Life Insurance Products and Practice
Domain 3 examines the main life-insurance product families and the policy mechanics a candidate must explain to a customer. Numerical questions usually involve bonus, maturity or premium components.
Core rules
- Term insurance pays only on death during the term; there is no maturity benefit unless a return-of-premium variant is bought.
- Whole-life covers the whole lifetime; endowment pays on maturity or earlier death; money-back pays survival benefits during the term and the balance at maturity.
- ULIPs combine insurance with market-linked funds; the investment risk is borne by the policyholder and a lock-in applies.
- Annuities convert a lump sum into periodic income; they are not a substitute for death cover.
- Premium has mortality, expense and interest components. Bonus may be reversionary or terminal; surrender value and paid-up value apply after the policy acquires value.
- Nomination is made under Section 39 of the Insurance Act, 1938; assignment is under Section 38.
Worked example
A 20-year endowment policy has a sum assured of ₹5,00,000 and a reversionary bonus of ₹40 per ₹1,000 sum assured per year. Bonus units = 5,00,000 ÷ 1,000 = 500. Annual bonus = 500 × 40 = ₹20,000. Total bonus over 20 years = 20,000 × 20 = ₹4,00,000. Maturity amount = ₹5,00,000 + ₹4,00,000 = ₹9,00,000, before any terminal bonus. Reasoning: the bonus rate applies to each ₹1,000 of sum assured, not to the premium.
Traps that cost marks
- Treating a term plan as a savings plan.
- Applying the bonus rate to the premium instead of the sum assured.
- Ignoring market risk in ULIPs.
- Confusing nomination with assignment.