Life Insurance

Life Insurance is an agreement or a long-term contract between the life insurer and the policyholder. It guarantees compensation on loss of life within the term of the plan, in return for a specified premium. The beneficiary/nominee whose name has been mentioned in the contract gets a specific sum called sum assured from the insurer, on death of the policyholder, within the term of the plan. A Life Insurance Plan gives adequate security to your family on an unexpected demise. Money can never compensate the loss of a loved one. But, there’s no need for your family to suffer financially. You enjoy peace of mind knowing your family is secure.

Why Life Insurance?

Your family enjoys financial security in your absence. Your wife gets the money to meet daily expenses and pay back loans like home loan, car loan and any other liability. Your children enjoy a quality education and there’s money for their marriage.


  • Life Insurance is a contingency plan for death and family’s financial security.
  • Life Insurance must be availed for risk protection. Your family gets the money on an unexpected demise.
  • Life Insurance also has savings and investments plans. They invest your money in equity or fixed income.
  • The loan facility is available against Life Insurance Plans. You can assign the Life Insurance Plan and take a loan against it.
  • Life Insurance enjoys tax benefits. You get tax deductions under Section 80C of the Income Tax act up to Rs. 1.5 lakhs a year.
  • Life insurers offer annuity plans for retirement. Annuity plans give you regular income after retirement.

Terms of Life Insurance

Insured:
This is the person whose life in being insured under the Life Insurance Plan. If the person availing the plan is different from the person being insured, the buyer is the proposer of the plan. The proposer must have an insurable interest in the person being insured under the plan.

Term of the contract:
This is the time period of the Life Insurance plan or the period when Life Insurance is available. The life insurer specifies an upper age limit (maximum age), when the term of the policy ends.


Terms of Life Insurance

The payment of sum assured takes place on death of the policyholder or expiry of the policy term. The mode of payment of the sum assured is either through a lump sum or in periodic installments. This is specified under the contract. Premium paid:The premium paid depends on sum assured. Premiums could be monthly, quarterly half-yearly or annually and is clearly mentioned in the contract. Some Life Insurance Plans have a single premium paid at the start of the plan. A grace period is provided for delayed premium payments. You can revive the Life Insurance policy within the time frame specified by the Life Insurer, on payment of pending premiums + penalties.


Bonus in Life Insurance

Life insurers periodically announce a bonus, as a percentage of the sum assured. This amount is added to the sum assured and paid to the policyholder on maturity of the plan. This amount is paid on maturity or in case of death within the term of the plan, the sum assured + accrued bonus is paid by the insurer.

Types of bonuses under Life Insurance

Guaranteed Bonus:
Guaranteed bonus is paid as a percentage of the sum assured. It’s paid for the first few years of the Life Insurance Plan, say 5 years. The guaranteed bonus is received at the end of the term of the plan. Reversionary Bonus:
An insurer declares a reversionary bonus, if it performs well. This bonus is completely at the discretion of the insurer. The bonus is declared after the completion of the guaranteed bonus period and is applicable only on participating policies.

What is surrender of a Life Insurance Plan?

If you surrender the Life Insurance Plan before the full term of the plan is completed, you get a portion of the money paid in premiums, after certain charges are deducted. If you decide to terminate the Life Insurance Plan before maturity, the insurer pays you (policyholder), what is known as the surrender value.
A surrender charge is deducted which varies across Life Insurance Plans. You can surrender traditional Life Insurance Plans. These are whole Life Insurance Plans, money back plans or endowment plans. Life insurers cannot levy surrender charges if you terminate the plan after 5 years as per IRDA rules and guidelines.

Types of Surrender Value

Guaranteed Surrender Value

You get guaranteed surrender value only after paying at least 2-3 annual premiums. If the premium paying term is less than 10 years, your Life Insurance Plan acquires a surrender value after paying two annual premiums. If the premium paying term is more than 10 years, your Life Insurance Plan acquires a surrender value after paying three annual premiums.
If you surrender the Life Insurance Plan after 3 years, the life insurer has to pay at least 30% of the total premiums, excluding the premiums paid for the first year. Any additional premium paid for riders and bonus that you have received from the insurer, is excluded.
  • If you terminate the Life Insurance Plan after 4-7 years, you get 50% of premiums paid.
  • If you surrender the Life Insurance Plan in the last two policy years, you get up to 90% of the premiums paid.

Special Surrender Value

This surrender value depends on sum assured, term of the plan, premiums paid on the plan and bonuses. You can calculate special surrender value by
Special surrender value = Surrender value of the Life Insurance Plan = [{(Number of premiums paid on the plan / Number of premiums payable on the plan) * Sum Assured of the plan} + Accumulated Bonus on the plan] * Surrender Value factor.
The Surrender value factor is basically a percentage of Paid-up value + bonus.


Types of Life Insurance Plans

Term Life Insurance

Term Life Insurance is pure risk cover. You pay a premium for a sum assured (This is specific cover under the plan) for a specific tenure. If the policyholder dies within the term of the plan, nominees get the sum assured called death benefit. This plan has no survival benefits.
Term Life Insurance Plans have low premiums as they are pure risk plans. They offer protection only in the event of death. These plans have no maturity value.
The 3 key factors of Term Life Insurance:

  • Sum Assured
  • Premium to be paid by the insured
  • Term of coverage
  • These factors define a term Life Insurance Plan. The term can be a year or more than one year. The premium may be constant or could change with time. The policy holder’s life is insured for a specific term. If the policyholder dies within the term of the plan, nominees get the death benefit. Term life plans have no survival benefits.


    Riders on Life Insurance

    Accidental death benefit rider

    In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.


    Critical Illness rider

    In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.


    Accidental disability benefit rider

    In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.


    Waiver of premium rider

    In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.


    Accidental death benefit rider

    In accidental death benefit rider, the life insurer pays sum assured + rider benefit to the nominees of the plan, if the policyholder dies in an accident. The percentage of accidental death benefit rider sum assured is calculated on the original sum assured and varies across life insurers. Some insurers have a cap on maximum sum assured.