Life insurance is normally considered a necessity, but is bought and maintained in a very passive mode by most policyholders because there is very little understanding on the part of both the buyer and the seller about the several uses to which a life insurance policy can be put to.
Several such benefits are noted in the schedule as well as in the fine prints of the policy bond. But, usually, policyholders do not care to read such conditions. Apart from its basic functions of providing financial security, a policy can be used as a very dynamic financial instrument for making life secured, enjoyable and convenient in taking care of loved ones.
Loan facility is available under almost all policies except pure term policies. A policy is eligible for loan after it acquires paid-up value. The beauty of the loan is that with completion of each year of the policy term, the loan amount under the policy increases and a policyholder can apply for additional loan if he desires. The loan amount need not be paid within any stipulated term. The loan can subsist under the policy as long as the maturity date.
As a prudent policy, however, the customer should regularly pay the interest amount at periodical intervals to avoid compounding of the interest amount. Insurance companies keep the rate of interest under policies 2-3% lower than the rate of interest offered by banks on personal loans.
This provision is made to unlock the embedded value of a policy to enable the policyholders to meet financial needs in emergency situations. Normally, this loan is disbursed on the same day when the application is filed, provided the policyholder is ready to complete formalities and submit the policy bond. While arriving at the quantum of loan under endowment policies, credit is given for vested bonus amount also, which is otherwise not encashable during the tenure of a policy. Irda has mandated payment of loan under unit-linked insurance plan also.
The provision of assignment of a policy makes it a very dynamic instrument. The policy can be assigned to a bank or any lender for securing a loan. Generally, businessmen offer policy as security to banks for securing term loan. A housing loan borrower should definitely assign his policy, preferably a low-cost term policy to a housing finance company so that in case of unfortunate demise of the borrower during the tenure of the loan, the repayment liability is taken care by the policy.
Even without valuable consideration, a policy can be assigned even in different ratio to family members. Through this method, the policyholder clearly allocates the amount of sum assured and likely bonus among his spouse and children in case of death claim. Assignment can even be conditional. It can be made to expire on happening of certain events. Provision of nomination makes payment of money by the insurance company to the claimants/beneficiaries a smooth process. Hence, nomination must be made under each policy. Law provides for single as well as several nominations. A policyholder must note that assignment cancels nomination; hence, on reassignment of policy, fresh nomination must be made.
The life insurance policy can be taken by a person under Married Woman?s Property Act and the formality for endorsement can be completed at the time of taking policy through a simple declaration. A policy under MWP Act ensures that the policy money, in all circumstances, is used for the benefit of the wife and children of the policyholder. The policy, which is normally a part of the person?s property or the estate of the deceased, cannot be attached by any authority. Such a policy protects the family of the deceased businessman against creditors too.
A life insurance policy is a very good tool for making tax-efficient savings and income in old age. As per existing IT law, premium paid up to R1 lakh per annum is deductible from taxable income.
The writer is Ex-MD & CEO of Star Union Dai-ichi Life
Insurance. He can be reached at kamalji786@gmail.com