Basic Elements of Life Insurance
Primary purpose of Life Insurance is to give financial protection against :
1. Risk of an early death and
2. Risk of living too long
Therefore, all Life Insurance products has two basic elements :
1. Death cover and
2. Survival benefit.
Life Insurance products are popularly called ‘plans’.
The two basic plans catering to the aforesaid elements are :
a) Term Assurance – It provides cover against the risk of death. The sum assured is paid only on death of life assured if it occurs within the policy term.
b) Pure Endowment – provides cover against the risk of living too long life. The sum assured is paid on expiry of policy term only if the life assured does not die within that term.
All Life Insurance plans are a combination of the two basic plans – Term Assurance and Pure Endowment. The most common combinations examples are given below :
• Endowment Plans : The policy is for specific term, if the life assured is dies during that term, sum assured is paid, else the sum assured is paid on the maturity of the policy term.
• Money Back Endowment Plans : It differs from an ordinary endowment plan in that –
a. The sum assured is paid in instalments at a specified periodical interval during the policy term as long as life assured survives until maturity and last such instalment is paid on maturity.
b. On death during the policy term, full sum assured is paid without deducting the parts payments already made.
•Double Endowment Plans : On death during the policy term, the specified sum assured is paid and if the life assured survives the policy term, double the sum assured is paid on maturity.
Basic features of Life Insurance product –
• No single policy can provide for all the needs of an insuring prospect. There are certain features, which are significantly relevant to financial security. These may be –
a) Target life assured – may be an individual adult or a minor or more than one person jointly under one policy.
b)Quantum of sum assured – Minimum and maximum limits on sum assured and maximum limit may also be for certain benefits, for example – Accident benefit.
c)Contingency for payment of sum assured – a plan of Insurance is different from another if the condition –
i. When the sum assured is payable are different
ii. For payment of sum assured are different
• Mode of sum assured payment – may be in lump sum or in instalments
• Risk coverage term – may even go beyond the policy term
• Premium payment term – premium payment may continue until maturity or death or even for a period less than the policy term
• Increase or decrease in sum assured
• Additional benefits – by way of riders on payment of additional premium
• Any number of Life Insurance products may be developed by making changes in these features or combining some of them –
a. Name given the product does not always suggest the exact nature of the plan. Some policies are given names, which denote specific purpose of the policy.