Personal Finance Saturday, March 10, 2001

LIFE INSURANCE POLICIES
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Children
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Endowment policies
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FAQs
Life Insurance Claims
Glossary

FAQs

What is life Insurance?

Life insurance is a contract for payment of money to the person assured or to the person entitled to receive the same on the occurrence of the event insured against. Usually the contract provides for -

  • Payment of an amount on the date of maturity or at specified periodic intervals or at death, if it occurs earlier.
  • Periodical payment of insurance premium by the assured, to the corporation who provides the insurance.

What is a life insurance policy?

The document which contains the terms and conditions of the life insurance contract is termed as the life insurance policy.

What is a life insurance contract?

A life insurance contract is one whereby the insurer, in consideration of a premium paid either in lumpsum or in regular installments, undertakes to pay a certain sum of money (in lumpsum or installment), either on the death of the insured or on the expiry of the stipulated number of years.

When does the insurance company pay the money to the insured?

The money is payable to the policyholder at the end of the term of policy. In the case of death of the person insured, the money is payable to his/her nominee. Certain plans offer survival benefit payments during the term of the policy.

What is "Insurable Interest"?

The proposer must have an insurable Interest in the life to be insured. This means that the proposer stands in such relation to the person being insured that he suffers loss by his/her damage and is benefited by his/her safety or existence. In every life insurance contract it is a pre-requisite to have Insurable Interest in the life that is being insured.
Examples: a husband's interest in his wife's life, a father taking it for his child or one business partner taking it for another.

Who is the beneficiary?

The person to whom the policy proceeds will be paid in the event of the death of the insured.

Who is the proposer?

A proposer is the person who sends the proposal form for taking an insurance policy and pays the premium.

What is the insured amount?

The amount for which the risk is insured is referred to as the insured amount, policy money or the face value of the policy.

What does life proposed mean?

Prior to the acceptance of a proposal by a life insurance company, the person on whose life insurance is sought is known as life proposed.

What does life assured mean?

Once the insurance company accepts the proposal, the life proposed becomes the life insured / assured.

What is a Whole Life Policy?

When most people think of life insurance, they think of a traditional whole life policy. These are the simplest policies to understand: You pay a fixed premium every year based on your age and other factors, you earn interest on the policy's cash value as the years roll by, and your beneficiaries get a fixed benefit after you die. The policy takes you into old age for the same premium you started out with. Whole life insurance policies are valuable because they provide permanent protection and accumulate cash values that can be used for emergencies or to meet specific objectives. The surrender value gives you an extra source of retirement money if you need it.

What is an Endowment policy?

Unlike whole life, an endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy. Endowment life insurance pays the face value of the policy either at the insured's death or at a certain age or after a number of years of premium payment.

Endowment life insurance is a method of accumulating capital for a specific purpose and protecting this savings program against the saver's premature death. Many investors use endowment life insurance to fund anticipated financial needs, such as college education or retirement.

Premium for an endowment life policy is much higher than those for a whole life policy.

What is a Money Back policy?

This is basically an endowment policy for which a part of the sum assured is paid to the policyholder in the form of survival benefits, at fixed intervals, before the maturity date. The risk cover on the life continues for the full sum assured even after payment of survival benefits and bonus is also calculated on the full sum assured. If the policyholder survives till the end of the policy term, the survival benefits are deducted from the maturity value.

What is a paid-up policy?

According to LIC rules and regulations, once you pay the premiums on a life insurance policy for 3 full years, the policy does not become wholly void even if no subsequent premiums are paid. Such policies are known as paid-up policies. In such cases, the sum originally assured is reduced to a sum bearing the same ratio to the full sum assured as the number of premiums actually paid to total number of premiums originally stipulated as payable under the policy.

If 6 out of the originally stipulated 30 premiums are paid, the sum assured under a paid-up policy would still be 20 percent of the original sum assured by the policy.

What is an Annuity Scheme?

Annuity schemes are those wherein your regular contributions over a period of time (or a one-time contribution) accumulate to form a corpus with the LIC. This corpus is used to yield you a regular income that is paid to you until death starting from your desired retirement age. Some annuity schemes have the option to pay your survivors a lump sum amount upon your death in addition to the regular income you receive while you are alive.

What are With Profit and Without Profit Plans?

LIC distributes its profits among it policyholders every year in the form of a bonus/ profit share. An insurance policy can be "with" or "without" profit. In the former, any bonus declared is allotted to the policy and is paid at the time of maturity/ death (with the contracted amount). In a "without" profit plan, the contracted amount is paid without any profit share. The premium rate charged for a "with" profit policy is therefore higher than for a "without" profit policy.

What is Bonus?

LIC distributes its profits among it policyholders every year in the form of a bonus. Bonuses are credited to the account of the policyholder and paid at the time of maturity. Bonus is declared as a certain amount per thousand of sum assured.

What is meant by 'interim bonus'?

A bonus paid between two successive annual declarations of bonus. It is paid on 'with profit' policies that mature or

result into claim during the currency of a financial year. Final bonus is declared only at the end of the financial year when the final accounts of LIC are made up. Therefore, the policies maturing during the year are paid proportionate interim bonus for the period from the immediately preceding March 31 till the date of maturity or claim of the policy. This bonus is generally paid at the same rate as the last bonus declared by LIC on the policy.

What are Guaranteed Additions?

In some policies, LIC guarantees the bonus/ profit declared as a certain amount per thousand of sum assured. This assured bonus will be credited to the policyholder irrespective of the performance of LIC and is known as Guaranteed Additions. Guaranteed Additions will be payable at the end of the term of the policy or early death of the policyholders.

What are Loyalty Additions?

In some policies, over and above Guaranteed Additions, LIC will declare and credit to the policyholder, an additional amount per thousand of sum assured every 5 years, depending on its performance. This additional amount is known as Loyalty Addition.

What are Survival Benefits?

In some policies, a part of the sum assured is paid to the policyholder in the form of Survival Benefits, at fixed intervals before the maturity date. The risk cover for life continues for the full sum assured even after payment of survival benefits and bonus is also calculated on the full sum assured. If the policyholder survives till the end of the term, the survival benefits will be deducted from maturity value.

What are Accident Benefits?

On payment of an additional premium of Re1 per Rs 1, 000 of sum assured per year, the assured is entitled to the following benefits: -

  • In case of accidental death, the nominee shall receive double the sum assured,
  • In case of total and permanent disability due to accident, risk coverage continues without further payment of premium. In addition, an amount equal to the sum assured is paid to the assured in monthly installments spread over 10 years. However, subsequent accidental death will not entitle the nominee for double the sum assured.

What are Disability Benefits?

If the assured becomes totally and permanently disabled due to any accident, he need not pay future premiums and his policy shall remain in force for the full sum assured.

What are the various modes of payment for premium?

Premiums, other than single premiums, can be paid by the policyholders to LIC in yearly, half-yearly, quarterly or monthly installments or through a Salary Savings Scheme. If the mode of payment is yearly or half-yearly, LIC gives a rebate of 3% and 1.5% respectively on the premium. If the mode of payment is monthly, LIC charges an additional 5% (this additional charge is waived for the Salary Saving Scheme).

What is Salary Savings Scheme?

Salary Savings Scheme provides for payment of premiums through monthly deductions by the employer from the salary of employees. For this scheme, the additional charge of 5% of the premium usually added for the monthly mode of payments will be waived.

What are Medical and Non-Medical Schemes?

Life insurance is normally offered after a medical examination of the life to be assured. However, to facilitate greater spread of insurance and also as a measure of relaxation, LIC has been extending insurance cover without any medical examination, subject to certain conditions.

What loans are available against life insurance policies?

At present loans are granted on unencumbered polices as follows -

up to 90% of the Surrender Value for policies, where the premium due is fully paid-up, and

up to 85% of the Surrender Value for policies where the premium due is partly paid-up.

The minimum amount for which a loan can be granted under a policy is Rs150. The rate of interest charged is 10.5% p.a., payable half-yearly. Loans are not granted for a period shorter than six months, or on the security of lost policies (the assured must have the duplicate policies) or on policies issued under certain plans. Certain types of policies are, however, without loan facility.

What is Surrender Value?

The cash value payable by LIC on termination of the policy contract at the desire of the policyholder before the expiry of policy term is known as the surrender value of the policy. A policy can be surrendered provided the policy is kept in force for atleast 3 years. The bonus is also added to the surrender value if the policy has been in force for atleast 5 years.

What is a Death Claim?

The claim is usually payable to the nominee/assignee or the legal successor, as the case may be. However, if the deceased policyholder has not nominated/assigned the policy or not made a will, the claim is payable to the holder of a Succession Certificate or such evidence of title from a Court of Law.

How do you effect a Change of Address and Transfer of Policy Records?

When a policyholder wants to change his address in LIC’s records, notice of such change should be given to the Branch office servicing his policy. Policy records can be transferred from the Branch Office that services the policy to any other Branch Office nearest to the policyholder’s place of residence. The correct address facilitates better services and quicker settlement of claims.

When does a policy lapse?

When the premium is not paid within the days of grace provided after the due date, the policy lapses. The grace period in case of yearly, half-yearly and quarterly modes of payment is one month and in case of the monthly mode of payment, it is 15 days.

How can a lapsed policy be revived?

A lapsed policy may be revived during the lifetime of the assured, but within a period of 5 years from the due date of the first unpaid premium and before the date of maturity. Revival of a lapsed policy is considered either on non-medical or medical basis depending upon the age of the life assured at the time of revival and the sum to be revived. If the revival of the policy is completed by payment of over-due premium within 14 days from the expiry of the grace period, only the late fee for one month has to be paid.

Can a policy be altered?

No alteration is permissible in the policy document - the evidence of contract, unless both the parties to the contract agree. After the policy is issued, a policyholder in a number of cases finds the terms not suitable to him/her and desires to change them to suit his/her convenience. LIC, as insurer, also realises that insurance being a long term contract, certain changes under given circumstances might necessitate an alteration of the contract. Keeping in view the basic principles of insurance and administrative convenience, LIC permits some alterations. As a rule, LIC will not permit alterations resulting in lower rates of premia and within the 1st year from the commencement of the policy.

What happens if the policy document is lost?

The loss or destruction of a policy document does not in any way absolve the Corporation of the liability of payment of policy monies when the claim arises. If the policy is lost or destroyed, claim or sum assured will be paid to the claimant or policyholder after he/she furnishes an indemnity bond jointly with one surety. Similarly, a policy can be surrendered even if the original policy document is lost. However, for the purpose of loan or survival benefit one has to obtain a duplicate policy. The policy being a legal document, the issue of duplicate policy involves the normal procedures like issuing a newspaper advertisement, surety, etc.

What should be done in the case of a lost policy?

The branch or divisional office of LIC, where the policy is serviced, should be immediately intimated. A duplicate policy will then be issued. It may, however, be noted that the loss of policy document does not extinguish the right of the policyholder in the policy.

Who can buy a life insurance policy?

Any person who has attained majority and can enter into a valid contract can buy a life insurance policy for himself and for those in whom he has insurable interest. That means you can buy a policy not only for yourself but your spouse or children or even your business partner. Factors such as health and age of the person to be insured and the income of the person buying the policy are considered.

What is the procedure when opting for a LIC policy?

  • Fill a proposal form providing information such as his name, age, occupation, medical history, particulars regarding his health and that of his parents, the amount he wishes to be insured for, the type of policy, the rate and mode of premium and name of the nominee.
  • Submit proof of age (horoscope, birth certificate, and baptism certificate for Christians, high school certificate, service book).
  • Obtain an 'Age admission certificate' from the LIC.
  • A medical examination by LIC-approved doctors. The doctor's report is sent directly to LIC. This step is often bypassed for someone very young or if the insured amount is very small.
  • After the medical report, the LIC agent's confidential report is submitted to obtain impartial information about the individual.
  • An assessment of risk is made based on the information obtained. If the life proposed is found insurable, then the Corporation accepts it and sends an acceptance letter along with a premium notice stating the amount of the premium payable and the due date.
  • On and from the date of payment of the first premium, the risk (of LIC) commences on the life proposed and he/she becomes life insured. However, in case of certain policies, the risk commences from a later date. Once the risk commences, LIC becomes liable to pay the full amount of insurance in the event of happening of the insured event.
  • The signed and stamped original policy documents are despatched to the individual.
  • Proof of age can be submitted at the time of filing the proposal or anytime till the claim is made.

 

What is meant by 'dating back' of a policy?

This is an option provided by LIC wherein policyholders can get the policy dated as a date earlier than that on which the policy is actually bought. The main benefit of this facility is reduction in age of the proposer for the purpose of finding out the applicable premium. The premiums payable on a policy increases with the increase in age of entry into a policy. Therefore, by availing of this benefit one can reduce the amount of premiums payable by him on the policy.


Policies (other than single premium policies) issued by LIC can be dated back within the same financial year for a period not exceeding three months (one month in case of certain policies) without any extra charge. Policies may be dated back for longer periods also within the same financial year provided interest is paid at 9% per annum for the period in excess of three months (one month in case of certain policies).

Who is a life insurance agent?

A person authorised to canvass and procure life insurance business and in possession of a licence to act as a life insurance agent.

What is the agent's role?

  • Responsible for canvassing and procuring new insurance business.
  • Helps the proposer in filling the forms completing formalities for obtaining life insurance.
  • Advises on the type of policy best suited.
  • Informs clients about new policies and schemes announced by LIC.
  • Responsible for rendering after-sales services to the policyholder.
  • Takes care of the policyholder's queries.
  • Helps the policyholders or beneficiaries in making and realising claims.
  • Acts as a middle man between the corporation and the proposer/ policy-holder and is responsible for furnishing true and fair information about the proposer at the time of obtaining insurance.

What is a premium?

The amount paid by the insured to the insurer. In other words, premium is the price of insurance.

Premiums may be one-time or single premiums or they may be paid monthly, quarterly, half-yearly or annually. The mode of premium payment can be changed during the premium paying period.

What is meant by 'days of grace' for payment of premium?

Policy holders are required to pay the premiums to LIC on the due dates. However, one month but not less than 30 days of grace is allowed for payment of quarterly, half-yearly and annual premiums and 15 days for monthly premiums.

What happens if the premium is not paid?

When the premium is not paid within the days of grace, the insurance policy lapses.

What is nomination of policy?

Nomination is the appointing of a nominee under the policy. The nominee has the right to receive the amount assured in the event of death of the insured. The nominee need not necessarily be a relative or legal representative of the assured and can be changed at the choice of the policy holder any number if times.

How is nomination effected?

Nomination can be done at the inception of the policy by providing details of nominee in the proposal form. However, if the nomination is not done at the inception of the policy, the policyholder can nominate at a later date. This nomination has to be effected by giving notice in a prescribed form to LIC and getting it endorsed on policy bond.

Who can nominate?

Nomination can be done only by a policyholder who is a major holding Policy Bond in his own name.

What are the rights of a nominee?

Under Nomination, the Nominee gets only the right to receive the policy money in the event of the death of the policyholder. Nomination does not pass on the property in the policy. If nominee dies when the policyholder is still surviving then the nomination would be ineffective. Nomination has no effect if the policyholder is surviving. If Nominee dies after the death of the policyholder but before receiving policy money, then also Nomination becomes ineffective and money can be claimed only by the legal heirs of the policyholder.

How can nomination be changed or cancelled?

A nomination can be changed or cancelled either by an endorsement at the back of the policy or by making a will. In the case of change or cancellation by a will, notice of such cancellation or change would be required from the executors of the will after the death of the insured. In case of change or cancellation through endorsement, it should be notified to the LIC for registration in its records.

What is meant by assignment of policies?
Assignment is a means whereby the beneficial interest, right and title under a policy gets transferred from the assignor to the assignee. Assignor is the policyholder who transfers the title and 'Assignee is the person who derives the title from the assignor.

When can Assignment be made?

Assignment can be made only after acquiring the policy. Assignment can be done only for consideration- for money or money's worth or good, moral and meritorious consideration like, love and affection.

How is a policy assigned?

Assignment can be done by mere endorsement on the policy or by a separate duly stamped deed. Assignemnt can be done by the proposer, policyholder, or the absolute assignee

What are the essential features of assignment?

  • The person assigning the policy must have absolute right or interest vesting in him in respect of the policy.
  • The assignor must be a major and competent to enter into a contract.
  • The assignor must not be subject to any legal disqualification.
  • Assignment must be supported by consideration which may be a valuable consideration in money or a good and moral consideration (love and affection one may have towards his spouse or children).
  • A life insurance policy from LIC may be assigned only after a period of five years.

Can one take loans against life insurance policies?

Policyholders are eligible to take loans on their policies subject to certain rules. The policyholder has to apply for a loan in a prescribed form and submit the Policy Bond with the form duly completed. The loan amount is calculated depending on the Surrender Value (SV) that the policy would have acquired, and approximately 90% of the Surrender Value or 85% in the case of paid-up policies is given as loan.

LIC is currently charging 10.5% interest payable half-yearly on Policy Loans. A policyholder can repay the loan amount either in part or in full any time during the term of the Policy. The minimum repayment should be Rs. 50 and thereafter in multiples of Rs. 10. If the loan amount is not repaid during the term of the Policy or early claim, the amount of loan plus interest, if any, will be deducted from the claim money and the balance amount will be paid to the claimant.

If the interest is not paid regularly every half year, then the interest is calculated on compound interest basis.

No loans are given on children's education or marriage or term assurance or on a lost policy.

What is the procedure for the revival of a lapsed insurance policy?

Revival of a lapsed policy is considered either on a non-medical or medical basis. This depends on the age of the policyholder at the time of revival, as well as the sum to be revived (sum assured less paid-up value as on the date of lapse). However, if the revival is sought for within six months from the due date of first unpaid premium, revival is effected on receipt of arrears of premium with interest. The interest rate depends upon the date of issue of policy.

When does a life insurance policy result in a claim?

On maturity of the policy (completion of the term for which the insurance was taken in case of endowment policies)

On death of the life insured, if it occurs before maturity of the policy, provided policy is in force on the date of death or has acquired paid-up value.

What is the procedure to be followed in the case of maturity of the policy?

  • A maturity intimation, along with the discharge forms, are sent to the policy holder informing him about the requirements for the settlement of claim.
  • In case the maturity intimation is not received by the policyholder around two months before the date on which the policy matures (for yearly or half-yearly premium frequency; one month for other premium frequencies), he should contact the concerned divisional office and obtain a copy of the maturity intimation.
  • On receipt of it, the policyholder should send the original policy document along with the last receipt of insurance premium paid.
  • The policy document needs to be submitted in original unless it is in custody of LIC as security for loan.
  • In case the policy or any Deed of Assignment or Re-assignment is lost by the policyholder, he has to submit an indemnity bond along with a reliable surety of sound financial standing acceptable to LIC. The indemnity bond has to be in a particular form). In such a case the claim is settled in the absence of the policy document.
  • The policyholder should also submit his age of proof if it has still not been submitted.
  • In case age of proof has already been submitted, the discharge for) is to be sent along with the maturity intimation.
  • The discharge form should be properly filled and the signature must be on a revenue stamp and attested by a witness.
  • In due course, LIC sends a cheque to the policyholder for money due to him as per the policy's terms.

What is the procedure to be followed in the case of death of the policyholder?

  • Intimation of Death has to be sent to the branch office of LIC from where the policy was issued.
  • The letter of intimation of death should contain the name of the life assured, a statement that the life assured is dead, the date, cause and place of death, policy number and the claimant’s relationship with the deceased.
  • The intimation needs to be sent by the person who is entitled to get the proceeds of the policy. It could be the nominee, the assignee or the nearest relative.
  • Soon after the receipt of the intimation of the death, the branch office sends the necessary claim forms along with instructions regarding the procedure to be followed by the claimant.
  • As proof of death, a certificate by the municipal death registry or a public record office, maintaining records of births and deaths in the locality, is a must.
  • Other certificates necessary are a statement from the doctor who attended the deceased policy holder’s last illness, certificate of treatment in the hospital where the policy holder died or was treated by the hospital authorities, certificate of burial or cremation to be given by an independent person who attended the funeral and has seen the dead body and certificate from the employer if the policy holder was in employment at the time of death.
  • In case proof of age has not been submitted, it should be done now.
  • If the policy is validly assigned, or a nominee has been designated in the policy, no further proof of title is necessary. If not, the certificate of title is necessary. In such a case, the corporation would require legal evidence of title such as a Succession Certificate or Letters of Administration or Letters of Probate or a Will.
  • On completing the above formalities, the insurance company issues a discharge form for completion, which is to be signed by the person entitled to receive policy money.
  • In due course, LIC sends the cheque for the amount due to the person entitled to receive the same.

Are there instances where the insurance company will not honour the claim?

  • In the event of the policyholder committing suicide.
  • If the claim has arisen within two years from the date of commencement of risk or revival of the policy, investigations are done by LIC on receipt of the claim forms.
  • Normally, in the case of a reduced paid-up policy, on claim only the reduced paid-up value is payable by LIC. However, LIC will pay the entire sum originally assured even in case of a paid-up policy if these conditions are satisfied:
  • The insured has died within six months from the due date of the first unpaid premium; and
  • Premiums under the policy have been paid for a minimum period of three years.
    OR
  • The insured has died within one year from the due date of the first unpaid premium; and
  • Premiums under the policy have been paid for a minimum period of five years.

What are the tax benefits available?

Important Income Tax provisions applicable to Policyholders are :

  • An individual can claim rebate on premium paid on his/her life, his/her spouse, his/her children including adult children and married daughter.
  • Under section 88 of the Income Tax Act, a rebate of 20% is allowed on investment in the form of premium. This rebate is deductible from the total tax payable by the individual. the total amount of investment in the form of LIC premium and other specified investments like PPF, NSC, etc., is restricted to Rs. 60,000 p.a.
  • Under Section 80 DDA a deduction upto Rs. 20,000 p.a is allowed from gross total income, when a contribution or deposit is made with the LIC for the maintenance of a handicapped dependent.
  • Under Section 80 CCC a deduction upto Rs. 10,000 p.a is allowed from gross total income, when a contribution or deposit is made towards Jeevan Suraksha Policy.
  • Any sum received under policy including maturity bonus etc., is non taxable. The exceptions to this clause are Keyman Insurance, Jeevan Aadhar, Jeevan Dhara, Jeevan Akshay policies and Dhanaraksha Mutual Fund.
 

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