Insurance Policy FAQ’s

Insurance Policy FAQ

When does life insurance cover begin?

Your life insurance cover will start on the date of commencement after the insurer has received and approved of your insurance application. It is also known as Risk Commencement date.

Premiums paid by a term insurance policyholder are fully utilised towards creating a life cover. Under other types of life insurance plans, only a part of the premium paid is allocated towards creating a life cover. The balance is utilised to provide for maturity benefits or as in the case of ULIPs a part of the premium is used to meet administration and sales expenses. This makes term insurance plans more affordable than other plans. This is why they are also called pure protection plans because they only offer a pay-out in the event of death of the life assured. Other plans offer returns as well as life coverage.

Insurance companies provide something called a grace period to customers who are unable to make premium payments on the due date. The period usually spans for 15 to 30 days, and customers who default on their premium payments are expected to pay during this period. Failure to do so will mean that your life insurance policy has lapsed. As a result, you can either reinstate or revive the policy within a predetermined period of time.

When purchasing a life insurance policy, the most important thing to check is whether or not guaranteed returns will be provided by the plan. You must also keep an eye on the lock-in period, information regarding premium payments, the implications of defaulting on premium payments, the revival conditions, the fees that would be charged for cancelling or surrendering the policy, the availability of a loan facility, etc. Go through the terms and conditions of the policy you wish to purchase and make sure that it meets all your requirements for an affordable cost.

When a life insurance plan has been active for a specified number of years (usually at least five), the policy acquires a cash value. Every life insurance policy has a savings portion called the cash value. The cash value of a life insurance policy adds up when the worth of premium payments made by  the policyholder exceeds the cost of insurance. This excess amount is transferred to a cash value account where it accrues interest. In case you choose to surrender the policy, the company will offer you the cash value or surrender value of the policy. However, please note that surrendering an insurance policy prior to the end of the maturity period will make you incur a significant loss.

If a policyholder wishes to cancel his/her policy, once in effect, they can surrender it to the insurer and receive the surrender value as a refund. The surrender value is calculated based on premiums paid and how long the policy was in effect. Surrender is usually allowed after a certain period of time.

At the time of purchasing a life insurance policy, the insurance provider may design and define the manner in which you will receive the payout. Settlement options are offered by most insurance companies and they ensure that you receive your money in a manner that was specified when you were purchasing the insurance policy.

If, for example, a policy is used to raise a loan, the policy is ‘assigned’ or transferred to the lender. The policy then bears the lender or the ‘assignee’s’ name. Once the loan is repaid the policy can be reassigned or transferred back.

Graded life insurance is one of the lesser known types of insurance. This whole life policy features initial premium which are lower than other similar policies. However, the premium increases every year for a fixed number of years, after which it stays fixed till the policyholder owns the policy. This type of life insurance is suitable for those individuals wish to get covered but may not be able to afford the premiums of a life insurance policy. With a graded policy, they can take advantage of the lower initial premiums which eventually stabilize after a few years. Graded premium policies are also known as graduated premium life insurance policies.

Under certain plans, insurance companies give policyholders a share in profits. This amount is called a bonus and accrues to the policyholder at no extra cost. It is awarded at certain times during the policy period. Bonus amounts are decided by the company and are paid out in addition to the chosen sum assured. Certain plans guarantee bonus payments.

Cancellation of policies during the free-look period can be done free of cost. However, in case you wish to cancel your life insurance policy after the free-look period, you will be charged a small fee for the same.

Life insurance policies are meant to provide financial sustenance in the event of death, primarily. However, most policies offer additional coverage for disability, accident and various illnesses. These are called riders and usually come at an additional cost although some policies do offer them as part of the primary plan.

The premiums of life insurance policies usually do not change and remain fixed for the term of the policy which is decided by the policyholder. Some policies have single pay or limited pay options also where the premiums can be paid in one lump sum or over a period of a few years.

Yes, premiums paid are deductible U/S 80C, U/S 80CCC, U/S 80D, U/S 80DD and death benefits are tax exempt U/S 10(10D). This is subject to prevalent provisions of the Income Tax Act, 1961.

Yes, purchasing a life insurance policy at a relatively young age, such as in your twenties, can help you avail the plan for significantly low premium.

Insurance companies may request medical reports from applicants depending upon the age at which they purchase the insurance policy, their age when the policy matures, personal and family history, sum assured, and other factors they consider crucial. For instance, if the applicant is obese, special reports such as Glucose Tolerance test or Electro Cardiograms could be requested. Similarly, depending upon your medical condition, the insurance company may ask you for one or more reports.

Premiums are the amounts paid by the policyholder to the insurance company in order to keep the policy in force.

Riders are specific to certain situations or events whereby the insurer pays the policyholder a certain amount of money when such event occurs. E.g. critical illness or disability rider. They are an additional benefit to a standard policy for higher premiums.