FAQs: Life Insurance

1. What is life insurance?
Life insurance is a legal agreement between you and the insurance company to secure your family's future in case of your untimely demise. It provides with a pre-determined amount to the beneficiary during the contract period. The primary purpose of Life Insurance is the protection of your entire family in case of your death. Now a day's Life insurance also acts as a tool to plan effectively about your future savings, your child's education needs etc. So apart from covering your life, it is an effective tool to augment your wealth.  
2. Why do I need life insurance?  
Life insurance provides for financial security in the event of death or on the inability to earn due to physical disabilities. Besides providing for financial security in the case of one's untimely death, it can be used to accumulate a kitty for your old age, systematically build assets, for funding your child's education and also for saving on taxes.  
3. What kind of life insurance should I buy?  
If you require life-long protection for premature death, retirement income or cash to settle your estate - then you should consider cash value insurance. Likewise, if you need protection for a specified period of time, perhaps to pay off a loan or mortgage in the event of your death, term insurance may be the right choice for you.
4.Who can take out a policy on my life? 
Only someone who has an "insurable interest" can purchase an insurance policy on your life. That means a stranger cannot buy a policy to insure your life. People with an insurable interest generally include members of your immediate family. In some circumstances your employer or business partner might also have an insurable interest. Insurable interest may also be proper for institutions or people who become your major creditors.  
5. How is my premium on life insurance calculated?  
It’s based on four factors-   Age of the policyholder.   Health of the policyholder.   Term of the policy.   Sum assured.  
6. Which type of policy is best suited for me?   Back to top
The type of policy that suits you best depends on many factors, such as your insurance objectives, your income, assets, liabilities, number of dependent members in your family and family expense. Life insurance policies are broadly classified in to following categories Endowment policies An endowment policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. Money Back Policies Unlike endowment plans, in money back policies, the policy holder gets periodic payments during the term of the policy and a lump sum amount on surviving its term. In the event of death during the term of the policy, the beneficiary gets the full sum assured without any deductions for the amounts paid till date, and no further premiums are required to be paid. Unit Linked Insurance Policies ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. In this type of policy, the investment risk is generally borne by the investor. Whole life policies A whole life policy runs as long as the policyholder is alive. As risk is covered for the entire life of the policyholder, therefore, such policies are known as whole life policies. In a whole life policy, the insured amount and the bonus is payable only to the nominee of the beneficiary upon the death of the policyholder. There is no survival benefit as the policyholder. Children's policies Children plans help the parents in building fund for expected expenses such as higher education expense, wedding expenses etc. Children's life can also be insured at young ages which could be advantageous since they are offered at very low premium. Term Life Policies Term Insurance is a simple insurance plan that covers the life for a specific "term". Death benefit is paid only if the person dies within this covered period. Since its a no-frills product, it is also the cheapest amongst the Life Insurance Products. Pension Plans Pension Plans are Individual Plans that gaze into your future and foresee financial stability during your old age. These policies are most suited for senior citizens and those planning a secure future, so that you never give up on the best things in life.  
7. What is nomination? And who is a nominee?  
Nomination is a right conferred on the life insurance policyholder to appoint a person or persons to receive the policy monies in the event of the policy becoming a claim by death. Any policyholder, who is a major and the life insured under a policy, can make a nomination. A nominee is the person designated by the policyholder to receive the proceeds of an insurance policy, upon the death of the insured.  
8. What are survival benefits?   Back to top
These Benefits are there in some policies where a part of the sum assured is paid to you (policyholder) at fixed intervals before the maturity date. The risk cover for Life is continued for the full sum assured even after payment of survival benefits and if the policyholder survives till the end of the term, these benefits are deducted from the Maturity value.  
9. What is bonus?
  Insurance Company distributes its profits to its Policyholders every year in the form of a Bonus, it is declared as a certain amount per thousand of sum assured. Bonuses are credited to the policyholder's account and paid at the time of maturity 10 What are with profit and without profit plans?   With profit plans are those where bonus declared is allotted to the policy and is paid at the time of maturity/death. The Without profit plans are those where the contracted amount is paid without any profit share, therefore the premium rate for with profit plan is higher than the without profit plan.  
11. What are guaranteed additions?  
In some policies bonuses/profits are guaranteed declared as a certain amount per thousand of sum assured and are payable at the end of the term or early death of the policy holder.  
12. What are disability benefits?   Back to top
These are those Benefits which are given to the insured in case he becomes totally and permanently disabled due to any accident where he need not pay future payments and the policy shall continue for the full sum assured.  
13. What is meant by double accident benefit?  
It is that benefit where payment of double the amount of designated benefit is made if the Policyholder is died due to certain kind of accident, also called Double Indemnity.  
14. What is salary savings scheme?  
It is that scheme where the premium is paid from the employee's salary through monthly deductions by the employer & there will be waiver of 5%, the additional charge of the premium which is added usually for the monthly mode of payment.    
15. What is surrender value?   Back to top
It is that value which is payable by the insurer whenever he desires to terminate the contract before the expiry of the policy term. The insured can surrender the policy if the policy is kept in force for 3 years and bonus is also added to that value if the policy has been there for at least 5 years.  
16. What additional benefits can be added to my life insurance policy?  
Disability waiver of premium provides for payment of premiums by the insurer in the event that the insured becomes disabled. The accidental death benefit provides for payment of an additional benefit if the insured dies in an accident. Guaranteed insurability provides for purchase of additional life insurance at regular rates and at specified ages, regardless of occupation or state of health. Term agreements can provide additional protection for specified periods of time.  
17. What is a settlement option?  
When life insurance proceeds are paid to a living policy owner or to beneficiaries, they are paid under a settlement option. These options are:   A lump-sum cash payment.   Monthly payments continuing until all proceeds and interest are paid.   Lifetime income payments.   Payments of interest on proceeds remaining with the insurer under the interest option.  
18. How is a settlement option chosen? Back to top  
When life insurance proceeds are paid as a death benefit, the beneficiary may select or change a settlement option unless the policy owner has specified otherwise. When proceeds are paid during the lifetime of the insured, the policy owner may choose a settlement option.  
19. Who is a beneficiary?  
A beneficiary is the recipient of your death benefits or the proceeds of your life insurance policy. A beneficiary can be a person or an organization, such as a favorite charity.  
20. Can I change my beneficiaries?  
Unless you designated your beneficiaries as "irrevocable," you always have the option to change your beneficiaries. Changes of irrevocable beneficiaries require the beneficiaries' consent. Review your beneficiary designation periodically to remain secure about the distribution of you policy's proceeds.  
21. Must my beneficiaries be related to me?  
No. You can designate unrelated individuals, your estate, trusts or charitable organizations as beneficiaries.  
22. Can I name a minor as my beneficiary? Back to top  
Generally, life insurance companies will not pay out to a minor. If you want to name a minor as your beneficiary, you should create a trust or appoint a custodian/guardian. In the event of your death, the proceeds will be managed on behalf of your child by a Trust or guardian until such time your ward reaches legal age. If you have more than one child you should designate the portion of proceeds to be given to each child.      
23. What tax advantages are offered by life insurance?  
Under current tax law, the yearly increase of cash value in a life insurance policy is not subject to Federal Income Tax. Taxes are paid only when the policy owner withdraws money from a policy's cash value, which exceeds total premiums paid. Generally, beneficiaries do not pay a federal income tax on death benefits. When life insurance proceeds are received as monthly income under a settlement option, a portion of each monthly payment is received free of federal income tax, until the cumulative non-taxable portions received equal premiums paid. Then, the entire payment is taxable.  
24. Can my cash value life insurance policy also serve as a way to accumulate interest?  
Yes. A cash value life insurance policy is one way to accumulate funds for retirement or other purposes. Life insurance provides coverage in the event of untimely death, while offering a systematic means of building funds. Unlike a savings account in which you make deposits whenever you wish, a cash value insurance policy requires regular premium payments on specified dates, increasing your cash value.      
25. Why invest in a cash value policy when a savings account may pay a higher interest rate?  
A savings account may pay a higher interest rate, but it does not offer the insurance coverage or death benefits a life insurance policy guarantees. Life insurance can serve as both an investment vehicle and a source of income in the event of death.    
26. What are joint life policies?   Back to top
Joint Life policies are similar to Endowment Policies but are categorized as they cover two lives simultaneously, thus offering a unique advantage in some cases, notably, for a married couple or for partners in a business firm.    
27. What is an annuity Scheme?
An annuity scheme is an investment wherein you have to make regular contributions over a period of time either in a single lump sum or through installments made over a certain number of years which yields a regular income until death starting from your desired retirement age. In some annuity schemes upon the death of the annuitant, or at the expiry of the period, the invested annuity fund is refunded usually along with a small bonus to the survivors. In nutshell the annuities offer a guaranteed income for a certain period or for life and are bought to generate income during your retired life and are also called pension plans.      
28. What is a cash value life policy?   Back to top
A cash value life policy covers you for your lifetime. "Cash value" means that premiums generally stay level during the premium payment period. The policy not only provides insurance benefits when you die, but it also builds up a dollar value from your premium payments and investment returns. You can borrow against this value with a policy loan or redeem it for cash at any time before the policy matures. Whole life, universal life and extra value life are some of the more popular forms of cash value life policies.  
29.  What happens to the cash value after the policy is fully paid up?
The company plans to use the cash value to pay premiums until you die. If you take cash value out, there may not be enough to pay premiums. The company could require you to resume paying premiums, or reduce the amount of the death benefit to an amount that the remaining cash value will support. 
30.  Do smoking and/or tobacco use affect my life insurance rates? Back to top
Life insurance rates for individuals who use tobacco products such as cigarettes or chewing tobacco are often much higher (I mean really high!) than they are for someone who does not. This is due to the increase in health problems associated with tobacco use. In most cases, life insurance companies require that you be smoke-free for at least one year for standard underwriting class, and anywhere from three to five years for preferred class.