Policy Premiums Are Payable Finance Essay

Policy premiums are payable on the due dates as defined in the schedule.

Premiums are usually paid annually, but they can be paid semi-annually, quarterly or monthly for those policies that require the regular payment of premiums. However, if the policyholder elects to pay an annual premium in smaller, more frequent amounts, then there is usually a small interest charge added to it.

All premiums shall be payable in advance, either at the home office of the company or to an agent of the company, upon delivery of a receipt signed by one or more of the officers named in the policy.

If any amount received towards policy premium is less than the instalment due, the same will not be accepted. On the other, hand if the amount received towards policy premium is more than the instalment due, the excess amount will be refunded to the policyholder. No interest or reward is payable on the excess amount received.

A policy owner may specify that all dividends are either to be paid to the policy owner in cash or applied towards the payment of next premium due. Thus, the prospect of substantial dividends may make it possible for some people to afford higher face amounts of coverage than would otherwise be the case.

Nomination and Assignment Clause

The policyholder should be advised for nomination, if no nomination was effected. When nomination or assignment is effected by a policyholder, it should be scrutinized thoroughly to see whether it was in order or not. If there is any material omission or mistake, it may be returned to the policyholder or the assignee with a covering letter giving instructions as to the corrections to be made in the assignment or nomination. When a document is sent for correction, reminders should be sent every fortnight until the requirements are complied with. The policyholder should follow the instructions printed on the back of assignment or nomination.

Nomination

Nominee is the person who is entitled to take money when the life assured dies.

Nomination is the process of identifying a person to receive the claim amount in the event of the death of the policyholder. Nomination can be done at the beginning of the policy by giving details of nominee in the proposal form. However, if the nomination is not given at the beginning, the policyholder can give it at a later date. For that purpose a prescribed form is to be filled up and nomination can be endorsed on policy bond.

Change in Nomination - Change of nomination can be done by the policy holder any time during the term of the policy and any number of times he wants to. Procedure of nomination is same every time.

Withdrawal of Nomination - Nomination can be withdrawn by the policy holder without giving prior notice to the nominee. Nomination can be done only by a policyholder who has attained majority and on a policy on his life. Under nomination, the nominee has just the right to collect the policy proceeds in the event of the death of the policyholder, it is to be noted that he is not the owner of money; legal heirs are the owners as explained in exhibit 8 and 9.

Death of the Nominee - If the nominee dies and the policyholder is still surviving then the nomination would be ineffective and stands cancelled. If nominee dies after the death of the policyholder but before receiving the policy proceeds, in this case also nomination becomes ineffective and only the legal heirs of the policyholder can claim money.

Nomination at a later date – If the policy documents have been prepared and issued but nominee is not mentioned in the policy, the insured can give the nomination by an endorsement (printed matter is affixed in the policy bond and it becomes part of the policy document) on the policy itself, not required to be stamped. Nomination in favour of a stranger cannot be given as there is no insurable interest involved in that case. For nomination in favour of wife and children, specific names of wife and children should be given.

Successive Nominee - Nomination can also be done in succession. Where it is mentioned in nomination that the policy money should be paid to "nominee ‘A’ failing him to nominee ‘B’ whom failing to nominee ‘C’, etc." (refer exhibit 8), such nomination is called successive nomination. Such nomination would be in favour of one individual in the order mentioned in the policy. All such nomination would mean that if nominee ‘A’ were dead at the time in question the nominee ‘B’ would take the whole amount and that if both nominees ‘A’ and ‘B’ were then dead then nominee ‘C’ would take the whole amount and so on.

Exhibit 8 : Successive Nominee

Wife

1st Son

2nd son

A Minor Nominee - In view of the Insurance (Amendment Act) 1950, the life assured has the right, where a nominee is a minor, to appoint any person as the appointee to receive the moneys secured by the policy in the event of the assured’s death during minority of the nominee. The person so appointed will not be a guardian of the minor nominee’s power will be limited to the right to receive the policy money in the event of the assured’s death during the minority of the nominee. The appointment must be a major. The appointment of appointee must be communicated to the insurance company in writing. So his name can be registered with the company. The appointment can be cancelled or changed by the life assured any time before the maturity of the policy.

Features of Nomination

Sec 39 of The Insurance Act, 1938 deals with nomination.

The Policyholder, where he himself is the Life Assured under this Policy, may at any time during the tenure of the Policy make a nomination for the payment of the moneys secured by the Policy in the event of his death.

The Nominee can be changed by the Policyholder at any time during the term of the Policy and any such change shall vacate earlier nomination automatically.

Where the Policyholder is different from the Life Assured, there will be no nomination permitted under the Policy.

The Life Assured is eligible to make two or more nominations; however, nomination can be challenged in the court of law.

Nomination is valid only till the maturity of the policy.

If there is no nomination on the policy, death claim can be obtained only after receiving ‘succession certificate’ from the court of law, till that time policy becomes an estate. It is known as open titled policy.

In an open titled policy, nomination cannot be made on separate paper, it can only be done by endorsement with witness and date in writing.

Where the nominee is a minor, an Appointee, who is not a minor, will necessarily, be appointed by the Policyholder to receive the death benefits during the minority of the nominee. Nomination may be made by communicating the same in writing to the Company.

Nominee is not the owner of money. He has been given only the right of collecting the claim amount on behalf of class I legal heirs.

(Legal heir - A lawful owner or entity who has the right to gain possession of your assets on your death, according to the laws of inheritance, is your legal heir).

Under the Hindu Succession Act, legal heirs are as per exhibit 9;

Exhibit 9 : Legal Heirs as per Hindu Succession Act

If hindu male member dies; class I heirs are -

Wife

Children

Mother

Equal rights in life insurance property

If wife dies; class I heirs are -

Husband

Children

Equal rights in life insurance property

(Neither her mother or mother-in-law is eligible)

If unmarried girl dies; class I heirs are -

Only Mother

Rights in life insurance property

Note : (Under Hindu Succession Act, mother is a class I legal heir, not father)

As per Hindu Succession Act, legal heirs are described as Class I and class II. In case of Hindus :-

Class I legal heir;

Include mother, spouse and children. Each of them gets equal share of the estate. If any of the children are already dead, then their children and wives (in case it is a son) would share the portion of the estate belonging to the deceased equally.

Class II heirs;

Include father and siblings and also other relatives such as grand children, nieces and nephews and your mother’s and father’s siblings.

When a male Hindu dies intestate i.e. without making a will, his assets are to be distributed as per this act among his legal heirs. The first right to the assets of the departed is held by class I legal heirs. In case you have no class I legal heirs and the property goes to class II legal heirs, then there are eight entries under it. The assets will be distributed to those relations listed under entry one if there are any; else second entry and so on.)

If there are no class II legal heirs also, then the property will go to the deceased’s agnates or relatives through male lineage that is through father or son. If there are no agnates, then the property is given to cognates, or any relative through the lineage of females that is through mother or daughter.]

When nomination stands cancelled ?

In case of maturity claim

When assignment is made

When the nominee dies

By foreclosure action

By writing a will

Assignment

An Assignment is the transfer of the interest under the policy either absolutely or conditionally by the Assignor (policyholder) to the Assignee.

Section 38 of Insurance Act, 1938 deals with assignment clause. ‘assignor’ is the policyholder who transfers the title and ‘assignee’ is the person who gets the title of the policy from the assignor. Assignment can be made either by endorsement on the policy or on a separate paper duly stamped. Assignor must be a major. Assignment must be in writing and assignor’s signature along with a witness is required. Notice of assignment should be submitted to the insurer by the assignor. Assignment will not be permitted where the policy is under the ‘Married Women’s Property Act, 1874*’ and conditions apply to assignments of policies issued to partnerships or Hindu undivided families. There are two types of assignment :

Absolute Assignment

Conditional Assignment

(* Married Women’s Property Act, 1874 (MWP Act) was formed with the intention to safeguard a married woman’s property from creditors and family members. As per the Act, this includes all property vested in them or acquired by them.)

Absolute Assignment

Transfer of rights, title and interest (benefits/ ownership) to someone else out of love and affection and in which the assignor and the assignee may agree that in case specified event or events happen, the assignment would be cancelled or ineffective in part or as a whole. An absolute assignment can even be by way of a gift.

For example mother has assigned her life insurance policy to his son.

A person who has absolute interest in the policy may make an assignment. He/ she can be :

The policyholder or

An absolute assignee (i.e. a person to whom the policy has been assigned absolutely)

Note : The assignor must be a major and competent to enter into a contract.

There are two conditions during which assignment will stand cancelled :

If the assignee predeceases the life assured (if mother dies before the maturity of the policy).

If both, life assured and assignee are alive on the date of maturity (the policy will come back to life assured).

Conditional assignment

Transfer of rights, title and interest (benefits/ ownership) to someone else for monetary consideration or subject to the fulfilment of a condition without the possibility of cancellation of the same.

For example : an assignment may be made subject to the condition that, the assignment will be valid only as long as a loan given by the assignee to the assignor remains outstanding.

Assignment can be done only after issue of policy. An assignment of the Policy can be made by an endorsement upon the Policy itself or by a separate instrument signed in either case by the assignor specifically stating the fact of assignment and duly attested and not by endorsement (as in nomination). After assignment, policy holder loses control over the policy; he just has to pay the premiums in order to keep the policy in force.

What happens after assigning the policy ?

In case of an absolute assignment, the assignee becomes the policy owner.

An absolute assignment automatically cancels any nomination under the policy.

In case of a conditional assignment, where the policy is conditionally assigned to Life Insurance Company (the Insurer) as security for a loan, the nomination shall be not be cancelled, but the nominees rights shall be reduced to the extent of the liabilities towards the Life Insurance Company.

The liabilities under the policy are also transferred to the Assignee from the date of the assignment - under an absolute assignment.

If more than one notice of assignment is received from the same assignor, the assignment received first shall take effect.

The date of receipt of the notice by the Life Insurance Company shall determine the claim, NOT the dates of execution of the assignment.

An absolute assignee can re-assign the policy by following the same procedure.

"When are the benefits payable to the Assignee?"

The benefits under the policy are paid to the Assignee in the event of the death of the Life Insured or at maturity, provided the assignment is in force at that point in time.

Does Assignment of the policy affect the Nomination ?

Any transfer or assignment (even a part assignment) of the policy will automatically cancel the nomination. However where the policy is assigned to the Insurer (ABC Life Insurance, in this case) as a security for loan granted by ABC Life Insurance within the surrender value of the policy, the nomination shall not be cancelled but the Nominee’s rights shall be reduced to the extent of the liabilities towards ABC Life Insurance.

Illustration

Mr A has a life insurance policy with ABC Life Insurance for a sum assured of Rs. 5 lacs. He takes a loan of Rs. 2 lacs from ABC Life Insurance and the policy is assigned to ABC Life Insurance. Mr. B is the Nominee under the policy. Mr. A dies and Rs. 2 lacs is payable to ABC Life Insurance and the remaining Rs. 3 lacs to Mr. B. Thus the nomination is not cancelled by this assignment but only affected to the extent of interest that ABC Life Insurance has in the policy.

Where the loan has been repaid and the policy re-assigned to Mr A (The Life Insured) the nomination in favour of Mr. B shall be valid for the full amount.

Impact of assignment - In assignment, assignor gives all the rights over the policy to the assignee that becomes the owner of the policy. The assignee has the right to reassign that policy.

In the event of death of the assignee - If the assignment is conditional assignment and the assignee dies, the assignment becomes ineffective and all the rights and title of the policy goes back to the life assured if he is alive. If the life assured is not surviving, the benefit goes back to the life assured’s nominee. In case of absolute assignment, if the assignee dies, all the rights entitled of the policy are given to legal heirs of the assignee.

Cancellation of assignment - An assignment once executed cannot be cancelled, however, if an assignee during the term of the policy reassigns the interest and title of the policy to the previous assignor such reassignment will result in cancellation of assignment and the benefits of the policy go back to the original assignor.

Procedures of assignment - A standard form of Assignment is issued to the policyholder who wants to effect an assignment of his policy. Necessary instructions are there for executing the assignment which is then registered by the insurance company. Points to be checked by the insurance company for affecting assignment:

Check whether the assignment is executed on the Policy or on a separate paper and if it is executed on a separate paper that the paper is adequately stamped. If it is unstamped or inadequately stamped inform the assignor and get it corrected.

Check whether notice of assignment is received from the assignor; if the notice is not received or it is defective, inform the assignor.

Check the signatures of assignor affixed to the assignment and notice with the specimen of his signature in the proposal papers to see that they tally. If the signature differs then for writing letter to the person concerned, inform the assignor.

If the assignment is executed on a separate paper, ensure that the paper should be stamped, in accordance with the stamp regulations.

Check that the data and place of execution on Assignment are mentioned. If they are not mentioned the assignment may be registered, if otherwise in order, but while returning the Assignment to the party concerned he should be asked to have the necessary particulars inserted in the Assignment under the Assignor’s.

If the assignment is in order and that the notice there of has been duly received the particulars of assignment must be entered in the space provide for the purpose in the policy ledger sheet under the heading "Nominations and Assignments".

Also the appropriate rubber stamp is affixed at the foot of assignment write the date on which the assignment and the notice are received.

Policy Loan Provision

Sometimes the policy holder may need access to funds that are only available through the cash value of his or her life insurance policy and it may not be desirable to terminate the policy. In such a situation, the cash value may be borrowed from the insurer, with the insurance coverage remaining intact.

Most of the insurance companies give the facility to the policyholders to get loans on life insurance policies according to the rules framed like the amount available for such a loan depends on the number of years the policy is in force, age of the insured at the time when the policy was issued and the size of the death benefit. Such loans are often made below-market interest rates to policy holders, although more recent policies usually allow borrowing at rates that fluctuate in line with money market rates. The policyholder can apply for a loan in a prescribed form and has to give policy bond along with the completed form. The loan amount that the policyholder can get is calculated according to the surrender value (also called as cash value, it is the amount available in cash upon cancellation of an insurance policy, before it becomes payable upon the death or maturity) of the policy at the time of taking the loan. Rate of interest charged on the loan by the insurance company may vary from time to time and may depend upon the rules of the insurance company. For loan the policy should be assigned absolutely in favour of the insurance company.

If the insured dies with an outstanding policy loan, the amount of the loan is subtracted from the policy proceeds before payment is made to the beneficiary. Otherwise there is no obligation to repay policy loans. However, because the insurer calculates premiums on the assumption that interest will be earned on the funds supporting the policy, interest is charged to anyone, including the policy holder, who borrows some of those funds. Unpaid interest accumulates and is added to the total loan outstanding. If the entire cash value has been borrowed or if the loan plus the unpaid interest equals the cash value, then it becomes necessary for the insured to pay subsequent interest assessments to avoid having the contract lapse.

If the policy holder takes a policy loan but still wants to maintain the full amount of death protection, the one-year term dividend option can be helpful, assuming that the contract is participating. For example; Aman has a participating whole life policy of Rs. 1,00,000 with the cash value of Rs. 20,000. Now Aman wants to borrow the entire Rs. 20,000 but later realizes that if she does so, his beneficiary will receive only Rs. 80,000 (the policy face minus the indebtness) if he dies. To avoid this situation, Aman borrows Rs. 20,000 and then exercises his option to purchase one year term insurance of Rs. 20000, using dividends from the basic policy to pay the necessary premium.

Because policies without flexible premium arrangements will lapse after expiration of the grace period if premiums are not paid when due, many insurers encourage use of an ‘automatic premium loan provision’. This provision automatically authorizes the insurer to use the cash value to pay unpaid premiums that are due. Under this provision, a loan is established against the policy just as though the insured had borrowed the amount for another purpose. In this way, the policy continues without interruption, with the only change being that there is a loan outstanding.

Points to Ponder

Step 1 : "Borrow" money from a cash value life policy as an absolute last resort. If you own a home, consider an equity line before borrowing from your cash value. With an equity line, your interest is deductible and you will most often get a better rate than the insurance company is willing to offer.

Step 2 : Contact your insurance company if you have no other options and find out how large your cash value is and how much you can borrow. The amount available to you depends on how much cash and accumulated in the policy. That, in turn, depends on how long the policy’s been around, how much you’ve paid into it, and other factors. For example; if you have a Rs. 300,000 policy with cash value of Rs. 50,000, your borrowing capability will be based on the Rs. 50,000 cash value.

Step 3 : Understand that when you borrow against your cash value, you must pay interest on the amount you borrow. The interest you pay does not go into your cash value, as many people think. Instead, it goes back into the pockets of the insurance company.

Step 4 : Carefully check the terms and conditions of the loan. Some insurance companies restrict how much of your cash value you can borrow, and some have special payback terms. Make certain that the interest rates are lower than what other loan sources, such as home equity loans, are offering.

Step 5 : Withdraw the money. There is no restriction on how you can use the money, as there is with a 401(k) withdrawal, for example. You don’t ever have to pay it back, as long as you’re willing to have a reduced death benefit for your beneficiaries when you do pass away. But, you’ll also pay interest on it for the rest of your life. On top of that, any interest you owe on that loan will also be deducted from the payout.

Free Look Option

If you disagree with any of the terms and conditions of the policy, you have the option to return the original policy document within fifteen days of receipt of the policy document ("the free look period").

It’s possible that after buying an insurance policy, you realize that you are not satisfied with it and wish you had never bought it in the first place. As per the ‘Insurance Regulatory and Development Authority’ (IRDA), you need not worry since most policies come with a 15-day free-look period. You can return the policy to the insurance company within this period and ask it to return the premium you have paid. The best part is that you don’t even need to give a reason for returning the policy.

The 15-day period starts from the day you get the policy in your hand.

The Policy will be cancelled by the insurer and we will pay you an amount equal to the :

Policy premium paid by you;

Minus the aggregate of the stamp duty on the policy, any expenses borne by the company for medical examination and proportionate premium for the time that the company has provided insurance cover up to the date of cancellation.

All the rights under the policy shall stand extinguished immediately on the cancellation of the Policy under the Free Look Option.

Withdrawal Provision

This provision allows you to withdraw money from your life insurance policy up to the amount of the cash value you have accumulated.

It is to be noted that, due to this provision, your life insurance policy is reduced by the amount you withdrawn.

Before purchasing a life insurance policy, it is advisable to read all the provisions carefully. Understanding your responsibilities as a policyholder is crucial. Your rights and the rights of your insurance company are outlined in your policy - its just a matter of knowing where to look.

LIFE INSURANCE POLICY RIDERS

Additional coverage to your existing life insurance policy by attaching special provisions to it what is known as a rider.

Increasing day to day medical care expenses result in need for excess funds which are over and above the benefits provided by the insurances because of caps on benefits, coinsurance, deductibles, exclusions and (perhaps primarily) because of inadequate coverage. Hence, the purchase of riders along with the original policy will relax the insured to some extent.

The name ‘rider’ is taken from the concept that they have no independent existence, they are in force and effective only when they are attached to a policy or riding it. They are the options that allow you to enhance your insurance cover, qualitatively and quantitatively.

According to the customer’s present and future insurance needs, the rider can be combined/ purchased with the basic insurance policy, but for an extra cost. This extra premium charged by the insurance companies for supplementary benefits demands low premium because relatively little underwriting is required. It is to be noted that, if the claim for the benefits of a rider is made, it can result in the termination of the rider, while the original policy continues to cover the insured as earlier. Your lifestyle, your beneficiaries’ needs will all yield different coverage needs and therefore, different life insurance riders are available. But some life insurance riders are fairly universal and generally a good idea for every policy holder to add to their life insurance policy.

Features of Riders

Riders are risk premium only.

Rider premiums do not have any accumulation.

Rider sum assured cannot be more than the basic sum assured (as rider rides the horse).

Rider alone cannot be purchased but only with the basic plan.

If policy lapses, rider alone cannot be revived.

Rider can be given only from the inception of policy but can be withdrawn anytime during the policy.

IRDA has given regulations related to riders premiums in April 2002 and further amended in October 2002 as under :

If basic plan is the saving product and if you have taken all the riders with it then the sum total of all rider premiums should be 30% maximum of basic plan premium.

If basic plan is the risk cover product, i.e., terms cover then sum total of all rider premiums should be maximum equal to basic plan premium.

Common Insurance Riders

Renewal Provision/ Guaranteed Insurability Rider

10. Long-Term Care Rider

Term/ Preferred Term Benefit

11. Return of Premium Rider

Spouse and Children’s Insurance Rider

12. Level Term Cover Rider

Accidental Death Benefit (ADB) or Double Indemnity Rider

13. Double Sum Assured Rider

Accelerated Death Benefit/ Living Benefits/ Terminal Illness Rider

14. Critical Illness Benefit (CIB) or Dreaded

Disease Rider

Waiver of Premium Rider

15. Major surgical assistance benefit

Permanent Disability Benefit (PDB)

16. Life Guardian Benefit (LGB)

Family Income Benefit Rider

Cost of Living Rider

Child Term Rider

Additional Insured’s Riders

Instances where rider benefit is not covered

Suicide within 1 year of policy.

Catastrophic events not covered.

Self inflicted injuries (example; a person who is not an electrician climbs the pole and dies)

Hazardous occupation.

Renewal Provision / Guaranteed Insurability Rider

This rider gives the right to purchase additional insurance (of the nature of base policy) at different stages, without further medical examination.

If this rider is taken along with the basic life insurance policy, it guarantees the policy’s renewability at the end of its term, further the policy holder will not be required to submit any additional proof of insurability.

If the policyholder wants to take full rider benefit, he/she is often required to renew the policy within a set period of time; you have fewer days to renew as you get older. It is to be noted that this rider may also expire at a certain age.

The rider is specifically beneficial in certain significant circumstances of life like birth of child in the family, marriage or an increase in your income.

The rider becomes more important for the policyholder when he/ she develops such a condition that would prevent the purchase of new life insurance at standard rates or becomes uninsurable.

Term/ Preferred Term Benefit

In the event of death of the life insured, the beneficiary would receive an additional death benefit amount, which is over and above the basic sum assured.

The amount of death benefit available to the beneficiary is maximum equal to the basic sum assured.

Where the Term Benefit applied for is more than Rs. 10 lacs, better rates may apply, subject to meeting eligibility requirements.

Spouse and Children’s Insurance Rider

It offers term insurance for your spouse and/ or your children for an additional premium.

Accidental Death Benefit (ADB) or Double Indemnity Rider

This benefit provides an additional amount (over and above the death benefit) to the beneficiary in the event of accidental death of the life insured.

‘Accident’ is defined as; death which is sudden, visible and violent and is independent of any physical or mental illness. For example; snake biting, shoot by terrorist, electric shock, car/ road accident, murder etc. It is to be noted that, suicide, heart attack, self provocation murder, self inflicted injuries are not accidents. If the person dies within 180 days/ 6 months from happening of event, then it is considered to be an accident.

Generally, the addition of this provision doubles the death benefit if it is the result of an accident. The additional amount is referred to as the ‘principal sum’; thus the term, ‘double indemnity’. However the maximum cover available under this benefit is equal to the basic sum assured (subject to a maximum of Rs. 10 lacs).

Exceptions to this rider benefit are; accidental death caused by war, suicide, violations of the law, illegal activities, gas or poison, aviation (except as a passenger on a regularly scheduled airline).

Adding this coverage is relatively inexpensive and may prove to be quite invaluable. However, accidental deaths (especially by the insurance company’s definition) are seldom. So, if you want to lower your costs, forgoing accidental death coverage is ideal.

Often the policy will stipulate time and age when this coverage will unconditionally expire. For example; the insured must die within 90 days of the accident and be aged 60 or even less.

An ‘accidental death benefit rider’ to a life insurance policy may also include an additional benefit for dismemberment. In that case, it’s called an ‘accidental death and dismemberment (AD&D) rider’ which usually provides that, the benefit will also be paid if the insured loses sight in both eyes or suffers the loss of any two limbs. Notable fact is sometimes a smaller amount may be paid for the loss of sight in one eye or the loss of one limb.

The rider sometimes proves to be highly beneficial and ideal if the policyholder is the sole income provider for the family as it takes good care of surviving family’s expenses in his/ her absence. However, it is advisable to read the policy documents carefully before purchasing the policy and special attention is to be paid to the definition of the term ‘accident’ which is often very restricted.

Accelerated Death Benefit/ Living Benefits/ Terminal Illness Rider

Accelerated death benefits are triggered by either the occurrence of a catastrophic (dread) illness or the diagnosis of the terminal illness (that will considerably shorten the insured’s lifespan), resulting in payment of a portion of a life insurance policy’s face amount prior to death.

The insured can claim this rider if he/ she is diagnosed with terminal illness; requires long-term care or admission to a nursing home. With these conditions, the insured would most likely be unable to continue work and earn an income. This life insurance rider can help relieve some of the financial burden and medical costs.

The benefit can usually be claimed from the insurance company when the two doctors mutually agree that the insured has six months or less to live.

Usually, the terminally ill insured can receive up to 25-40 percent of the death benefits of the base policy to the insured to improve quality of life before death. However, the death benefits payable under the policy are reduced by any amounts paid under this rider. Often, the coverage is provided without an additional premium.

Note : Different insurers come out with different versions of the definition of "terminal illnesses", so better check what the rider has to offer before opting for it.

Waiver of Premium Rider

The rider says that, all future premiums will be waived off, in case the insured becomes permanently disabled or loses his/her income as a result of injury or illness prior to a specified age.

Effectively, this rider acts as a ‘disability insurance’ against the life insurance policy.

Disability of the main bread-earner can be severely painful for the family. During these circumstances, this rider exempts the insured from paying the future premiums due on the base policy until he or she is ready to work again i.e. once the policyholder is no longer disabled, he/ she is required to resume the premium payments as before.

Insured’s disability should be total and permanent to avail this rider benefit. However, a waiting period of 3-6 months normally applies before the benefits of this rider go into effect.

Time and age limits are usually applicable. For example; the insured after turning 65 becomes disabled for longer than six months, the premiums will be waived off. However, usually, the premiums paid during the six months of disability will be reimbursed, but it depends upon the design and nature of life insurance policy.

This rider can be valuable particularly, when the premiums on the policy are quite high and in case of disability when the premiums are waived off, the policy holder is escaped from the risk of lapsing the policy.

The premium paid for this rider qualifies for tax deduction under section 80D of the IT Act.

Note : The definition of being ‘disabled’ varies within insurance companies, hence it is always beneficial to read over the guidelines before agreeing to the extra cost. Find out what qualifies as being disabled and how long a person is able to retain his/ her policy without paying the premiums.

Permanent Disability Benefit (PDB)

If the policyholder becomes totally and permanently disabled, this rider guarantees a monthly income from the insurance company, for as long as the disability lasts.

‘Permanent disability’ is defined as; permanent loss of use of two limbs or total and permanent loss of sight or permanent and immediate inability to work.

This rider usually includes the waiver of premium rider (as explained above). As in the case of the waiver of premium, the disability income rider also requires a waiting period of generally 3-6 months before taking effect i.e. when an insured becomes disabled for at least six months, premiums due are waived off. However, during this time period, the life insurance policy stays in force, so that if the insured dies the beneficiary receives the face value of the policy and the cash values continue to build up and in case the policy is participating, dividends continue to be paid.

Depending on the nature of the rider, the insured may begin to receive either a monthly income which is usually 1% of the face value of the policy or only the premium may be waived off.

Usually attached to juvenile insurance policies, the payer of premium (typically a parent) ensures that if he/ she dies or becomes disabled before the child has reached a specified age, the insurance company will waive all further premiums until the child reaches a certain age. To put it simply, the child will not be without an insurance policy if something happens to the parent or guardian (also refer children plans for better understanding).

The maximum cover available under this benefit is equal to the basic sum assured (subject to a maximum of Rs. 10 lacs).

Family Income Benefit Rider

The rider guarantees continued monthly income in case the policyholder dies.

In case of sudden demise of the salaried individual’s death, this rider will be of a great relief and will face fewer financial difficulties, where they can depend upon reliable monthly payments as they will not be cut off from all sources of income. Depending upon the situation, the beneficiaries can choose to receive the amount in a lump sum or monthly payments. However, as you grow older the duration will decrease and eventually expire.

While purchasing the life insurance policy with this rider, it is at the policyholder’s discretion to choose the length of time he/ she would like to provide this security to their family.

Child Term Rider

It provides a death benefit in case a child dies before a specified age.

The term plan can be converted into permanent insurance plan with the coverage multiplying up to five times the original face amount without the need for medical tests, but only after the child has attained maturity.

Long-Term Care Rider

This rider offers monthly payments, in case the insured requires staying at a nursing home or receiving home care due to his/her bad health.

Although long-term care insurance are individual insurance plans but still some insurance companies offer them as rider that takes care of the insured’s long term care costs.

Return of Premium (ROP) Rider

This rider says that the insurance company will give back most of the amount of premiums that the policyholder has put into the policy.

This is new add-on feature to the traditional term insurance policy after taking into consideration the financial needs and goals of people where, if you have outlived the term life insurance, the policyholder gets the money back at the end of the term.

It is merely increasing the amount of term life insurance and does not actually mean return the paid-in premiums. It always equals the total of the premiums paid at any point during the effective years of the rider and adds this additional amount to the death benefit as long as the death falls within the time period specified in the rider. However, the policyholder has to pay a marginal increased premium and at the end of the term, if you have survived the term, all the paid premiums are returned in full.

For example; in a normal term insurance policy, the policyholder is authorized for only the death benefit, no maturity benefit is permissible. Now consider if Mr. Tom has purchased a term insurance policy of Rs. 5,00,000/- for 20 years with a monthly premium of Rs. 500/-. Now lets say he has survived after the term and nothing was collected as benefits from the insurance company. The amount which he spent in last 20 years was Rs. 1,20,000.

Now, if Mr. Tom decides to purchase a term insurance policy with ROP rider. It will cost him marginally extra, lets say Rs. 525/- a month. But, now he can get return of entire amount he spent. He not only got the life coverage of 20 years but also the return of premiums in full at just little extra cost.

It is to be noted that the benefit of ROP rider will not be paid to the beneficiary in the event of death of the policyholder. i.e. the beneficiary will receive the policy’s face value like the standard term insurance policy.

Note : Insurers sell this rider with many variations, so it is always better to verify the phrasing of the rider before you buy.

Level Term Cover Rider

It provides a fixed amount of term insurance that is added to a permanent life policy for a specified period of time.

Generally, a level term rider is written for an amount that may be up to three or even five times the death benefit of the permanent policy to which it is attached. However, it provides the policy holder the option to enhance his/her risk cover for a limited period, up to a maximum of the sum assured on the base policy.

It solely offers death benefit and helps the survivors to meet any unforeseen expenses that need to be taken care of or some liabilities to be cleared of in event of death of the policy holder.

Although, the survival benefits will be proportionately lower in this case, the basic need for life insurance is met at a far lower cost. For example; if the need for life insurance cover is Rs. 10 lacs, the policyholder will have to purchase a policy of the same amount and will have to pay the premium accordingly, whereas if he/ she goes in for a Rs. 5 lac life cover and add a term rider for Rs. 5 lac, he/ she can satisfy his/ her insurance requirement at a far lower premium.

Double Sum Assured Rider

This provides for an additional amount equivalent to the basic sum assured to the survivors in case of an unfortunate death of the policy holder.

With a little extra premium the policy holder can double his life cover at a nominal cost as compared to opting for a larger endowment policy.

It is commonly found that the policy holder is the main source of income of the family and in case of an unforeseen event of his death, his survivors are likely to need more money to manage the household, thus the double sum assured rider caters to such a situation.

Critical Illness Benefit (CIB) or Dreaded Disease Rider

In case of medical emergencies, this given benefit can be added to the basic plan to provide financial support.

Generally, the extra cover is equal to the sum assured on the base policy and is paid upon diagnosis of the illness.

While the illnesses covered and the premiums vary among insurers, most insurers cover cancer, coronary artery bypass graft surgery (CABG), heart attack, aorta surgery, kidney/ renal failure, major organ transplant, loss of limbs, major burns, blindness and paralytic stroke.

On the first occurrence of critical illness during the term of the plan, the policyholder would receive a portion of the sum assured, in order to help him/her reduce the financial burden in this emergency.

The maximum CIB that a policyholder can avail of, is equal to half of the basic sum assured (subject to a maximum of Rs. 20 lacs). The clause differs from company to company, more or less with similar provisions.

After the CIB is paid, the basic sum assured and all the benefits dependent on the basic sum assured will reduce in the same proportion that the CIB bears to the basic sum assured at the time of claim.

A few insurers terminate the base policy once a claim is made on the rider. Thus, a plan that continues to give you life cover, at marginally higher premium on the rider, is preferable.

The main difference between a critical illness benefit and a mediclaim policy is that under the critical illness benefit, the policy holder gets an amount equal to the sum assured irrespective of the medical expenses on diagnosis of the critical illness while under a mediclaim policy, the policy holder receives a reimbursement on producing the bills which is limited to the extent of amount medical expenses incurred.

The premium paid for this rider qualifies for tax deduction under section 80 D of the IT Act.

Note : Before adding this rider one must check illnesses covered and the exclusions.

Major Surgical Assistance Benefit

It provides financial support in the event of medical emergencies that require surgery in addition to the base policy.

When this clause is triggered, a part of the sum assured is paid to the policy holder.

Most insurers exclude claims arising from pre-existing injuries for illnesses and other predefined specific events. Also, expenses on hospitalization for ailments that do not require surgery are not covered.

The premium paid for this rider qualifies for tax deduction under section 80 D of the IT Act.

The premium varies in a large range because only some insurers allow the base policy to continue once a claim is made on the rider.

Note : You must check the list of surgical procedures covered and the exclusions.

Life Guardian Benefit (LGB)

This rider waives off all future premiums on the policy and keeps the policy alive, in the event of death of the policyholder.

It is to be noted that if life assured and proposer are two different people then only the benefit of this rider can be availed.

Cost of Living Rider

The policy’s death benefit can be increased (with a corresponding increase in premium) to match any increase in the cost-of-living index by availing this rider.

The above aim is fulfilled either by changing the face amount of an adjustable life policy or by attaching an cost of living rider to the policy.

Additional Insured’s Riders

In order to cover one or more additional people in the given insurance policy, this rider can be taken along with the main policy.

These are usually term insurance riders covering a spouse, one or more children or all family members in addition to the insured policy holder.

Note : Riders give you the flexibility to cover specific activities that you engage in without an exclusion of coverage for that activity. For example; if you know that your policy excludes death as a result of engaging in rock climbing, you can purchase a rider to your policy that covers death as a result of rock climbing. Riders are typically more expensive than a traditional policy because of the increase in risk for the life insurance company. However, adding a rider to your existing policy should still cost less than buying a specialized policy that covers all types of typical exclusions.

Points to Ponder

Due to intense competition in the insurance space, especially among private insurers, there’s a wide range of insurance products available today at really affordable rates. The typical riders you can take are critical illness benefit, waiver of premium benefit, level-term covers and accident and disability benefit, but you can opt for customized riders as well. Today, almost 80 per cent of all policies sold carry at least one rider.

Why are they so popular ?

The main reason is that riders offer high value at a low cost, and they offer extra protection without you having to take a second policy. As the premium for the rider goes completely towards the cost of the risk cover rather than towards savings, the premiums on riders tend to be lower than that for the basic policy. Moreover, the administrative cost on policies goes down when a base policy is maintained along with a rider cover. It’s a perfect value-for-money match that both insurers and customers look out for today.

You can attach riders to almost any form of insurance policy–endowment, money-back and whole life– under the traditional and unit-linked formats. Typically, insurers let you attach a rider at the time of taking the policy; some also offer you the option to attach a rider at a later date, though the cost at that time may be higher depending on your health condition and your age. However, taking a rider at the inception of a policy is more gainful than taking it at a later date.

Riders at different stages in life can add more value. You can add disability, accident and critical illness rider at an early age. You can take waiver of premium rider in middle age and add critical illness and term insurance riders to pension plans.

BENEFITS OF LIFE INSURANCE

Life is a great adventure where ‘risks’ and ‘uncertainties’ like accident, illness, theft, natural disaster are a part and are all built into the working of the universe. Life insurance has no competition from any other business. Other investment options and saving schemes like fixed deposit, national savings certificates, mutual funds etc., when the person saves, the amount of funds available at any time is equal to the amount of money set aside in the past, plus interest. In case of money invested in share market, carry a risk being lost in high fluctuations and if not lost then the available money at any time is the amount invested plus appreciation. This is not similar even to a hire purchase scheme where the intended purchase is effected immediately, but the price is paid in instalments later. However, in the event of death, the balance instalments are not excused. They have to be paid by the surviving family.

On the other hand, in life insurance, however, the fund available is not the total of the savings already made (premiums paid), but the amount one wished to have at the end of the savings period which may be next 20 or 30 years. The final fund is secured from the very beginning. One is paying for it over the years, out of the savings. One has to pay for it only as long as one lives or a lesser period, if so chosen, but, the assured fund is not affected. The premiums cease on death of the life insured, there are no outstanding instalments. There is no financial arrangement that can equal the benefits of life insurance. There is no scheme which provides this kind of benefit. Therefore life insurance has no substitute.

Life insurance as "Risk cover"

As explained earlier, insurance is about life's unpredictable losses, risk cover and protection; financial protection, to be more precise. Insurance provides the insured with a unique sense of security that no other form of investment provides, it is basically designed to safeguard against losses suffered on account of any unforeseen event. After buying this asset, a person actually buys his/ her peace of mind and is prepared to face any financial demand that would hit the family in case of an untimely demise.

In order to provide such protection, contributions are collected from the people facing the same risk by the insurance companies and they act as trustees. A loss claim is now paid out of the total premium collected by the insurance companies.

Safeguard against drop in income after retirement and accidents are also provided by the insurance. It can lend timely support when the family has devastating effect of an accident or disability of the earning member.

A person can choose from a wide range of products and services after the entry of private sector players in insurance. Further, they can be customized to fit individual/group specific needs.

Life insurance as "Investment"

Many people are not aware of insurance as an attractive investment option, where people recognize insurance majorly only towards risk hedging and its tax saving potential. Besides the added incentives (bonuses) offered by insurers, in fact, insurance products yield more, in comparison to regular investment options.

Financial protection from risks; something that is missing in non-insurance products. The premium paid for an insurance policy is an investment against risk. Before comparing with other investment options/schemes, it must be accepted well in advance that a part of the total amount invested in life insurance goes towards providing for the risk cover, while the rest is used for savings.

Unlike non-life products, maturity proceeds are received at the end of the term in the form of the amount invested as premium in the policy coming back with added returns. Death benefits are received within the tenure of the policy, the family of the deceased will receive the sum assured plus bonus.

Life Insurance when compared with the Public Provident Fund (PPF); if a person invests Rs. 10,000 in PPF, the amount will grow at the rate of 8.8% (w.e.f. 1st April 2012), i.e. Rs. 10,880. Secondly, access to the funds will be limited like the account holder can without maximum upto 50% of the amount after 5 years and can be closed at the expiry of 15 years, however the account period can be extended for a period of 5 years on request. On the other hand, in life insurance, the same amount of Rs. 10,000 can give you an insurance cover of approximately Rs. 5-15 lacs (depending upon the plan, age and medical condition of the life insured etc.) and on policyholder’s death, this amount can become immediately payable to the nominee.

Hence, insurance also acts as a unique investment tool, which attarcts sound returns in addition to protection.

Life insurance as "Tax planning"

Insurance serves as an excellent tax saving mechanism too as the policyholder is eligible for various tax benefits under the Income Tax Act 1961. The Government of India has offered them in order to facilitate the flow of funds into these productive assets. Though there are various other options for saving tax, life insurance is one of the most effective tax planning instrument. Hence, with the life insurance plans, individuals can not only save tax but also look at achieving their long term goals.

Refer Chapter 17, Income Tax Act, 1961 for different tax benefits of insurance.

Life insurance plans provides several benefits like life cover, investment plans with wealth maximization opportunities, child planning options, retirement planning options and many of them are coupled with effective tax saving options.

"In today's economy, there are no guarantees.

You just have to make the best decision and the best guess".

What underlying assumptions are embodied in the advice, "Buy term and invest the difference"? What do you think of this advice ?

Although there is no such thing as a standard life insurance policy, certain provisions may be required by law. In addition, some optional provisions or modifications may need to be added to the basic policy. Which of the optional provisions d you think should be considered essential by the insurance buyer ?

What is meant by the expression, "The policyholder gets the benefit of the doubt", in connection with any interpretation of the provisions of the life insurance policy ?

The policyholder went on holiday with her family and they were involved in a serious road accident. They contacted the assistance company and the policyholder and her daughter were hospitalized. The policyholder submitted a claim for loss of sight under the personal accident section of the policy. She said she had no useful vision in her left eye and there was no prospect of improvement. The insurer insisted on obtaining additional medical evidence. The insurer’s consultant concluded that the policyholder had lost all central vision but retained a small amount of peripheral vision, which he estimated at 2-3%. In his opinion, "In theory, [the policyholder] had retained sight in the left eye. However, it was so minimal; it [would] be of no practical use to her. For practical purposes, [the policyholder] had lost all sight with the left eye".

Key Questions : What type of policy with rider will benefit the person in order to compensate his earnings due to loss of vision. Also comment on the role of insurer.

Source : The Financial Ombudsman Service.

It has been said that policy loans constitute "borrowing from widows and orphans". What is meant by this statement ? Do you agree with it ?

Historically, the disability waiver of premium provision was to provide benefits only if the disability was total and permanent. How have the terms total and permanent been interpreted ?

It is often said that policyholders should not have to pay interest on policy loans since they are "borrowing their own money". Explain specifically the fallacy of this argument. Assuming the policyholders did not pay interest on any policy loans, what would happen ?

To what extent does the accident death benefit (or double indemnity) provision of a life insurance policy violate the rules of good risk management ?