Life Insurance (Plans, Premiums, Bonuses, Nomination and Claims)
Life insurance is a benefit contract: it pays a fixed sum on death or survival, so indemnity, subrogation and contribution do not apply. The exam tests plan selection, what drives the premium, how bonuses are declared, and the difference between nomination and assignment.
Plans
- Term assurance: pure death cover, no maturity value, cheapest per unit of cover; can be level, decreasing or increasing.
- Whole life: cover for the whole of life, with or without profit.
- Endowment: payable on death or on survival to maturity; savings element included.
- Money-back: periodic survival benefits that reduce the sum assured on death.
- ULIP: part of the premium is invested in funds of the policyholder's choice; risk charges and fund charges are deducted.
- Annuity: pays a regular income; protects against longevity risk.
Premium and bonuses
The premium is built from mortality cost, interest earned on reserves, expense loading and contingencies. Bonuses declared from the valuation surplus may be reversionary (attached from year to year), interim or terminal; a reversionary bonus is commonly quoted per Rs 1,000 sum assured.
Worked example
A 20-year endowment with sum assured Rs 5,00,000 earns Rs 45 per Rs 1,000 of sum assured each year. Annual bonus = 500 x 45 = Rs 22,500; over 20 years = Rs 4,50,000. Maturity value before terminal bonus = 5,00,000 + 4,50,000 = Rs 9,50,000.
Nomination and assignment
Nomination (Section 39): the policyholder names a person to receive the proceeds. The nominee is primarily a receiver of the money, not the owner of the policy; where the nominee is a parent, spouse or child the 2015 amendment makes the nominee beneficially entitled. Assignment (Section 38): transfers the rights of the policy to another person absolutely (or conditionally), and should be notified to the insurer. A policy under the MWP Act, 1874 is for the benefit of wife and children and cannot be attached by creditors.
Claims
Death claims are early (within 3 years) or non-early. Documents include claim form, death certificate, original policy, nominee credentials and, sometimes, police or medical reports. Maturity claims need the policy, discharge and proof of identity.
Traps
Missing premiums within the grace period, treating the nominee as the absolute owner, and assuming bonuses are guaranteed.