Getting a life insurance policy? Know how to read the policy 

If you are an earning member of the family and intend to get a term insurance plan of 50 lakh term insurance, or any other amount for that matter, you need to understand one thing: your responsibilities do not end with the purchase of the policy. As a first-timer, you will come across various terms and phrases that you must first understand.

How Do I Read a Life Insurance Policy?

When you receive your life insurance policy, your financial advisor must sit down with you and go over the policy’s important sections. However, it is also advisable to study the complete policy yourself so that you have a thorough understanding of how it works.

To make it easier for you, below are the most crucial things to read in a term insurance plan. 

General Information

Typically, the policy schedule appears first in your policy document. This section includes information mentioned during the application process. It often includes:

  • The benefit amount, known as the “Sum Assured,” is the amount payable in the case of the insured’s death.
  • The amount you will be paying as the premium on a 50 lakh term insurance for example.
  • The frequency of payment the policyholder has chosen might be annual, semi-annual, quarterly, or even monthly.

Understanding Policy Document Sections and Benefit

  1. Benefit Illustration: To prevent mis-selling, the Insurance Regulatory and Development Authority of India (IRDAI) has mandated that benefit illustrations be included in policy documents. The benefit illustration is intended to help you understand how the return on your policy money will vary depending on the rate of return (4% or 8%), as well as how the amount of the investible element of the premium is calculated.
  1. Death Benefit: The death benefit section explains the details of the death benefit. The “exclusions” section, along with the other sections, should be studied carefully because it lists the conditions or reasons that can invalidate or reduce a death benefit, the most serious of which is suicide. Most policies will not pay a death benefit if the insured commits suicide within a certain timeframe. In the event of riders, some of the benefits will be subject to specified exclusions.
  1. Free Look Period: A sensible policyholder should go through the process to ensure a smooth payout at the time of claim. You will also be able to determine whether the 50 lakh term insurance aligns with the benefits described by the insurance professional. If not, you may return the policy document during the free look period. The free look period is normally 15 or 30 days from the date of receipt of the “Policy Document” by the policyholder depending upon the form of policy issuance.
  1. Unit-Linked Product: The policy document for a unit-linked product must include information on the investment fund. The insured should be aware of the fund to which the premium is distributed and in what percentage. Generally, the fund can be switched into another fund or a mix of funds.
  1. Understanding the Legal Language: Usually, Term insurance plan and other life insurance policies are written in legal jargon, which can be confusing, thus each policy includes a definitions section that clarifies the terms used in the policy. When reading your policy, refer to the “definitions” section and ask questions if you don’t understand something. Never be afraid to ask questions and clarify your understanding of the rules.
  1. Claim Section: The claims section explains how a beneficiary can file a claim and the options available for receiving the policy’s benefits. 
  1. Claiming the Policy: With a lapsed policy, the policyholder loses all rights and benefits. However, if the policyholder desires to reinstate the insurance with full benefits, they can do so by paying the outstanding premiums with a penalty determined by the firm. This method is known as “revival.” Revival can only be done within three to five years of the plan’s lapse, depending on its nature.
  1. Lock-In Period: Insurance is a long-term contract in which the policyholder has agreed to a specific period. As a result, there is a lock-in period during which the policyholder will be unable to quit or withdraw funds. In due course, the policyholder may demand funds for some reason and is unable to wait until maturity. In such instances, there is an option to surrender or encash the policy. The terms and conditions of surrender should be carefully reviewed, as they may result in a loss of policy value and the purpose being unfulfilled.
  1. Term: Term refers to the number of years you choose to insure yourself. The longer the term, the cheaper the premium will be.
  1. Premium paying term: The premium payment period refers to the number of years you pay premiums on your coverage. The longer the premium payment time, the lesser the premium. Typically, the premium payment term is the same as the policy term. However, some policies allow you to choose a premium payment term that is shorter than the policy term.
  1. Bonus / Participating profit: It is declared by the insurance firm each year as a proportion of the total sum assured. This sum may vary depending on the policy and terms. Although declared annually, the bonus is a lump sum payment delivered to the insured individual upon maturity or to his family upon death, in addition to the total sum insured.
  1. Nomination: The “life insured” can specify the person or people to whom the policy benefit of the term insurance plan will be paid in the case of their death. The individual could be your children, spouse, or parents, for example.
  1. Tax benefits: Considering the inherent benefit of a life insurance plan, the Income Tax Act gives tax benefits to policyholders on both premium payments and maturity amounts, depending on the kind of plan.

So we are saying,

Life insurance is a product that protects against the chance of death and because of this understanding your life insurance policy contract in its whole is so critical. An individual’s financial aspirations are not constant. They may change as a result of marriage, having a child, or changing jobs. As a result, it is critical to periodically examine your life insurance needs and adjust your policy as needed.