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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
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Are the complex terms of a life insurance policy preventing you from buying one?
No wonder! The packaging of these policies is often tied with complex sentences and words, which one could easily misconstrue. This makes it fairly impossible for a common man to decode the terms mentioned in them. However, since it is imperative that you know at least the basic features of anything you are purchasing, here's a little assistance.
Read on to understand some important terms related to life insurance, before you sign the deal:
Sum assured
Sum assured is the guaranteed amount the insurance policy pays you in case of a mishap. In other words, it is the cover and the full amount for which a policyholder is insured.
Premium
An insurance premium can be defined as the consideration money that an insurance policy holder has to pay to avail the benefits promised by the insurer.
Bonus
All policies do not receive bonuses. It is only the with-profit policies that are entitled to bonus, the amount of which may be added to the sum assured, every year.
Proposer, Life Insured & Nominee
The proposer is the owner of the policy. A person can propose a policy on self or on near ones like children, spouse etc. Life insured is the person whose life is covered by the policy. The nominee is one who, upon the death of the life insured, is entitled to receive the sum assured.
Term insurance
The term insurance policy is one of the simplest and basic insurance policies, where the premium is charged only for the insurance cover. No investment portion here. In case of the death of the policy holder during the policy term, the nominee is entitled to the insurance money.
However, if the policy holder outlives the policy term, he or she does not get anything back. But that isn't something to be disheartened about because a term policy can give you a considerably huge life cover for relatively nominal premium. It is an essential piece to have if you got a family to support, and if they rely heavily on your income.
Traditional insurance policy
These are insurance policies with an investment portion attached to it and come with the assurance of guaranteed returns. This can be divided into participating and non-participating plans, both of which can turn out to be a great money-back plan.
Unit-linked insurance plans (ULIPs)
Here is another policy that can be a little confusing. ULIPs are long-term investment plans that provide you with financial protection and allow wealth creation at market-linked returns. A part of your premium is directed towards providing you with insurance and meeting administration expenses, while the rest of it is directed towards an investment fund. Each ULIP offers multiple investment funds, each having a different risk and return profile. You also have the freedom to switch from one fund to another during the policy term. Click here to know more about ULIP plans.
Free–look period
Free-look period indicates a time period during which you can return the policy if you feel that this is probably not what you wanted. This feature is effective from the moment you receive the policy document till the 15th day. If you are not satisfied, you can return the policy within the same time period.
Although, the moment the policy is issued in your name, the insurance cover kicks in. So even if you change your mind about the policy, you will not receive a full refund. You will still be charged for stamp duty, medical check-up done at the time of purchasing the policy plus the proportional insurance cover. The remaining premium money will be given back to you.
Surrender charges
Apart from the free-look period, you also have the option to surrender or discontinue your policy in case you aren’t happy with it. The only difference is that you have to pay a surrender charge, which may be a little expensive for traditional policies.
Surrender value
Surrender value is the amount payable by the life insurance company if the policy holder decides to exit the insurance policy before its maturity.
Now that you have brushed up on a few insurance terms, how about buying a life insurance for yourself or enhancing your existing life cover? Check out other articles in the series to know more about investments and insurance.
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