Life insurance is a contract which assures of death benefits upon the death of the insured. There are two basic types of life insurance policy – traditional whole life and term life insurance. The premiums are the cheapest in case of a term life insurance plan as it provides pure life cover with no saving or profit component. A whole life policy covers your entire life. Hence, the maturity is not defined. A policyholder is required to pay regular premiums until the death, upon which the corpus is paid to the family.
Apart from selecting the kinds of funds, there are other aspects of the cover which you should keep in mind before selecting a plan. From the consequences of surrender to repudiation of the contract by your insurer, here are ten facts about life insurance which may startle you:
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1) Buying an insurance policy is agreeing to a contract. You agree to an insurance policy at the time of policy purchase. If you have agreed to a maturity date at the time of buying the contract, then you will not be able to change or revise the agreed term or number of years. For example, if you purchased a term plan for 60 years, then you can not change the maturity date. However, you can buy another cover which can insure you for 80 years.
2) You can take a loan from the insurance company. The interest rate charged by insurers on loan depends on the time when a policyholder opts for a loan. The interest rate is linked to an index. For example, a 10-year G-sec yield or base interest rates of banks approved by Insurance Regulatory Development Authority Of India (IRDAI). The interest rates vary between the insurers.
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3) If you surrender your policy after a certain year, the charge which the company deducts depends on the policy you own and its features. The surrender value is not directly linked to the amount of the premium paid, rather it depends upon the unit value of the unit linked policy or the accrued benefits of the traditional policies. If you have a ULIP, you will get a full unit value after five years as the surrender charges are zero after five years. In a traditional policy, the surrender value is some discounted value of the accrued benefits paid. The surrender charges vary from policy to policy and are mentioned in the contract.
4) The contract of insurance follows the principle of uberrima fides, meaning utmost faith. It requires you to disclose all relevant personal information, including current health condition and the health issues of the past. The chances of your claim getting rejected are high if you do not provide the relevant information correctly. The chances of claim rejection diminish if you give true to the fact information. Your insurance policy contract is a document which covers information related to inclusions and exclusions.
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5) The current laws, as per section 45 of the Insurance Act, do not permit repudiations of a life insurance contract after three years for a new policy. If the insurer had an opportunity to re-evaluate and the insurer has issued a second policy after the first, then it’s advised to be absolutely certain about the claim by communicating about the terms and conditions. You can issue a declaration of good health in order to be completely sure about the policy.
6) The endowment policy of a life insurance offers loan facility, but unit-linked insurance plans and term plans do not. Generally, the loan sanctioned is a proportion of the surrender value. Remember that loan and repayment have no bearing on the premium amount.
7) If you don’t repay the loan, then the amount will be recovered from the insurance.
8) As a thumb rule, one should have a cover of 10 times one’s annual income.
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9) In a term insurance policy, the nominee is paid only if the policyholder dies. There are no survival or maturity benefits of the policy.
10) If you do not define a nominee at the time of taking a policy, then the legal heir of the deceased will be entitled to the insurance proceeds. The insurer will ask for a succession certificate at the time of claim settlement to ascertain the beneficiary.