In today’s day and age, a life insurance policy is an investment which is hard to miss. While equities, debt, or bank instruments, may be your preferred choice of investment avenue, life insurance plans provide protection for your life. Thus, they act as a shield in case things go down south.
Traditional life insurance plans protect against the risk of death. So, they are an instrument designed to safeguard your finances even in your absence. While there is a myriad of life insurance plans to choose from, the type of life cover a policy provides depends on the policy you choose. Endowment plans, money-back plans, and Unit Linked Insurance Plans (ULIPs) are examples of some types of life insurance policies that provide returns along with protection for life, whereas a term insurance policy is the one that provides only death benefits with no returns. Thus, it is crucial to understand the life insurance policy you are looking for and only then buy one.
Here’s how you must read a life insurance policy by understanding these fundamentals first –
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What are the benefits of a life insurance plan?
Life insurance plans are designed in a way to not meet just one objective, but many at once. Here are some of its key benefits:
Protection for life
One of the primary benefits of a life insurance policy is protection for your life. As described above, life insurance plans are essentially designed to provide your dependents with a financial safety net in your absence.
Corpus accumulation
The next benefit after protection for your life is a way of accumulating corpus. Money required to meet future financial goals, like your child’s higher education, marriage or simply contributing to your retirement corpus, can be met using the proceeds of a life insurance policy.
Financial discipline
Finally, financial discipline by way of periodic payments to keep the policy active ensures you have protection for your life along with a habit of savings. As the termination of a life insurance policy usually leads to a loss, it encourages the policyholder to remain invested in their non-compromising goals.
What are the key parts of a life insurance policy document?
Irrespective of the different types of life insurance plans, a policy document includes a policy schedule that contains the following information:
- The policy’s sum assured which is payable in the event of the demise of the policyholder.
- The premium paid by the policyholder.
- The frequency of payment of the premium (monthly, quarterly, half-yearly or yearly).
How to read the different sections in a policy document?
Benefit illustration
The insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), has mandated the benefit illustration to be a part of the policy document. This illustration mentioned in your policy document is aimed to make the policyholders understand how much returns your insurance policy will fetch at different rates of returns (4% or 8%).
Death benefit
The death benefit is the section of your insurance policy that reads the amount which the insurance company will compensate for in the unfortunate event of the death of the policyholder. To thoroughly understand which events are not included in the policy’s scope, the section on ‘exclusions’ must be read in tandem. This section may either invalidate or limit the death benefit of a policy, with suicide being the major one.
Free-look period
When buying a life insurance policy, the free-look period is a duration where the policyholder can choose to return the policy if the policy’s terms and conditions are not in alignment with those explained by the insurance representative. This section is essential for all policyholders as it ensures the claim settlement process in the future is seamless.
On returning the policy, the insurance company will deduct nominal charges, like the cost of medical examination, stamp duty charge, and a proportionate premium for the days the insurer covered the risk. This free-look period is usually 15 days or 30 days depending on the mode of the policy being purchased.
Unit Linked Product
A unit-linked product is a section that contains the details of the investment component of your life insurance policy. This section specifies how much premium is allocated and in which proportion. This section also outlines the procedure to switch to any other fund or combination of funds.
Comprehending the legal terminologies
The policy document is often riddled with legalese, which makes it confusing for a layman to understand it. For that reason, you can refer to the definition section of the policy that specifies the meanings of such jargon used in the policy document.
Nomination of your insurance plan
The nomination section in your life insurance policy mentions persons that are entitled to receive the death benefit. While you can change your nomination, you can also divide it among different beneficiaries.
Lock-in period
Since an insurance plan is a legal contract between the policyholder and the insurance company, there is a lock-in period during which the policyholders may not be permitted to exit or withdraw their funds. However, in due course, if the policyholder requires funds and is not in a position to wait till maturity, then such a policy will be surrendered. The terms of its surrender are mentioned in the policy document.
While these are some sections that you can find in your life insurance policy, make sure to compare the available options using a life insurance calculator. This nifty tool aids in policy comparison as well helping you determine the premiums of your policy based on the choice of features.