Deciding to buy a life insurance policy is not simple. The policy document typically includes several technical terms and limitations. Complicated benefit illustrations and poor disclosures further add to the confusion.
Before you decide to buy a life policy, it is recommended that you understand the basics. Here are four terms you should understand to make an informed decision:
- Types of policies
Every policy works differently and understanding the features of each plan is important. A term plan is a pure life cover and the benefits are paid to your beneficiaries in case of the policyholder’s demise during the policy period. Some other types of policies like unit-linked insurance plans (ULIPs) include an investment component. Traditional plans may not provide details on the costs and investments. These are classified as participating and non-participating policies. Participating plans assure a minimum amount, which usually includes the sum assured. Non-participating plans guarantee the returns upfront at the time of purchase.
- Free-look period
A common feature among all types of life insurance policies is the free-look period. During this time, you have the option of returning the policy in case it does not meet your requirements. Generally, the free lock-in period is for 15 days from the date of receiving the documents. In case the policy is sold through a ‘Distance Marketing Channel, the free-look period is 30 days. However, before you return the policy, bear in mind that costs like stamp duty and medical check-up will be deducted from the premium paid.
- Surrender charges
If you do not return the policy during the free-look period, you later have the option of surrendering the same. The surrender charges become applicable and are often quite high especially for traditional plans. In case the premium paying term exceeds ten years, insurers often pay only 30% of the premiums if you surrender the policy after three years. For plans that have a premium paying term of lesser than ten years, the guaranteed surrender value is as per the pre-defined norms.
In the case of ULIPs that come with a five-year lock-in period, surrender is not possible. If you discontinue the policy during the lock-in period, the insurer may levy an exit load or discontinuance charge before transferring it to a discontinued fund.
- Tax implications
To ensure life plans with an investment component are not perceived as pure investments, the regulator mandates that insurers provide a minimum life cover. This minimum coverage varies based on your age and policy duration. If your age is over 45, the minimum sum assured is ten times the annual premium. If your age is less than 45, the minimum death benefit must be seven times the yearly premium.
Additionally, the total benefits payable to your beneficiaries must not exceed 105% of the total premiums paid. Section 80C of the Income Tax Act, 1961 allows deductions of up to INR 1.5 lakh for insurance premium. However, to avail of this benefit, the minimum insurance coverage should be at least ten times the yearly premium.
Having understood the four basic terms of life policies, you may do your research, compare different plans offered by various insurers, and get your life cover today.
