What is life insurance?

Life insurance is a financial product, which ensures that financial obligations undertaken by us in the discharge of ordinary business of life are met for our loved ones, with us, or even in the adverse situation of our absence from this world.

Simply explained, life insurance provides a cover of a defined sum of money which is payable in the event of an unfortunate demise of the person insured. This helps the affected family mitigate the sudden financial loss suffered by them which is besides the immeasurable emotional loss suffered by the family.

Why do I need insurance?

Asset protection and income protection: Insurance is concerned with the protection of the economic value of assets. Insurance as a concept originated as a financial instrument designed to protect tangible assets. Since every asset has value, it is subject to risk and peril. There is a distinct possibility that the asset may be destroyed, or lost, resulting in sufferance of loss by the owner of the asset. All assets that we possess; the house we live in, the car we drive, our business assets, the products and services manufactured or sold by a businessperson or an organization, have an assigned pecuniary value. The single most important asset that we human beings possess is the capability of being able to make a living in life. All other tangible and intangible assets are our creation. Our capability to earn money gives us the confidence of managing and rearing a family. Hence, we have a responsibility to protect this single most important asset to ensure our loved ones continue to get what we have provided for them, with us or without us.

Types of life insurance products:

Term insurance plans: Term Insurance policies as the name suggests, offer coverage of insurance for a defined term or time period and cover only the risk of mortality or the risk of dying too young for a customer. These products primarily cater to the protection of income need of the customer and in case of death during the term of the policy contract, the specified sum insured/death benefit is paid to the nominee specified in the policy. In the event of the insured surviving the policy term, there is no payment on maturity of the policy, as the term insurance is intended to cover only the risk of death during the term of policy. Premiums are generally very low for such plans as they cover only the risk of death and have very negligible investment element in the premiums.

Whole life insurance plans: These plans cater to the need for life protection throughout the whole life of the insured and are hence called whole life plans. The premiums are paid either for whole life or for limited premium payment period. Whole Life Plans cater to the protection need of the individual for whole lifetime, generally only the risk of death is covered by such plans, though whole life products can also be a combination with endowment products, hence maturity benefits are also part of some whole life plans. Whole life policies are more expensive compared to term plans as the period of coverage is throughout the life of the person insured and due to the savings or investment element, which may be part of such offering.

Endowment assurance plans: These are life insurance plans which provide coverage for the risk of death during the policy term and provide the survival benefit on maturity as well. Accordingly, such products cater to the saving and accumulation cornerstone of financial security and provide a base life insurance cover as well. Endowment life insurance products hence provide life protection throughout the term of the policy contract, that is to say in the event of eventuality the defined sum assured/death benefit is payable to the nominee and in case of survival, maturity proceeds are payable as survival benefit.

Money back insurance plans: These plans are an offshoot of endowment products. Instead of survival benefit being paid on maturity or at the end of the policy term, in case of money back plans survival benefits are paid periodically at defined intervals of time through the policy term, thereby enhancing the liquidity for the customer.

Participating and non-participating insurance plans: Whole life, endowment and money back plans cater to the savings and accumulation needs of customers, as there is an element of investment or returns built in the product construct. These products are traditional plans and can be participating or non-participating in nature.

Participating plans as the name suggests, participate in the future profits of the company and hence are eligible for bonus, subject to declaration by the life insurance company. Bonus is the share of profits of a life insurance company, which is shared with the policy holders.

Non- participating plans on the other hand, do not participate in the future profits of the life insurance company, hence do not qualify for bonus. Though, in such plans guaranteed returns may be inbuilt as part of product construct.

What is Bonus?

Bonus in life insurance context refers to the share of profits of the insurance company, which is distributed or shared with the policy holders.

Premiums paid by policyholders are pooled within the insurance company's life fund. The company uses these pooled resources to pay out claims. A large part of the life fund is invested in government-secured debt instruments, with a small portion invested in equity to achieve a desired return. Based upon the earnings from the investments made by the company and its claims experience, a life insurance company may distribute a part of its surplus to the participating or with-profits policyholders in the form of bonus.

The bonus rate depends upon factors such as the return on the assets and investments, the level of bonuses declared in previous years and other actuarial assumptions.

Different types of bonus:

Simple reversionary bonus: This type of bonus is calculated on the sum assured. This bonus is generally declared annually at the end of each financial year and attached on each policy anniversary as per terms and conditions of the policy contract, to be paid out at the time of a claim or on maturity.

Compound reversionary bonus: This type of bonus is calculated as a percentage of the sum assured and all previously accrued bonuses. The bonus of each year is added to the sum assured and the next year's bonus is calculated on the enhanced amount.

Terminal bonus: The terminal bonus, also known as loyalty or a persistency bonus is a bonus paid to indicate an overall performance of a participating policy. The terminal bonus is paid at the time of maturity or death of the life assured. This form of bonus may be distributed after staying in the policy for a predetermined long time period and is offered at the discretion of the insurer depending on the profit experience for the policy.

Interim bonus: Interim bonus is payable for those policies that mature or result in a death claim in between two bonus declaration dates. While the policy has already accrued the bonus declared at the end of the last financial year, there may be a short period in between the bonus declaration date and the maturity/claim date for which the policy has not received bonus. In such instances, bonus is added on a pro-rata basis using the interim bonus rates declared by the company. An interim bonus ensures that policyholders who claim benefits in the middle of a year will receive credit for keeping the policy in force for that part of the year.

Cash bonus: Some insurance companies may decide to pay the bonus on every policy anniversary in the form of cash pay-out, instead of accrued reversionary bonuses.

Traditional products vs. Unit linked insurance products

Traditional products

Traditional products range from term, whole life, endowment, and money back plans. These are either participating (with profit) or non-participating (without profit) plans other than term plans which are purely risk protection products.

Traditional products are also known as bundled insurance products, in which the insurance premiums are bundled in such a manner that the elements of the premium amount; mortality (risk premium), administration, and investment components cannot be separated easily or transparently. Premiums collected through traditional products are invested majorly into government securities and debt instruments. Resultant of which is that investment returns are not volatile and remain stable throughout the term of the policy. Traditional products are suitable for those customers who wish to accumulate and build savings for long-term goals and want guaranteed or semi guaranteed returns.



Unit linked products

Unit linked insurance plans or ULIPs as they are commonly referred, are insurance products along with market-linked investment opportunity for a customer. The investments in ULIPs are made in market-linked securities and hence the returns on the same are aligned with the capital markets. Premiums invested in the ULIPs are invested into various types of funds as per the choice of the customer, depending on his or her investment risk profile. ULIP Premiums can be invested by the policyholder in various types of funds such as equity, balanced, debt, income, or money market funds. As per switching feature, a customer may switch from one fund to the other depending on the market conditions and as per choice exercised by the customer. ULIPs offer tremendous flexibility to the customers through various features like increase or decrease in sum assured, premium payment options, switching of funds, partial withdrawals, top up premiums, etc. ULIPs are also called unbundled insurance products as premium elements of mortality or risk premium, investment and administration expenses can be segregated for full transparency with customers. The Net Asset Value (NAV) represents the value of investment component in the ULIP. The sum assured assigned to the ULIP is the value of the insurance cover given to the customer.

How much life insurance is needed?

Life insurance is intended to protect one’s family against possible financial loss on premature death of the life insured. How much life insurance coverage is needed is a question, which needs to be addressed with what one can afford? ‘human life value’ is a methodology to determine the appropriate amount of sum assured required to avoid future loss of income. Human life value is determined by three main factors:

1.Age
2.Current and future income
3.Current and future expenses

Calculate the coverage required using our calculator

How can I apply for an insurance policy with Star Union Dai-ichi Life Insurance?

Customers can contact and discuss with the representatives of our channel partners in any branch of Bank of India or Union Bank of India. We have a bouquet of products catering to suit the needs of the customer at every phase of his or her life.

What are the general considerations for accepting a risk when a proposal is received?

When a proposal for insurance is received, it undergoes the process of ‘underwriting’. Underwriting is the process of evaluating the risk involved with reference to many factors like age, health, occupation, family history (longevity), social, and financial status of the person seeking the life insurance. For obvious reasons that the premium rates depend on mortality table with the premium goes up with the increase of age.

What are ‘riders’ in life insurance?

Riders are additional instruments of protection, which are attachable to the main policy. The objective of attaching riders is to fortify the protection part in a life insurance policy, which is the essence of insurance.

Rider premiums are very inexpensive and hence very affordable for customers. Various types of riders are offered; Accidental Death Benefit Rider, Accidental Death and Permanent Total Disability Rider, Waiver of Premium Rider, Critical Illness Rider, etc.

Insurer

The insurance company who agrees to pay the sum of money in the event of death or disability of insured.

First Premium

The consideration paid by the insured to the insurer for accepting the risk.

Premium

The periodic payment of amount necessary to keep insurance policy in force.

Underwriting

The process of classifying and identifying the risk involved in the life of the proposer.

Underwriter

The person who is responsible for carrying out the underwriting in the insurance company.

Reinstatement

Providing satisfactory evidence of insurability along with the required premium to the insurer in order to put the lapsed policy back in force. Policy is brought into ‘Active’ status by paying the arrears of premium and evidence of insurability.

Moral Hazard

Moral hazard is an aspect which is not physically visible unlike a physical hazard, but will have bearing on the underwriter’s decision. Life insurance contract being a contract of utmost good faith, both parties to the contract should fairly act to eliminate the presence of moral hazard. Few examples of moral hazard are:

• Seeking insurance for high sum at very advanced age
• Seeking insurance at a place where that person normally resides
• Nomination in favor of a person other than family member

Insured

In life insurance, insured is the person whose life insurance risk is being accepted by the insurance company and in event of his death of insured, the insurance company would pay the stated amount of money to the beneficiary.

Insurance Policy

This is the proof of the contract between the two parties i.e. insurer and insured.

Nominee

The person who is designated to receive policy moneys on happening of the event insured against, usually death of Life Assured.

Coverage

The coverage implies the amount of insurance purchased.

Death Benefit

The amount paid to the beneficiary if insured dies within the policy term.

Evidence of Insurability

Any proof in form of certificate or statement of a person health, Age occupation and income.

Mortality Rate

The number of individual died per thousand in a group of people having the same risk exposure.

Lapse

Termination of insurance policy due to Non-payment of premium within the grace period.

What is 'Days of Grace'?

Premium under a life insurance policy becomes due on the due date as mentioned on the face of the policy document, which will be aligned to the issue date of the policy. Life insurance being a contract between insurer and insured, it is obligatory on the part of the insured to pay the premium as and when it becomes due, and on the part of the insurer to pay the sum that is assured. In case the premium is not paid by the due date, policy lapses. But, usually insurer allows additional time to pay the premium after its due date which is called ‘Days of Grace’. So, if the premium is paid within the days of grace the policy does not lapse.

What is Lapse / When does the policy lapse?

If the premium is not paid within the days of grace then the policy lapses. Typically, the days of grace for policies with monthly mode of payment is 15 days and for all other modes it is one month not less than 30 days.

What is Nomination?

Nomination is the process of designating a person to receive the policy moneys payable under life insurance policy upon happening of the risk event specified in the policy. Life insured at the time of taking a policy or at any time later during the term of the policy, may nominate a person who he thinks will suffer the financial loss upon his/her (LA) sudden demise. Nominee is authorized only to give a valid discharge to the policy proceeds when the claim is payable.

What is Assignment?

Assignment in simple terms is transfer of ownership of the policy. With assignment the interest of the insured (Owner) is transferred to the person usually for a monetary consideration he receives or as a gift. There are two types of Assignment -

conditional and absolute assignment. In the conditional assignment ownership is transferred back upon fulfilling a condition which is mutually agreed upon. In absolute assignment complete ownership is transferred. In this kind of assignment creditors of the policyholder cannot have any claim against the policy moneys and proceedings of the policy forms part of the assignee’s estate.

What is Paid-Up Policy?

The policy, under which at least 3 full years’ premiums have been paid, is treated as paid-up policy. After policy acquiring paid-up value, if the further premiums are not paid, then the policy is not treated as void but will continue to cover the risk for the reduced sum which is Paid-up value.

What is the effect of policy becoming paid-up?

When the premiums are paid only for 3 years and no further premiums are paid, then the policy value is reduced to a sum bearing the same ratio as the number of premiums paid bears to total number of premiums payable under the policy.

Formula to calculate Paid-up value is:

Paid-Up value = (Number of premiums paid / Number of premiums payable) X Sum Assured

On policy becoming paid-up, it will not participate in profits declared further, hence no bonus is allowed.

What is Fully Paid-up policy?

The Life insurance policy under which all premiums have already been paid but still not matured is called a fully paid-up policy.

Which sections of Income Tax are applicable for premiums paid under life insurance policy?

Sections 80C, 80CCC, 80D of Income Tax Act 1961 are applied in respect of premiums paid under life insurance policy.

What is the tax benefit allowed for premium paid under life insurance policy?

Premium paid under life insurance policy in any financial year is allowed as deduction from gross income for the corresponding assessment year, under section 80C, subject to a maximum of Rs. 100,000. Section 10 (10D) states that proceedings received under a life insurance policy or Key-man insurance policy, are not taxable.

What is the tax benefit available for premium paid under pension policy?

Premium paid under a pension policy in a financial year is allowed as deduction from income for the corresponding assessment year, under section 80CCC, subject to a maximum of Rs.100,000. Pension received under pension policy is treated as income and is taxed as such.

What is the effect of Section 80CCE?

Section 80CCE of Income Tax Act 1961, states that the total premium that is allowed as deduction under Section 80C and 80CCC taken together, in any assessment year cannot exceed Rs.100,000.

What is the applicability of Section 80D?

Any sum paid to effect or to in force a health insurance policy on the life of assessee, or his/her spouse or dependant parents/children subject to a maximum of Rs.15, 000 is allowed as deduction from the income chargeable to tax.

What are the other conditions that apply to life insurance premium?

a) If premiums under a policy are not paid for at least 2 years, and the policy holder discontinues the policy, then the premium paid in the year of termination of the policy is not allowed as deduction for that year. Besides, the premium paid in the preceding year for which deduction was allowed, is treated as income for the year in which the policy is terminated and is taxed.
b) If the annualized premium under a single life insurance policy exceeds 20% of the Sum assured, and then the premium does not qualify for deduction.

What is the investment pattern of funds by the insurer?

Investment of funds held by the insured is regulated by Section 27 of Insurance Act 1938.

What is Section 40 of Insurance Act 1938?

Section 40 of Insurance Act 1938 prohibits a person from paying any remuneration or commission for procuring insurance business to any person other than an insurance agent or an insurance intermediary.

What does Section 41 of Insurance Act 1938 state?

Section 41 of Insurance Act 1938 states that no person shall offer any rebate as an inducement to any person to take or to continue the life insurance policy. It also prohibits the person from accepting such rebate to continue or to take a life insurance policy.

What is indisputability clause?

Section 45 of Insurance Act 1938 states that a policy of insurance shall not be called in question after 2 years from the date of effecting the policy by the insurer on the ground that a statement made in the proposal or report by medical officer or any supporting document leading to issue of the policy is false or wrongly stated unless the insurer proves that the statement which was made in the proposal or any supporting documents was on a material matter or suppressed the material factor or fraudulently made and that the policy holder knew it at the time of making the statement that it was false.
But, insurer can call for proof of age at any time and it shall not be treated that policy is called in question.

Which act regulates the licensing of insurance agents?

Section 43 of Insurance Act 1938 deals with licensing of insurance agents. Any person with required qualifications can apply in determined manner , by paying fee not more than Rs250. He will be issued a license and after obtaining license only he is authorized to procure the life insurance business.

Conventional Plans

1. Term Insurance: The type of policy which provides the insurance benefit only in case the insured dies within the policy period.
2. Pure Endowment: The type of insurance policy which provides the benefits only if the insured survives the policy period.
3. Endowment: This is a combination of term and pure endowment. The benefits are payable either at the time of the death of insured within the policy period or at the time of maturity of the policy.
4. Whole life policy: The policy for which the premiums are paid throughout the life of insured. The policy proceeds are always paid to the nominee on the death of the insured.

Unit Linked insurance Plans

Unit linked insurance plans: ULIPs provide twin benefits of investment and insurance cover. These are the market linked insurance plans in which the premium is invested as per the mandate received from the customer in Equity, Debt and Cash by way of allocating Units, which are having the NAV. Customer can switch between the different classes depending upon his risk appetite. ULIPs can be single premium or regular premium.

Group Life Insurance

Group insurance refers to the insurance coverage offered to a group of people with the caveat; the group is not formed for the purpose of taking insurance.
Salient features of a group insurance are:
1) Group must be an organized homogeneous group which is active in other words it should have regular inflow and outflow of members.
2) Group must comprise a minimum number of members which is decided by the insurance company offering group insurance coverage.
3) All members of the group are covered under a single policy which is called ‘Master Policy’.
4) Premium under a group insurance policy is much lower than the premium payable under individual insurance policy for the same sum assured. Premium is more often decided on experience of the insurer on similar groups.
5) At the inception of group insurance at least 75% of the members must join the group insurance scheme and every member who joins after issuing the group insurance plan must join the scheme.

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