8 Endowment Plan Features: De-Jargonized!
Here are a few of the most relevant features of your traditional (or “non-linked”) Life Insurance plan, minus the jargon.
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If the plethora of complex -sounding terminologies related to your traditional Life Insurance policy are leaving you flummoxed, you’re not alone. Even many seasoned insurance buyers haven’t been able to fully wrap their heads around many of the nuances of their policies! For your benefit, here are a few of the most relevant features of your traditional (or “non-linked”) Life Insurance plan, minus the jargon.
The Death Benefit on your traditional insurance policy is the quantum of money that’ll be paid to your nominee in the event of your unfortunate death; in other words, this is the most important reason for purchasing the policy in the first place. The death benefit may or may not be equal to the sum assured; make sure you read the policy clauses before signing up. IRDAI norms stipulate that the death benefit must be equal to at least ten times the annualized premium. In many policies, the death benefit is represented as a percentage of the sum assured, plus other additions that may have accrued to the policy over time. Some policies allow the insured persons to receive an “accelerated death benefit” during their lifetime itself, in case they are diagnosed with any one of a set of crippling illnesses.
The “Sum Assured” or Basic Sum Assured is arguably the most important feature of your policy. Put in simple terms, this is the minimum sum total of the combined cash flows that will accrue to you as survival benefits from your policy. These cash flows could come through as multiple, small ones at prespecified intervals, or as one cumulative pay out at the end of the policy term or ‘maturity’ date. For instance, in a “money back” plan with a Sum Assured of Rs. 1 lakh that pays you back in periodic intervals, the sum total of all these cash flows will add up to at least Rs. 1 lakh. Sum Assured is commonly confused with “Death Benefit”.
Loyalty Additions are discretionary sums of money that are added by the life insurer to your final pay out amount at periodic intervals. Most traditional plans strap on loyalty additions at the end of each passing year, and some of them throw in a larger loyalty addition at the end of the policy term. The loyalty addition is expressed as a percentage of the basic sum assured. It may interest you to know that despite loyalty additions, traditional life insurance policies usually provide poor returns that fail to outpace inflation in most cases. The representation method of the loyalty additions could confuse insurance buyers into believing that they’re buying high return policies, even when they’re not. Returns from traditional policies rarely, if ever, exceed 6.5 per cent per annum; it usually works out to a much lower growth rate for shorter tenor policies.
The maturity benefit is the final pay out made to the insured after the policy completes its term or ‘matures’. For money back plans, this maturity benefit is in addition to the periodic pay outs already made. The maturity benefit is represented as a percentage of the sum assured; this percentage will be higher for plans with more lengthy tenors and vice versa. The maturity benefit also includes the loyalty additions that have accrued through the tenor of the policy. Maturity benefits are tax free under section 10(10D) of the IT Act.
The “policy term” is the duration for which the insured person’s life is covered. Once the policy term finishes, the risk of loss of life of the insured person is automatically transferred back to the individual, and the maturity benefits due are paid out. The policy thus terminates.
Premium Payment Term
Many policies have a premium payment term that is different from the policy term. For instance, a policy may have a term of 20 years, but a premium paying term of 12 years. For the 8 years after the 12th payment, the insurance cover or death benefit stays intact despite no premiums being required to be paid. However, there are no free lunches in the world of Life Insurance – the quantum of annual premium will be higher for policies that have premium paying terms that are shorter than their policy terms.
The “surrender value” of your traditional policy is the amount of money you’ll be getting back, should you change your mind along the way or require emergency funds. Bear in mind that most traditional plans have notoriously low surrender values, meaning that there’s a very heavy price to pay for terminating your policy before its stipulated term. Surrender values do go up year on year, but typically start gaining any sort of significance only in the second half of the policy term. The surrender value is clearly represented in the benefit illustrations that your agent is mandated to provide to you; evaluate it carefully.
Riders are optional, additional risk transfer features that you can add on to your traditional plan; for a price, of course. Riders enhance plain vanilla policies by making them more comprehensive. For instance, an “Accidental Death” benefit rider may result in a higher pay out if the insured person dies in a car crash. A “Critical Illness” rider could allow you to commute part of the death benefit upon being diagnosed with a critical illness, and a “Partial or Total Disability” rider could entitle you to a pay out in case of a disability. Some riders are cosmetic and aimed at increasing premium quantum without adding any serious value, whereas some (such as the disability rider) make a lot of sense. Exercise your judgment and smarts while strapping on riders, after putting their costs into perspective.