved ones, ensuring that the intended purpose for which it was taken is achieved in a disciplined manner. In addition, in the event of an unforeseen event resulting in the death of the primary breadwinner, the goals may continue to be met.

Covers all the details: The policy document covers all the benefits, terms and conditions of the policy. It is important to share the details of the insurance and educate loved ones, children and spouse about the features of the policy and how to handle any claims in the event of a contingency.

Regardless of the type of life insurance, once you have decided to purchase a policy, it is important to understand your coverage, its benefits and its obligations.

Life insurance policies usually contain standard sections to some extent.

Key elements of a policy document

The first part of your policy document is usually the policy timeline. This section contains information discussed during the application process. It generally includes:

  • The amount of the benefit called “Sum insured”, which is the amount payable in the event of the death of the insured.
  • Amount you pay, which is the premium.
  • Payment frequency whether annual, semi-annual, quarterly or even monthly.

Understanding the Sections of a Policy Document

Benefit illustration

The Insurance Regulatory and Development Authority of India (IRDAI) has mandated the benefit illustration to be part of the policy document for certain products to prevent overselling. The illustration of the benefit is intended to help you understand how the return on your policy will be obtained at different rates of return (4% or 8%) or the amount of the investable part of the premium is calculated.

Death benefit

The death benefit section sets out the details of the death benefit. The “exclusions” section should be read carefully along with other sections as it sets out the circumstances or factors that may invalidate or limit a death benefit, with suicide being the primary one.

Most policies will not pay out a death benefit if the insured commits suicide within the allotted time. In the case of riders, some of the benefits will be subject to the exclusions indicated.

Misreporting of personal information such as age, education or medical history may also limit the death benefit. Any misrepresentation of information you provide could result in the cancellation of the policy or could even be considered insurance fraud.

Free consultation period

A prudent policyholder would have to go through the same to ensure transparent payment at the time of claim. You will also be able to find out if this policy is aligned with the guarantees explained by the insurance representative. Otherwise, you can return the policy document during the free consultation period.

In such a case, the premium collected is returned to the insured after deduction of nominal costs such as medical costs, stamp costs and the risk premium for the number of days of risk for the insurer.

The free consultation period is generally 15 or 30 days from the date of receipt of the “policy document” by the policyholder, depending on the method of issuance of the policy.

Unit linked product

In the case of a unit linked product, the policy document should contain details of the investment fund. The insured must know the fund in which the premium is distributed and in what proportion.

Typically, there is a provision to swap the fund for another fund or a combination of funds.

Understand legal language

Life insurance policies are written in legal language that can be confusing, so all policies include a definitions section that defines words used in the policy.

Refer to the “definitions” section as you read your policy and ask about anything you don’t understand. Never hesitate to dispel all your doubts and questions regarding politics.

Nomination

The “insured” may name the person or persons to whom the policy benefit would be payable in the event of death. The person could be your children, spouses or parents, for example.

Claims section

The Claims section provides instructions on how a beneficiary can make a claim and the choices available to receive policy benefits.

Claim the police

In the event of forfeiture of the contract, the policyholder loses all his rights and benefits. However, if the policyholder wishes to re-establish the contract with all the benefits (full force), he can do so by paying the premiums due with a penalty as decided by the company. This procedure is called “waking up”.

Reinstatement is possible within three to five years from the date of forfeiture, depending on the nature of the plan.

Blocking period

Insurance is a long-term contract, and the policyholder has concluded with an agreed term. Therefore, there is a blocking period during which the policyholder will not be able to withdraw or withdraw funds.

In due course, the policyholder may need funds due to a requirement and is not able to wait until the due date. In such exceptional cases, there is a surrender or cash-out provision of the policy.

The terms of surrender should be read correctly as they may result in a loss in the value of the policy and the target may not be achieved.

Fiscal advantages

Because of the inherent advantage of a life insurance plan of providing protection, the Income Tax Act grants a tax advantage to the policyholder both on the payment of the premium and on the the amount at maturity depending on the type of plan. However, tax laws are subject to change in accordance with applicable laws.

A policyholder should ideally consult a tax advisor on tax matters.

Final result

An individual’s financial goals do not remain constant. They may vary due to marriage, the birth of a child or a change of job. Therefore, it is essential to review your life insurance needs from time to time and adjust your life insurance coverage accordingly.

Remember to factor in inflation when you assess your financial goals.


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Justin D. O'Neill