If you find the features of your traditional life insurance plan confusing, 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.
Death Benefit
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.
Sum Assured
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
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.
Maturity Benefit
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.
To be continued…