Risk Analysis and Insurance Planning

Q3. Your client purchased a single premium annuity policy by paying ₹50 lakh as premium when he was 53 years old and his spouse was 48 years old. The policy vested when the client became 60 years old with a purchase price of ₹1.61 crore in the form of an immediate life annuity with return of purchase price under the assumption that at least one out of the client and his spouse will survive till 85 years. The annuity amounts to ₹10.15 lakh. What is the maximum return expected from the vesting date? Ans. Note: Annuity policy: An annuity policy issued by a life insurance company is a pension policy where initially the client has to pay the premiums either on a lump sum (single premium) or periodic (regular premium) basis. Once the premium payment term is complete, the insurer starts paying the pensions. The date on which premium payment stops and pension payment starts is known as vesting. The total amount of corpus comprising of net premiums paid along with interest earned thereon is known as the purchase price. Tenure of the annuity: 85 - 55 = 30 years Rate of return under the annuity policy from the date of vesting: SET = Begin; N = 30; I = 6.72; PV = -1.61; PMT = -0.1015; FV = 1.61 239

3.3.6 Life Insurance Policy Riders Till now we have described the basic coverage provided by different types of individual life insurance products. Although their features vary, each type of life insurance policy we have described provides a benefit payable upon the death of the insured. We have also noted that term insurance can be provided by a policy or by adding a term insurance rider to another policy, such as a whole life policy. A number of other benefits can also be added to the various forms of life insurance policies. These additional benefits are usually provided by adding riders to the life insurance policy, although in some situations the benefits are provided through standard policy provisions. Policy riders benefit both the policyowner and the insurer because they give both parties flexibility. When an insurance company issues a policy, it can include riders in order to customize a basic plan of insurance for the policy owner. If the policy owner later wants to adapt the policy to better meet his needs, the insurer can drop or add riders. Thus, the insured and the insurer need not enter into a new contract when the insured desires customized or additional coverage. The insurance company usually charges an additional premium amount for each supplementary benefit that is added to a policy. This additional premium charge typically ceases when the supplementary benefit expires or is cancelled. These additional premiums, however, do not affect the cash value, if any, of the basic policy. Supplemental Disability Benefits Rider Disability benefits are generally classified as a type of health insurance coverage because such benefits are paid to cover financial losses that result from a sickness or injury rather than those that result from the insured's death. Some disability benefits, however, can be added to the coverage provided by a life insurance policy. In this section, we describe three types of disability benefits that may be provided by a life insurance policy. These benefits arethe waiver of premium for disability benefit, the waiver of premium for payer benefit, 240

and the disability income benefit. Waiver of Premium for Disability Benefit Rider One of the most common supplementary benefits available in nearly all types of life insurance is the waiver of premium for disability (WP) benefit. Under a WP benefit rider, the insurer promises to give up - to waive - its right to collect renewal premiums that become due while the insured is totally disabled. Most WP riders define total disability as the insured's inability to perform the essential acts of her own occupation or any other occupation for which she is reasonably suited by education, training, or experience. Premiums that are waived under a WP benefit are actually paid by the insurance company. Therefore, if the policy is one that builds a cash value, the cash value will continue to increase just as if the premiums were paid by the policy owner. Likewise, if the policy is a participating policy, the insurance company will continue to pay policy dividends just as if the policy owner were continuing to pay premiums. In the case of the universal life insurance policy, the WP benefit typically specifies that the insurer will waive any mortality and expenses charges that become due while the insured is disabled. In contrast, the WP benefit provided by the some universal life insurance policies specifies that the insurer will waive the amount of the target premium while the insured is disabled. Waiver of Premium for Payer Benefit Rider A variation of the waiver of premium for disability benefit is the waiver of premium for payer benefit. Note that the WP benefit provides a waiver of premium if the insured becomes disabled. Most individual life insurance policies are issued to a policy owner who is also the policy's insured, and the WP benefit was designed for such policies. In contrast, the waiver of premium for payer benefit is often included in third-party policies, such as juvenile insurance policies. A juvenile insurance policy is a policy that is issued on the life of a child but is owned and paid for by an adult, usually the child's parent or legal guardian. The waiver of premium for payer benefit provides that the insurance company will waive its right to collect a policy's renewal premiums if the policy owner - the person responsible for paying premiums - dies or becomes disabled. Because the disability or death of the policy owner triggers this benefit, the policy owner generally must provide satisfactory evidence of his own insurability - in addition to providing evidence of the insurability of the insured - before the insurer will add this benefit to a life insurance policy. When the benefit is provided by a juvenile life insurance policy, the policy usually states that the insurance company will waive the premium payments only until the insured reaches a specified age, such as 18 or 21, when ownership and control of the policy typically passes to the insured. 241

Waiver of Premium v/s Payor Benefit Rider SI. Conditions Waiver of Premium Payor Benefit Rider NO. Rider 1 Life Assured & Payor Same Different 2 Conditions leading to Disability & Critical Disability, Critical lllness & Death grant of benefits Illness 3 Condition leading to Reinstatement of Life Assured attaining withdrawal of benefits income earning age of majority capacity of the payor Disability Income Benefit Rider Another benefit that may be added to a life insurance policy is the disability income benefit. A disability income benefit provides a monthly income benefit to the policyowner - insured if he becomes totally disabled. Disability income riders typically define total disability as the insured's inability to perform the essential acts of his own occupation or any occupation for which he is reasonably suited by education, training, or experience. Typically the amount of the monthly disability income benefit is a stated dollar amount - such as ₹10 - per ₹1,000 of life coverage. Life insurance coverage provided by the policy continues, and, if the insured dies before recovering from a disability, the insurer pays the policy's death benefit. The disability income rider also usually includes a three - to six - month waiting period before disability income benefits will begin. Example: Praveen Hegde was the policy owner - insured of a ₹150,000 life insurance policy that included a disability income benefit rider. The rider stated that, if the Praveen became disabled, then the insurance company would pay him a monthly benefit of ₹10 per ₹1,000 of life insurance coverage during the period of disability; the income benefit would begin three months after the onset of a disability. While the policy was in force, Praveen became disabled as defined in the disability income benefit rider. Two years later, he died as a result of his disability. Analysis: Three months after he became disabled, Praveen became eligible to receive a disability income benefit of ₹1,500 per month. ₹10 X 150 units = ₹1,500 per month This monthly disability income benefit was payable as long as Praveen remained disabled. Upon Praveen's death, the policy's death benefit became payable to the named beneficiary. 242

Policies issued with a disability income benefit generally include a WP benefit as well. In such a case, both the renewal premiums charged for the life policy and the additional premiums charged for the disability income benefit are waived during the total disability of the insured. Accident Benefit Rider Accident benefits may be added to any type of life insurance policy. The two most commonly offered accident benefits are accidental death benefits and dismemberment benefits. Accidental Death Benefit Rider A policy rider that provides an accidental death benefit specifies that if the insured dies as a result of an accident, the insurer will pay the named beneficiary an amount of money in addition to the basic death benefit provided by the life insurance policy. This additional sum is often equal to the policy‘s face amount. When the amount of the accidental death benefit is equal to the face amount of the life insurance policy, the benefit is often referred to as a double indemnity benefit because the total death benefit payable if the insured dies in an accident is double the policy's face amount. The additional sum payable if the insured dies accidentally may also be some other multiple of the policy‘s face amount - such as three times the face amount - or it may be an amount that is unrelated to the policy‘s face amount. Most accidental death benefit riders expire when the insured reaches age 65 or 70. Generally, in order for the accidental death benefit to be payable, the insured person's death must have been caused, directly and independently of all other causes, by an accidental bodily injury. Determining the precise cause of an insured's death, however, can sometimes be quite difficult. Example: An insured with a history of heart problems died in an automobile accident. Her policy provides a ₹50,000 death benefit and includes an accidental death benefit riders that provides an accidental death benefit of ₹50,000. Analysis: The insured's death may have been caused by the accident itself. In that case, the accidental death benefit is payable in addition to the policy's basic death benefit. On the other hand, she may have died from a heart attack while driving her automobile. If so, then the death did not result from an accident, and only the policy's basic death benefit is payable to the named beneficiary. Accidental death benefit provisions usually contain several exclusions and limitations. For example, the provision typically states that the insurance company will not be required to 243

pay the accidental death benefit if the insured's death results from certain stated causes, including  Self-inflicted injuries (suicide),  War-related accidents,  Accidents resulting from aviation activities if, during the flight, the insured acted in any capacity other than as a passenger, and  Accidents resulting from illegal activities. Laws in some jurisdictions, however, prohibit insurers from excluding some of these accidents in their accidental death benefit provisions. Some accidental death benefit provisions contain a limitation that relates to the time span between the insured's death and the accident that caused the death. This time span is usually stated as 3 months or 90 days, though some insurance companies specify a longer period. The insured's death must occur within the stated time after the accident in order for the additional benefit to be payable. This limitation is included because of the difficulty that can arise in determining the cause of an insured's death. When the insured obviously died as the result of an accident, many insurance companies will disregard the stated time limit and pay the accidental death benefit. This is especially true now that medical science often can prolong life functions almost indefinitely, sometimes extending the life of an accident victim who in the past would have died shortly after the accident. Further, some jurisdictions prohibit insurers from including a limitation concerning time span in accidental death benefit riders. Keep in mind that these exclusions and limitations relate only to the accidental death benefit. With few exceptions, which will be described later in this text, the basic death benefit provided by the life insurance policy is payable regardless of the cause of the insured's death. Disablement Benefit Rider An accidental death benefit rider may also provide an additional benefit for dismemberment, in which case the rider is called an accidental death and disablement (AD & D) rider. These riders generally specify that a stated benefit amount will be paid if an accident causes the insured to lose any two limbs or sight in both eyes. The amount of the dismemberment benefit is usually equal to the amount of the accidental death benefit. In many cases, however, a smaller amount - such as one-half the amount of the accidental death benefit - will be payable if the insured loses one limb or sight in one eye. The loss of a limb may be defined either as the actual physical loss of the limb or as the loss of the use of the limb. Usually, AD & D riders state that the insurer will not pay both accidental death benefits and dismemberment benefits for injuries suffered in the same accident. 244

Terminal Illness Benefit Rider The most common of the accelerated death benefits is the terminal illness benefit. The terminal illness (TI) benefit is a benefit under which the insurer pays a portion of the policy's death benefit to a policyowner-insured who suffers from a terminal illness and has a physician-certified life expectancy of 12 months or less. A statement by an attending physician establishes evidence of the terminal condition and certifies that the insured is likely to die within the time period specified in the rider. Unlike other supplementary benefits, the terminal illness benefit is typically paid for by an administrative charge that the insurer assesses when a policyowner-insured elects to exercise the TI benefits. By contrast, when they issue a policy that provides other supplementary benefits, insurers typically impose an additional premium charge for each supplementary benefit that the policy provides. The amount of the TI benefit that is payable varies from company to company. Some policies permit payment of the full face amount prior to the insured's death. Generally, however, the maximum benefit payable is a stated percentage - usually between 25 and 75 percent - of the policy's face amount. The benefit is usually paid in a lump sum to the policyowner. The remainder of the death benefit is paid to the beneficiary at the insured's death. Dread Disease Benefit Rider( critical illness rider ) Perhaps the earliest form of accelerated death benefits coverage offered by insurers is the dread disease (DD) benefit under which the insurer agrees to pay a portion of the policy's face amount to a policy owner-insured who suffers from one of a number of specified disease. The remainder of the death benefit is paid to the beneficiary at the insured's death. Another form of dread disease coverage can be purchased as a stand-alone health insurance policy. An insured becomes eligible for DD benefits when he is afflicted by certain diseases or undergoes certain medical procedures specified in the rider. These specified diseases or medical procedures are known as the insurable events and usually include  Life-threatening cancer,  AIDS,  End-stage renal (kidney) failure,  Myocardial infarction (heart attack),  Stroke, and  Coronary bypass surgery. 245

Some companies also include vital organ transplants and Alzheimer's disease as insurable events. Although the accelerated death benefit is usually paid in a lump sum, some companies pay the benefit in monthly installments over a period of 6 to 12 months. Most companies provide DD coverage only to insured‘s who are under the age of 70 and only to insured‘s who are standard risks. And some companies do not make payments for multiple or recurring events. The DD benefit may offer a premium waiver option under which the insurer agrees to waive all renewal premiums payable after the accelerated death benefit payment. Sometimes the premium waiver option applies only to premiums payable while the insured is disabled; if the insured recovers, then subsequent renewal premiums are no longer waived. Alternatively, premiums may be waived only if the policy includes a waiver of premium benefit. 246

QUESTIONS Q1. Life Insurance contracts are ___________________ contracts. (a) Medium term (b) Long term (c) Short term Q2. Under money back policy, you'll get ___________________ (a) a survival benefits (if you survive the policy) or your nominees will get the sum assured plus additions and bonus, if applicable (in the event of your death). (b) A portion of your sum assured at regular intervals during your lifetime; in the event of your death, your nominees will get the sum assured with bonus, where applicable. (c) Insurance cover for a specified term typically five, 10 or 15 yrs: benefits accrue to nominees only in the event of your death during the period. Q3. If the person is risk averse; it may be better for him to purchase traditional products such as ___________________. (a) Emergency fund (b) Whole life or endowment insurance (c) Accumulation needs Q4. A ___________________ provides a death benefit that remains the same over the term of the policy. (a) level term life insurance policy (b) decreasing term life insurance policy (c) mortgage redemption insurance Q5. One-year term policies and riders are usually renewable. Such coverage is called ___________________ or annually renewable term (ART) insurance. (a) Renewable provision (b) Convertible term insurance policy (c) yearly renewable term (YRT) insurance Q6. A permanent life insurance policy contains a savings element that is known as the policy's ___________________. (a) Surrender value (b) cash value 247

(c) Policy value Q7. An ___________________ is the time span between each of the payments in the series of periodic annuitybenefit payments. (a) Maturity date (b) Annuity period (c) Premium period Q8. ___________________ is an annuity under which the amount of the policy's accumulated valueand the amount of the annuity benefit payment will fluctuate in accordance with the performance of a separate account. (a) A variable annuity (b) A life annuity (c) A fixed benefit annuity Q9. Term insurance policy provides for (a) sum assured in the case of death (b) sum assured plus bonus in the case of death (c) only premium paid till the date of death (d) none of the above. Q10. Under terminal illness benefits of the Term Insurance plans the terminal illness has been defined as a person who is likely to die out of an illness within a period of (a) One month (b) Three months (c) Six months (d) Nine months Q11. Which of the following is not a classification of term insurance policy (a) Only premium return term insurance (b) Level benefit term assurance (c) Increasing benefit term assurance (d) Decreasing benefit term assurance. Q12. Which of these is not an event under which the sum insured can be increased in a life insurance policy under \"Special sum insured increase\" feature (a) On insured getting married 248

(b) On insured‘s willingness (c) On insured getting an increase in the salary of sizeable amount (d) On the birth or adoption of a child by insured. Q13. Conversion option of life insurance policies refers to (a) Conversion of the sum assured (b) Conversion of a policy into a different policy (c) Conversion of terms and conditions of a policy (d) None of the above. Q14. What is meant by a participant whole life policy? (a) The insured will participate in the board of the insurance company (b) Insured will participate in the day to day running of the insurance company (c) Insured will participate in the profits of the Company. (d) None Q15. Endowment insurance policies are the policies, which pay (a) premium paid only on death (b) premium paid on death or survival (c) assured benefits only on death (d) assured benefits on death or survival Q16. Home loan/mortgage protection insurance refers to (a) Property insurance policy (b) Credit insurance policy (c) Life insurance policy guaranteeing the mortgage loan (d) None of the above. Q17. Educational life insurance polices do not provide (a) Education to the insured persons children upto a certain age. (b) Payment of educational expenses at a future time (c) Continued educational support to insured‘s children in case of his death (d) All the above Q18. Life Insurance benefits can be paid on the death of the life assured as per provision made in (a) Nomination 249

(b) Will (c) Legal heirs (d) Any one of the above Q19. Term Insurance provides for payment of capital sum assured in case of (a) Death of the life assured before the end of the term (b) Death of the life assured or on survival till the end of the term (c) Survival of the life assured till the end of the term only. (d) Death of the nominee before the end of the term Q20. In decreasing term insurance policies, the death benefit payable will (a) Remain the same throughout the term of the policy (b) Decrease regularly till the end of the term (c) Increase periodically over the policy term (d) Be decided by the insurer every year. Q21. Renewable term insurance policy gives the policy owner an option to (a) Cancel the policy at anytime and take refund of premium (b) Buy additional policies during the term of the policy. (c) Continue insurance cover for additional term (d) None of the above Q22. Whole life insurance policies provide for (a) Payment of sum assured on death during a fixed term only (b) Payment of sum assured on death during a fixed term or survival till end of the term (c) Payment of sum assured only on survival till the end of the term (d) Payment of sum assured on death anytime after commencement of policy. Q23. Endowment policies provide for payment of capital sum assured (a) Only on death of the life assured during the term of the policy (b) Either on death of the life assured during the term or on survival till end of the term (c) Only on survival of the life assured till the end of the term (d) Periodically in regular intervals during the term Q24. Under Anticipated Endowment policies, Capital Sum Assured is payable (a) Only on maturity of the policy 250

(b) In installments at regular intervals of time during the term of policy (c) Only on death of policyholder. (d) None of the above Q25. Under Joint Life Endowment Policies insurance coverage can be up to (a) Death of first life assured (b) Death of second life assured (c) Death of both lives assured (d) All the above Q26. An annuity contract whose cash values and benefit payments are related to assets allocated Q27. is (a) Life annuity with guarantee (b) Annuity Certain (c) Variable annuity Which of the following is not true of Universal Life Insurance (ULI)? (a) Choice of investment decision (b) Guaranteed death benefit (c) Flexibility in premium payment (d) Option of death benefit Q28. When you buy an annuity with a single installment purchase price you get Q29. (a) An indexed linked annuity (b) A variable annuity (c) A deferred annuity (d) An immediate annuity (d) Fixed annuity Riders on a Life Insurance Policy are (a) In-built provision with all policies (b) Additional benefits that can be purchased (c) Available free of cost under certain policies (d) None of the above 251

Q30. Pension scheme for employees can be designed as (a) Defined benefit schemes only (b) Defined contribution schemes only (c) Any of the above (d) None of the above. Q31. Fixed annuity provides (a) Guaranteed annuity installments (b) Very high returns (c) Annuity based on market rates (d) None of the above Q32. Variable annuity provides (a) Guaranteed returns (b) Investment option during accumulation stage (c) Annuity linked to Equity Index (d) None of the above Q33. A period certain annuity will provide for annuity payments (a) For a fixed period only (b) For the life of the annuitant and guaranteed for a fixed period. (c) For the life of the annuitant (d) For the fixed period and after that for the life of the annuitant Q34. Which of the following statements regarding universal life insurance are true. 1. Allows insured to buy Term insurance and invest an additional mount 2. Flexibility in Premium, Frequency and coverage within limits 3. A minimum interest rate is guaranteed. (a) Statement 1 only (b) Statement 2 only (c) Statement 3 only (d) All the above Q35. Which of the following is not an insurance product (a) Whole life insurance (b) Endowment insurance 252

(c) Insurance cover note (d) Term insurance Q36. An increasing term insurance means (a) The term insurance sum assured increases with inflation (b) The term insurance increases at intervals (c) Both the premium and sum assured increases (d) Only the premium goes on increasing Q37. The core characteristic feature of the whole life policy is (a) Payment on the whole-life policy from the insurer is certain (b) Premium payment for a guaranteed term is certain (c) It does not have a surrender value (d) It covers all the needs of the insured over all the stages of his life Q38. The endowment insurance policy is characterised by (a) Sum assured being payable either at death or at the end of term of the policy, whichever is earlier (b) Sum assured being payable at the end of the premium paying term (c) Return of premiums at the end of the policy (d) Return of premiums plus bonus at the end of the policy or on death Q39. Deferred annuity is when (a) there is a pre-specified time lag between payment of premiums and payment of benefits (b) There is a set of premium payments after which the benefit starts at a time later than the start of the policy. (c) The premium payments are deferred till the end of the policy (d) The benefit payable is deferred till the end of the policy term Q40. Which is one of the features of the whole-life policy? (a) One need not pay premiums after a certain build-up of cash value (b) A lapse in premiums will not affect the policy (c) You can surrender the policy and take cash value at any time (d) You can get a loan upto a specified percentage of the cash value at a pre-determined rate. 253

Q41. Which of the following benefits is not derived from a Term Insurance Policy. Q42. (a) Lower Premium (b) Higher Cover (c) Convertibility option (d) Surrender value. Annuity certain is where: (a) It is certain that Annuity would be paid for a definite period (b) It is certain that a fixed annuity would be paid. (c) It is certain that annuity would be paid till death. (d) It is certain that a fixed annuity would be paid. Q43. Mortgage redemption insurance illustrates: Q44. (a) Level benefit term insurance with level premium Q45. (b) Level benefit term Insurance with stepped premium (c) Increasing benefit term insurance (d) Decreasing benefit term Insurance Life Insurance Policy Rider is:- (a) Extra premium for physical impairment (b) Additional premium for supplementary benefit (c) Restoration clause to a policy (d) Discount of premium. Increasing benefit term assurance policy is an example of (a) Renewability (b) Index linking (c) Re-entry Option (d) Non-forfeiture rights Q46. Mortgage redemption policies are examples of (a) Increasing term assurance (b) Decreasing term assurance (c) Constant term assurance (d) Whole life assurance 254

Q47. The core concept behind \"level-premium\" approach is: Q48. (a) Bunching of premium (b) Averaging of premium (c) Indexing of premium (d) Stepping up of premium Under a joint life last survivor annuity: (a) Annuity payment stops on the first death of the covered lives (b) Annuity is payable as long as either one of the a annuitant is alive (c) Annuity is payable only to the annuitant specified. (d) None of the above. ANSWERS 1 B 17 A 33 A 2 B 18 D 34 D 3 B 19 A 35 C 4 A 20 B 36 B 5 C 21 C 37 A 6 B 22 D 38 A 7 B 23 B 39 A 8 A 24 B 40 D 9 A 25 C 41 D 10 C 26 C 42 A 11 A 27 A 43 D 12 B 28 D 44 B 13 B 29 B 45 B 14 C 30 C 46 B 15 D 31 A 47 B 16 C 32 D 48 B 255

3.4 CALCULATIONS OF CLAIM AMOUNT AND OTHER BENEFITS 3.4.1 Bonus- Revisionary, Performance, Maturity, etc. If the actual experience on the three counts, referred to above, is the same as expected in the calculations, everything‘s will be working smoothly for the insurer. If the actual experience proves to be worse than expectations, the insurer can suffer a loss. If the actual experience is favorable, surplus is generated. A major part of this surplus is distributed to policyholders as bonus. (No more than 10% of surplus can be distributed among the shareholders) For the purpose of participations in profits, the policies are divided into 2 categories: with profits and without profits. These are also referred to as ‗participating' and ‘non- participating' policies. In case of \"with profits\" policies, the policy holder pays an additional premium which entitles him to bonuses which are payable along with the Sum Assured at the time of claim payment. 256

On the other hand, in case of \"without profit\" policies, the policyholder pays no additional premium and as such is not entitled to bonus. When claim arises, he is paid the specified Sum Assured without any additional amount Thus for a \"without profit\" policy, the premium is lower as compared to that of a \"with profit \"policy. The insurer is required to maintain separate funds in respect of participating and non- participating policies. Methods of Bonus Distribution There are different methods of bonus distribution. 'Simple Reversionary Bonus' is easy to understand and implement.  The Bonus is declared as so many rupees per thousand Sum Assured (S. A.) per year and remains attached to the policy.  It is payable along with the basic sum assured as and when it becomes payable  Bonus rates may vary from Plan to Plan and within the same plan according to the policy term  Bonus rate for whole life policies is higher than under endowment policies. Compound Reversionary Bonus is another variation.  In this method, the bonus, which is already declared, attaches to the policy and this amount is taken into account as an increased sum assured, when subsequent year's bonus is declared.  If a bonus of ₹40/- per thousand is declared under this scheme, the S.A. next year will be taken as ₹1040/- (and not ₹1000/-) and if bonus for the next year is ₹50/- per thousand, it will be calculated not on ₹1000/- but on ₹1040/- Effective bonus thus would be ₹52/-and not ₹50/- Cash Bonus/Immediate Bonus  Bonus can be paid in cash also. In that case, either the bonus amount is paid in cash or is adjusted towards next premium or premiums. Generally in India we will not find this type of bonus with any life insurance company. Terminal Bonus or Final Additional Bonus is another method of bonus distribution.  It is in additional to the usual bonus already declared.  It provides for one-time bonus allocation. 257

This bonus is to reward those policyholders, who survive for a long time (say 15 years or more) and thus display a better mortality and help the insurer in the accumulation of surplus. Amount of this bonus depends upon the S.A. and the term elapsed. This bonus is per thousand S.A. for the entire elapsed duration of the policy. Thus bonus is not paid tinder ‘surrendered‘,‗discounted', or ‘paid-up' policies. Only in force policies are entitled to get this bonus. Interim Bonus Awith-profit' policy, that was in force on the date of the latest valuation and becomes a claim before the valuation results are declared, is entitled to bonus on interim basis. Such a bonus is called ‗interim bonus'. 3.4.2 Maturity of Policy Maturity claim is payable under endowment type of policies. There are also some Term Assurance plans whereunder premiums are refunded if the life assured survives the policy term. Intimation is sent normally by the insurer well in advance to ensure timely payment. Post-dated cheques in payment of the claim amount are normally sent to the policy holder in advance. The Insurer has to satisfy beforehand that- (a) the life assured or the assignee, as the case may be, is the holder of the policy; (b) identity of the life assured or the assignee, as the case may be, is proved; (c) age of the assured stands admitted; (d) all the premiums due have been paid. (e) the original policy together with completed discharge voucher is furnished (f) The title to claim policy moneys is clear. In case of absolute assignment, claim is settled in favour of the assignee and hence intimation goes to the assignee. In case of conditional assignment, claim may be settled in favour of life assured and hence intimation goes to the life assured 258

In case of MWPA policy, the proceeds are to be paid  To the trustee if there is no trustee, official trustee will step in  If the beneficiaries are major and competent to contract claim can be paid to them. Hence the discharge voucher is signed by the beneficiary/trustee and not by the assured. Intimation under ‘Survival Benefit’ Survival benefit becomes payable at the end of the specified periodical intervals during the policy term if the life assured is surviving. The intimation procedure is same as in the case of maturity claims. Maturity Claims The insurer call for the following documents: Policy Bond (Policy Document)  In case policy document not available due to having been lost/destroyed, ‗indemnity bond' is required. The indemnity bond is executed by the life assured alongwith a surety of sound financial position.  In case of small claim amounts, a letter of a indemnity may suffice instead of an indemnity bond where original policy bond is lost.  For very small claim amounts, requirement of indemnity may be waived by an Insurer.  In case of a survival benefit payment, a duplicate policy is issued before settlement of the payment. For maturity claim, a duplicate policy need not be issued. Age proof, if age not already admitted. Deed of Assignment, if any. Discharge form duly signed by the life assured and witnessed. On receipt of the required documents by the insurer-  Documents are scrutinized.  If found in order claim amount is sanctioned by the competent authority of the Insurer Payment is made by an account payee cheque.  The claim money is usually paid to the life assured himself or the assignee in case of an absolute assignment. Hence settlement is simple.  If the claim determines the policy finally i.e. the contract comes to an end on claim payment, the policy document is cancelled. 259

Survival Benefits Payment of survival benefit does not determine the policy finally i.e. the contract does not come to an end. Therefore, the policy document is not cancelled. Only a suitable endorsement is made on the policy document and the document is returned along with the cheque. However, now-a-days, some insurers do not call for policy document to make such endorsement if the survival benefit amount is less than certain amount (limit on such amount or procedures in this regard vary from insurer to insurer). If the life assured dies after survival benefit becoming due but before its settlement, the survival benefit is not paid to the nominee. It is payable to legal heirs of the life assured. Unusual Situations There may be certain unusual situations, such as-  The life assured (or the person to sign the discharge) is known to be mentally deranged. In that event: A certificate tinder Indian Lunacy Act, appointing a person to act as Guardian to manage the properties of the lunatic is called for.  The assured has been adjudged insolvent before the policy matured and a notice to that effect was received. In that event:  The official assignee is intimated about the maturity.  Payment of policy money is made to the official assignee under advice to the assured.  In the policy has been sold in court action, the purchaser will be entitled for the payment on production of the certificate. Prohibitory Order from a court of law or a Notice from the Income Tax Authority u/s 226(3) subsists. In that event  The life assured has to get withdrawal of such Order/Notice.  Otherwise payment is processed according to the Order/Notice. Life assured missing - If the life assured is reported to have disappeared and is not heard of for the last 7 years  The disappeared person is presumed to be dead under the Indian Evidence Act. In such a case a court order is required and the payment is made according to the status of the policy. 260

Miscellaneous Under a policy financed through HUF funds, the policy moneys go to the Karta of HUF. Payment to Non Resident Indian is governed by the Foreign Exchange Control Regulations. 3.4.3 Death Claim Death Claim Intimation Intimation about death of the life assured has to be given in writing Intimation may be given by either of these  Nominee  Assignee  A relative of the assured  A gent or development officer Intimation about death of the life assured has to be given in writing Intimation may be given by either of these 261

 Nominee  Assignee  A relative of the assured  A gent or development officer Intimation should contain the following particulars  Policy number  Name of the life assured  Date of death  Cause of death  Informant's relation with the life assured Sometimes insurer can also initiate claim action without waiting till the claim intimation is received. This could be on the basis of obituary columns or newspaper reports about accident or air-crash. However, identity of thedeceased as life assured is the most important aspect in any case. The ‗Death Claim Intimation' must satisfy two conditions:  It must be from a concerned person;  It must establish the identity of the deceased life assured beyond doubt. On receipt of the death intimation, the following documents are called for- 1) Policy document 2) Deed of assignment, if any 3) Proof of age, if age is not admitted earlier 4) Certificate of death issued by Municipality or Local Board 5) Legal evidence of title, if there is no nomination or assignment. 6) Claimant's statement giving details like life assured's name, policy number, date & cause of death 7) Certificate of identity and cremation/burial by an independent person who attended the same 8) Form of discharge executed and properly witnessed In case of death within three years from the date of issue of the First Premium Receipt or the date of last revival, following additional requirements are called for:  Statement from the last medical attendant giving details of last illness and treatment; 262

 Statement from the hospital if the deceased had been hospitlised  Statement from the person who had seen the dead body and attended the funeral rites  Statement form the employer showing details of leave, if the deceased was employed somewhere In case of unnatural death such as accident/suicide /murder or unknown cause, FIR,PIR, Chemical Analyst's report, Postmortem report Coroner's report etc will also be required. In case of proper nomination or assignment, no further proof of title of the claimant is needed. In case there being no nomination or assignment, legal evidence of title to the estate of the deceased from a competent court is required.  Evidence of title may be dispensed with, up to a certain limit if:  The claim amount involved is small;  There is no other estate left by the deceased; and  There is no dispute amongst the claimants of the policy money. On completion of the formalities as above, death claim is paid to the claimant. Time-barred death claim  If the intimation is received after 3 years from the date of death, the claim is time- barred. In that event;  If the claim is otherwise payable, ex- gratia payment can be considered.  If death had occurred within 3 years from the policy's commencement or the last revival, investigations are also conducted. Alternative proofs of death may be; In case of an air-crash, certificate from airlines certifying that the deceased was traveling as a fare-paying passenger on the plane In case of ship accident, a certified extract from the shop's log-book In case of defence personnel  Certificate from the commanding officer of the Unit.  If a court of inquiry is ordered, its findings are also required. 263

Early Death Claim In case of death within 2 years from the issue of the first premium receipt or the last revival, investigation of the possibility of suppression of material information is necessary. In case of death within 3 years from the issue of the premium receipt the last revival, the insurer would verify the possibility of intentional misrepresentation or concealment of material information at the time of proposal or revival, for which investigation may be conducted. 3.4.4 Surrender Value Surrender involves voluntary termination of contract by the policyholder during the currency of the policy. The amount, which he gets by surrendering the policy, is called surrender value or cash value. Some insurers mention surrender value are given in the Prospectus or in the policy conditions. Rates of surrender value are given by various insurers which is a percentage of premiums paid or a percentage of paid up value, are mentioned either in the Prospectus or Policy conditions. Special surrender value is calculated generally higher than the Guaranteed Surrender value. Surrender value is calculated either as a percentage of premiums paid or as a percentage of paid up value. 1. This percentage increases as the duration of the policy increases. In a policy with a term of 25 years, the percentage of paid up value, which will be payable, as surrender value will be higher after 15 years as compared to the surrender value after 10 years. 2. If there are two policies under similar plans with policy term of 25 years and 30 years, and both remained in force for 15 years surrender value on the former will be higher than on the later. 3.4.5 Return on Savings Component Life insurance is a contingent financial product. Contingency may be premature death or disability or the risk of living too long. It pays the benefits only when the contingency occurs. In case of term assurance plans, the benefit is payable if death occurs during the specified period and nothing is payable after the term of the policy i.e. the return on term assurance at maturity on the death of the life assured is very high. Now consider an 264

endowment assurance plan. In endowment plans, the benefits are payable in the event of death as well as in the event of survival at maturity. Therefore premium of endowment plans consists of the following elements: Premium = risk premium + savings premium + expenses Risk premium is based on the higher death rate of sixties and savings premium is calculated such that guaranteed sum of money is accumulated at the end of the contract at the interest rate of 6% or actual rate of return on savings. Example – 1: A participating policy of 20 years with sum assured of ₹5 lakhs at a premium of ₹31356 p.a. has revisionary bonus of 50/1000 of SA for the first 4 years, 55/1000 of SA in the next 10 years and 60/1000 of SA in the remaining years. The maturity bonus is also declared at 115/1000 of SA. Find the effective rate of return? a) 5.19% b) 11.19% c) 7.74% d) 4.73% Correct Answer: (A) 5.19% Sum Assured 5lakhs Term 20 years Premium 31356 p.a. Revisionary Bonus First 4 years = 50/1000 * 500000 * 4 = 100000 Next 10 years = 55/1000 * 500000 * 10 = 275000 Remaining 6 years = 60/1000 * 500000 * 6 = 180000 Total Revisionary Bonus = 555000 Maturity Bonus Maturity Bonus = 115/1000*500000 = 57500 Total Maturity Benefit = RB+MB+SA = 1112500 Calculate Rate (i%) Set Begin, N=20, PMT=31356, FV=1112500, P/Y=C/Y=1, Calculate I, i=5.19% Example – 2: A 40 year old male individual can get a 15-year with-profit life insurance policy of a company at an annual premium of ₹12,046 which gives a sum assured of ₹1.5 lakh. The company historically has declared reversionary bonuses and terminal bonus per 265

thousand sum assured at ₹35 and ₹80, respectively. A term plan with same life and other parameters is generally available for an annual premium of ₹3,565. Find the return on investment component of the company‘s policy on surviving the term. Ans: Premium of with-profit policy ₹12,046 Premium of term policy ₹3,565 The excess premium paid for the investment component = 12046 - 3565 = ₹8,481 Revisionary Bonus = 35/1000 * 150000 * 15= 78750 Terminal bonus = 80/1000 * 150000 = 12000 Maturity value from with-profit policy on surviving the term = 150000 + 78750 + 12000 = 240,750 Return from an investment component = (Set begin, N= 15, PMT=-8481, FV=240750; P/Y=C/Y=1, I (Solve) = 7.6264) Return on investment component 7.63% p.a Flow Chart for Life Insurance Policy Death Claim Calculation Flow Chart for Life Insurance Policy Death Claim Calculation Steps for Life Insurance Policy Death Claim Calculation Sum Assured XXX 266

Add: Vested Bonus XX Add: Advance Premiums XX Add: Interim Bonus XX XXX Less: Unpaid Premiums XX Less: Outstanding Loan & Interest XX Death Claim XXX 3.4.6 Taxation Aspects of Various Life Insurance Policy Life insurance policies can be useful tax planning tools, because the policy holder is eligible for tax benefits under the Income Tax Act 1961 (Act). Though there are multiple modes for saving tax, life insurance is one of the most effective tax planning instrument. Some important income tax benefits available under various plans of life insurance are highlighted below: 1. Deduction allowable from Income for payment of Life Insurance Premium (Sec. 80C/ 80CCC). a) Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee in the case of HUF, premium paid on the life of any member thereof under an insurance policy, (other than a contract for a deferred annuity,) issued on or before the 31st day of March 2012 shall be eligible for deduction only to the extent of 20% of the actual sum assured. b) Life Insurance premia paid in order to effect or to keep in force an insurance on the life of the assessee or on the life of the spouse or any child of assessee in the case of HUF, premium paid on the life of any member thereof, under an insurance policy, (other than a contract for a deferred annuity,) issued on or after the 1st day of April 2012 shall be eligible for deduction only to the extent of 10% of the actual sum assured. Note: Above benefits shall be reversed if the policy is terminated/cease to be in force within 2 years for traditional products and 5 years for ULIP products after the date of commencement of policy. c) Contribution to deferred annuity Plans in order to effect or to keep in force a contract for deferred annuity, on his own life or the life of his spouse or any child 267

of such individual, provided such contract does not contain a provision to exercise an option by the insured to receive a cash payment in lieu of the payment of annuity is eligible for deduction. Note: The aggregate amount of deduction under u/s 80C & 80CCC shall not in any case exceed one lakh fifty thousand rupees. However, there is no sectoral cap i.e. the limit of ₹1,50,000/- can be exhausted by paying premium under any of the said sections. 2. Deduction under section 80D As per F.Y. 2017-18 the deduction under section 80D, inter alia, provide for deduction of: (a) Upto₹25,000 to an assessee, being a individual in respect of health insurance premium, paid by any mode, other than cash, to effect or to keep in force an insurance on the health of the assessee or his family or any contribution made to the Central Government Health Scheme or any other notified scheme or any payment made on account of preventive health checkup of the assessee or his family; and (b) An additional deduction of ₹25,000 is provided to an individual assessee to effect or to keep in force insurance on the health of the parent(s) of the assessee. If parents are senior citizen the deduction of Rs.30,000. (c) A similar deduction is also available to a Hindu Undivided Family in respect of health insurance premium, paid by any mode, other than cash, to effect or to keep in force insurance on the health of any member of the HUF. As per F.Y. 2018-19> 1. Health insurance premium paid for Self, Spouse or dependent children is tax deductible uptoRs 25,000. If any one of the persons specified is a senior citizen and Mediclaim Insurance premium is paid for such senior citizen then the deduction amount will be Rs. 50,000 from FY 2018-19 2. In case of single premium health insurance policies having cover of more than one year, it is proposed that the deduction shall be allowed on proportionate basis for the number of years for which health insurance cover is provided, subject to the specified monetary limit. 268

Income tax exemption on Maturity/Death Claims proceeds under Section 10(10D) Under the provisions of section 10(10D) of the Income-tax Act, 1961, Maturity/Death claims proceeds of life insurance policy, including the sum allocated by way of bonus on such policy (other than amount to be refunded under JeevanAadhar Insurance Plan in case of handicapped dependent predeceases the individual or amount received under a Keyman Insurance Plan) ,is exempted from income- tax. However any sum ( not including the premium paid by the assessee) received other than death claim under an insurance policy issued on or after the 1st day of April 2003 but on or before the 31st day of March, 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds twenty per cent of the actual capital sum assured will no longer be exempted under this section. Further any sum ( not including the premium paid by the assessee ) received other than death claim under an insurance policy issued on or after the 1st day of April 2012 in respect of which the premium payable for any of the years during the term of the policy exceeds ten per cent of the actual capital sum assured will no longer be exempted under this section. Claims: Practice Sums Q1. Calculate the claim amount payable under each of the following cases: SL PARTICULARS CASE A CASE B CASEC CASE D NO 1 Date of 20-02-2011 12-01-2011 20-01-2011 07-02-2011 Commencement 2 Annual Premium (₹) 10,000 10,000 10,000 10,000 07-02-2018 3 Last Premium Paid 20-02-2017 12-01-2018 20-01-2017 (paid on Date 20- 01- 2018) 4 Sum Assured (₹) 3,00,000 3,00,000 3,00,000 3,00,000 5 Vested Bonus (₹) 1,20,000 1,20,000 1,20,000 1,20,000 6 Vested Bonus (Last 31-03-2017 31-03-2017 31-03-2017 31-03-2017 Declaration Date) 7 Interim Bonus (₹/000), 40 40 40 40 269

if applicable 24-01-2018 24-01-2018 24-01-2018 24-01-2018 8 Date of Death Solution (Case A): Step - 1: Calculation of Final Policy Year Date of Death 24-01-2018 Policy Anniversary20-02 Final Policy Year 20-02-2017 to 19-02-2018 Step - 2: Calculation of Policy Status as on Date of Death LPP: 20-02-2017 Add: Term: 1 FUP: 20-02-2018 Add: Grace Period: 01-01 Effective Date of 21-03-2018 Coverage: Date of death: 24-01-2018 Thus, policy was in force as on the date of death. Step - 3: Check for Premiums & Bonuses Final Policy Year 20-02-2017 to 19-02-2018 Premium Payable on 20-02-2017 (Paid) Bonus Receivable on 31-03-2017 (Received) Step - 4: Calculation of Claim Amount Sum Assured: 300000 Add: Vested Bonus: 120000 Claim Amount 420000 Solution (Case B): Step - 1: Calculation of Final Policy Year Date of Death 24-01-2018 Policy Anniversary 12-01 Final Policy Year 12-01-2018 to 11-01-2019 270

Step - 2: Calculation of Policy Status as on Date of Death LPP: 12-01-2018 Add: Term: 1 FUP: 12-01-2019 Add: Grace Period: 01 Effective Date of 12-02-2019 Coverage: Date of death: 24-01-2018 Thus, policy was in force as on the date of death. Step - 3: Check for Premiums & Bonuses Final Policy Year 12-01-2018 to 11-01-2019 Premium Payable on 12-01-2018 (Paid) Bonus Receivable on 31-03-2018 (Not Received) Step - 4: Calculation of Claim Amount Sum Assured: 300000 Add: Vested Bonus: 120000 Add: Interim Bonus: 12000 {(40/1000)*300000} Claim Amount 432000 Solution (Case C): Step - 1: Calculation of Final Policy Year Date of Death 24-01-2018 Policy Anniversary 20-01 Final Policy Year 20-01-2018 to 19-01-2019 Step - 2: Calculation of Policy Status as on Date of Death LPP: 20-01-2017 Add: Term: 1 FUP: 20-01-2018 Add: Grace Period: 01 Effective Date of 20-02-2018 Coverage: 271

Date of death: 24-01-2018 Thus, policy was in force as on the date of death. Step - 3: Check for Premiums & Bonuses Final Policy Year 20-01-2018 to 19-01-2019 Premium Payable on 20-01-2018 (Unpaid) Bonus Receivable on 31-03-2018 (Not Received) Step - 4: Calculation of Claim Amount Sum Assured: 300000 Add: Vested Bonus: 120000 Less: Unpaid Premium: (10000) Add: Interim Bonus: 12000 {(40/1000) *300000} Claim Amount 422000 Solution (Case D): Step - 1: Calculation of Final Policy Year Date of Death 24-01-2018 Policy Anniversary 07-02 Final Policy Year 07-02-2017 to 06-02-2018 Step - 2: Calculation of Policy Status as on Date of Death LPP: 07-02-2018 Add: Term: 1 FUP: 07-02-2019 Add: Grace Period: 02-01 Effective Date of 09-03-2019 Coverage: Date of death: 24-01-2018 Thus, policy was in force as on the date of death. 272

Step - 3: Check for Premiums & Bonuses Final Policy Year 07-02-2017 to 06-02-2018 Premium Payable on 07-02-2017 (One extra premium Paid) Bonus Receivable on 31-03-2017 (Received) Step - 4: Calculation of Claim Amount Sum Assured: 300000 Add: Vested Bonus: 120000 Add: Advance Premium: 10000 Claim Amount 430000 Q3. Given the following data, calculate the amount of death claim payable: Plan & Term = Endowment 25 years Sum Assured = ₹40,000 D.O.C = 20-07-2005 D.O.D = 18-02-2018 Vested Bonus = ₹30,000 Quarterly premium of ₹320 due in Jan, 2018 has not being paid. Interim bonus declared after valuation on 31-03-2017 is ₹70 per thousand. Solution: Step - 1: Calculation of Final Policy Year Date of Death 18-02-2018 Policy Anniversary 20-07 Final Policy Year 20-07-2017 to 19-07-2018 Step - 2: Calculation of Policy Status as on Date of Death FUP: 20-01-2018 Add: Grace Period: 01 Effective Date of 20-02-2018 Coverage: Date of death: 18-02-2018 Thus, policy was in force as on the date of death. 273

Step - 3: Check for Premiums & Bonuses Final Policy Year 20-07-2017 to 19-07-2018 Premium Payable on 20-07-17, 20-10-17, 20-01-18& 20-04-18 (Two premiums Unpaid) Bonus Receivable on 31-03-2018 (Not Received) Step - 4: Calculation of Claim Amount Sum Assured: 40000 Add: Vested Bonus: 30000 Add: Interim Bonus: 2800 {(70/1000)*40000} (320*2)* Less: Unpaid Premium: (640) Claim Amount 72160 274

QUESTIONS Q1. For delay in processing life insurance claim the insurer will have to pay interest at the rate ________________ over andabove the bank rate as at the beginning of the year (a) 4% (b) 5% (c) 2% (d) 1% Q2. A claim under a life policy shall be paid or disputed within ________________ days from the date of receipt of all therelevant papers. (a) 30 days (b) 45 days (c) 60 days (d) 15 days Q3. The claims arising out of the life assured surviving till the end of the selected term of the life insurance policy is referred to as (a) Maturity claims (b) Death claims (c) Annuity (d) None of the above Q4. In respect of maturity claims under a life insurance policy, the action to be taken is normally initiated by (a) The policyholder (b) The insurance company (c) The planer (d) The intermediary who sold the policy Q5. In case of claim arising out of the death of the life insured under the life insurance policy, the money would normally be paid to (a) The spouse of the life assured (b) The first son of the life assured (c) The mother of the life assured (d) The person nominated under the policy by the life assured, if any 275

Q6. In case the policy owner and the life assured under a life insurance policy are different, then the death claim would be payable to (a) The legal heirs of the life assured (b) The person nominated to receive the policy moneys (c) The policy owner (d) The spouse and children of the life assured Q7. The insurance planner or intermediary has a role to play in (a) Death claims in case of life insurance policies (b) Disability claims in case of personal accident policies (c) Health insurance claims (d) All the above Q8. In case of death of the life assured during grace period, the insurance company will (a) Not pay the claim (b) Pay the death benefit in full (c) Refund premium paid (d) Pay the death benefit after deducting the premium due. Q9. Due to the following factors, an insurance company may make a surplus A) Mortality B) Investment rate C) Expenses D) Lapses, surrenders of policy E) Adverse loss ratio (a) A,B,C (b) A,B,C,D (c) A,B,C,D,E (d) None of the above 276

Q10. Mr. Jain took a Life Insurance Policy which he continued for 3 years. He died within a fortnight thereafter, suffering from T.B. Mrs. Jain lodged the claim as Nominee. The sum assured was ₹10.00 lacs. The Insurer had indisputable evidence that Mr. Jain was hospitalized for 10 days earlier to his taking the proposal which was not disclosed in the proposal form. Though no fraudulent intention was established, the insurer repudiated the claim: (a) Repudiation is in keeping with Law (b) Repudiation is not in Keeping with Law. Q11. Mr. Ramesh submitted a Proposal on his own life on 1.3.2018. It was completed by the Insurer and the Policy Bond was received by him on 8.3.2018. On 20.3.2018, Mr. Ramesh returned the Policy Bond stating the reason for his refusal to accept some of the terms printed in the Policy Bond and asked for refund of premium paid. Is Mr. Ramesh is entitled to: (a) Refund (b) No refund Q12. A Planner and Prospect agreed for an Endowment Assurance Policy for ₹4 lakhs, limited payment for 10 years with a term of 20 years. If Reversionary bonus is taken as 7.5% per annum and Terminal bonus as ₹150/- per 1000/-, what will be the maturity value: (a) ₹10,50,000/- (b) ₹10,60,000/- (c) ₹10,70,000/- (d) ₹10,80,000/-65. ANSWERS 1 C5 D9 A 2 A 6 C 10 B 3 A 7 D 11 A 4 B 8 D 12 B 277

3.5 OTHER PROVISIONS OF LIFE INSURANCE CONTRACT 3.5.1 “Free Look” Period and Grace Period For some years now life insurers have provided a ‘cooling-off' period following their sales of policies. The ‘cooling off' is for a period of 15 days following receipt of the policy, during which time the insured can elect to cancel the policy and receive a full refund of the premium paid subject to deduction of expenses and proportional term insurance premium for the period elapsed. The purpose of this period is to protect against an insured being persuaded/pressured into a contract that they really did not want. By allowing this period, the insured has time, to decide if they wish to continue with the cover. Policy conditions stipulate that premium is to be paid in the insurer's office on the dates specified therein. These specified dates are known as \"due dates\". Normal modes of making premium payment include cash, cheque, demand draft, postal order, banker's cheque, money order, banker's order and now a days by Credit Cards and debit cards also. Insurance companies are at liberty to decide whether to ask for collection charges from the policyholders or not. Although premium are required to be paid on the due dates specified in the policy, insurers allow a \"grace period\" for payment of premium. 1. Payment of premium within grace period is considered as payments on time. 2. The Policy will not lapse if premium is paid within ‘Days of Grace'. 3. A grace period of one month but not less than 30 days is allowed for payment of Yearly, Half-yearly and Quarterly premiums. 4. A grace period of 15 days is allowed for Monthly premiums. In case of SSS policies, if the employer deducts premium from employees' salaries and there is delay is too frequent, SSS arrangement may be terminated. 5. Under Term Insurance Plan the grace period is generally reduced to 15 days or less by the insurers. 6. Within days of grace, premiums will be accepted (a) without any interest, and (b) irrespective of the state of health of the life assured. Non-payment of premium within days of grace is considered as default on the part of the policyholder and it results in the policy being termed as \"lapse\". If life assured dies within the days of grace and premium has not been paid, claim will be admitted in full and premium for the current policy year will be deducted from the claim 278

amount. Strictly, if premium is taken as paid in cash and it has been paid through some other mode, such as cheque or demand draft then it will be deemed to have been paid when the amount is credited to insurer's account. In practice the premium is taken as paid on receipt of cheque or demand draft and renewal premium receipt is issued\" subject to clearance\". If the policyholder gives proof that premium has been remitted, insurers may treat it as paid even if it had not been received in the office. Such proofs may be available in the case of remittance by money order or demand draft. This proof may be necessary in the case of death claim where death occurred before the premium reached office. The benefit would be given to the policyholder as the premium had left his hands and was in transit. With the introduction of computers and advancements in information technology, policyholders will be able to pay premium from their place of residence or office in the same way as we can make railway reservation from our residence through Internet. Insurers can make collection arrangement with the banks for collecting premiums. The collecting branch would send a cheque for the consolidated amount with policy details to the bank is taken as the date of receipt of premium. This arrangement is to help policy holders pf rural areas to conveniently pay renewal premiums. 3.5.2 Claim Concession In strict terms of the contract, if premium payment is in default, the policy lapes, If the policy is lapsed and life assured dies, no claim is payable. Yet, insurers pay death claims in certain situations even if the policy is in a lapsed condition on the date of death. Such a settlement of death claim is referred to as₹ claim concession'. There is no thumb rule about ‘claim concession'. But following points are relevant in this regard- In cases, where the policy conditions provide advancing premiums from surrender value, the claim amount will be payable in full until the surrender value becomes insufficient to advances further premiums. In case, where policy has lapsed due to non-payment of the ‘premium due within twelve months before maturity' and the life assured dies in the last year of the policy term, claim is paid after deducting the outstanding premiums. Some insurers extend claim concession is cases, where the lapsed policy could have been revived before death by simply paying the arrears of premiums without the requirement of any proof of good health. In such cases, claim in full is paid after deducting the outstanding 279

premiums with interest if due. For instance, LIC's practice of paying such claims is thus – 1. If the policy has run for 3 years and the death claim arises within six months from the date of lapse. 2. If the policy has run for 5 years and the death claim arises within twelve months from the date of lapse. Illustration of a claim case where 3 full years’ premiums are paid: Sum Assured: 2,00,000 Date of Commencement: 28.03.2005 Mode of Payment of Premium: Quarterly Last Premium Paid: Quarterly due 28.12.2007 Date of Death of the life insured: 26.09.2008 In the above example you would find that 3 full years premiums are paid (12 quarterly premiums under this case) as under: Details of premiums paid are Quarterly 3/2005 (along with proposal), 6/2005,9/2005,12/2005.3/2006,6/2006, 9/2006, 12/2006, 3/2007, 6/2007, 9/2007/ and 12/2007 In the above case when the life insured died, quarterly premium 28/ 3/2008 was unpaid. Quarterly premium 28/ 6/2008 was not yet due as he died on 26.09.2008. As three full years premiums are paid and the insured died on 26.09.2008 within 6 months from the first unpaid premium i.e. 28.03.2008(6 month period extends up to the midnight of 27.09.2008), the full sum assured is payable with all the benefits attached to the policy. However, the unpaid premiums due before the policy anniversary i.e. 3/2008, 6/2008, 9/2008 and 12/2008 will be deducted with interest from the claim amount. In this particular example the interest will be charged only on quarterly premium due 28/3/2008 up to 26.09.2008, which is the date of death. As stated above, LIC of India extends this concession from six months to one year if five full years' premiums are paid. 3.5.3 Lapse, Non-forfeiture Provision, Surrender and Revival In term of the policy contract, the obligation of the insurer to pay claim is conditional to premiums being paid on due dates. Premium received within‘days of grace' is taken as received on due date. If premium is not paid within the ‘days of grace' it is a default on the part of policyholder and the policy ‘lapse' - no claim is entertained on a lapsed policy and all 280

premiums are forfeited. In practice, insurers do not forfeit all the premiums paid under a lapsed policy. Insurance Act 1938 does not permit such forfeiture. The basis of this stipulation is that every policy acquires a reserve because - (i) premiums in the initial years are more than justified; and (ii) there is savings element in the premium. It would be unfair to forfeit this reserve. In the event of premium default, various safeguards have been provided to policy holders. These safeguards have various options and are called Non-Forfeiture Provision. One of the options is to return to the policyholder an amount, which represents the reserve - This amount is called the ‗Surrender Value' or ‗Cash Value'. Computation of Paid up Value Paid Up Value = No. of Premiums Paid x S.A. + Bonus (If any) No. of Premiums Payable Paid up Value Full sum assured is payable under in force policy on the happening of the event insured stops paying premium after a minimum required premium paying period, this stun is proportionately reduced. The reduced Sum Assured, which is also called Paid up Value bears the same ratio to the full sum assured as the number of premium paid bear to the total 281

number of premium payable. Paid up Value = [Number of premiums Paid x Sum Assured)/Number of Premiums Payable] + Bonus (if any) Examples for Calculating Paid-up Value Q1. Calculate the Paid-Up Value under a Policy with the following Particulars. S.A – ₹50,000/- Plan & Term – Endowment 20 Years D.O.C. – 01-06-2002 Mode – Half – Yearly Last Premium Paid Due – 01-12-2017 Ans. First Unpaid Premium (F.U.P.) = Last Premium Paid + Made = 01-12-2017 + 6 Months = 01-06-2018 No. of Premiums Paid = 01-06-2018 01-06-2002 = 16 Years = 16 x 2 (Since hlf yearly mode) = 32 No. of Premium Payable = 20 x 2 = 40 Paid-up Value = No.of Premiums Paid x S.A. Bonus (if any) No.of Premium Payable = 32 = 40,000/- + attached bonus (if any)  Only the sum assured is reduced proportionately. Bonus already vested before the policy became paid up, will remain unaffected. A paid up policy will not participate in future bonuses from the date it becomes paid up policy will also not be entitled to any interim bonus.  Premiums need not be paid after a policy becomes paid up. If there are some other benefits, which are related to sum assured, these benefits also will be proportionately reduced. Rider Benefit will get exhausted if he Policy becomes paid up for Reduced Sum Assured. Insurance Companies provide that policy must acquire some minimum value (say, ₹250) to become paid up. If paid up value works out to be a lower figure, this non-forfeiture benefit will not be available. In that case, the policyholder is entitled to surrender value as guarantee under the provision of law. 282

Guaranteed Surrender Value Section 113 of Insurance Act 1938 states that every policy where under premiums for at least three years have been paid, shall acquire \"guaranteed surrender value\". It is the minimum amount, which has to be paid to the policyholder, in case the policy holder wants to cancel the contract. However, the insurer may pay higher surrender value, which is more than the guarantee minimum. The stipulation that a policy must have remained in force for at least three years is because in the first year most of the premium goes out in expenses and not much is left for accumulation. Other Non-Forfeiture Provisions are —  Converting the policy into a paid-up one  Keeping the policy in force by advancing premiums out of the acquired surrender value (APA)  Providing term assurance cover out of acquired surrender value. Computation of Surrender Value Surrender Value = Paid Up Value x Surrender Value Factor KEEPING POLICY INFORCE (Automatic Premium Advance Clause) Under this option, if the premium are in default, the policy is kept in force by notionally advancing premium out of the Acquired Surrender Value. The policy is finally determined 283

when the surrender value is not sufficient to advance a full premium installment. In that case the balance of surrender value will be paid to the policyholder and the policy contract shall stand terminated. It may be noted that with every premium advanced and treated as paid, surrender value will also increase. Advantages The original insurance cover granted continues and is not reduced. Policyholder can resume payment of premium whenever he is in a position to do so. If it is a₹with profit' policy, it will be entitled to bonus additions, which will increase the Policy Value. Disadvantage If arrears of premium are not paid and surrender value is exhausted, sense of loss is much more as the cash available will be very little. Benefit of cover remains notional and not real. From policyholder's point of view disadvantage outweigh the advantages. Insurers, therefore, prefer the paid up option and the automatic premium advance clause is offered on specific request from the policyholder. Revival If a policy lapses, the insured, the insurer and the agent - all are adversely affected.  Insured loses the risk cover. Lapsation tantamount to a reversal of his earlier decision to provide security to his family and the family is again exposed to possible adverse circumstances.  Insurer charges level premium on the assumption that barring death claim, the policy will run for the full term. Initial expenses are high and can be recovered only if the policy remains in force. People with good health would tend to keep their policies in force, while people with good health may not value the continuance of policies so much. Thus will lead to ‗selection against the insurer', which means that insurer's liability will be greater than what was assumed while determining the premiums.  Agent not only loses his future commission but the lapsation also reflects that he had not fully convinced the policyholder about the usefulness of the plan. Lapsation may not be intentional and it may occur due to the neglect of the life assured in 284

payment of premiums or due to temporary financial difficulties. As it affects both the Life Assured and the Insurer adversely, insurersfacilitate revival of lapsed policies. When a policy lapses, neither the insurer nor the insured is benefitted. Life assured loses the full benefits. The insurer loses further expected revenues. The agent loses his future earnings Normally, people enjoying bad health value insurance and continue the policies, while other with normal health may discontinue. In that case, when the policy lapses, there is adverse selection or ‗selection against the insurer'. Lapsation may happen due to sheer neglect to pay or because of temporary financial difficulties. The lapsed policies are brought back into full force. This is called ‘revival'. A revival requires that the arrears of premiums be paid with interest. Insurers generally do not allow revival after five years of lapse as a fresh policy may be more beneficial to the policyholder. On revival the risk cover under the policy is being increased. Therefore, revival is treated on the same line as underwriting a new propsal. Accordingly policyholder will have to produce proof of continued insurability. The policy may also be revived without proof of continued insurability. Schemes of Revival LIC of India, generally categorize the revival into following schemes.  Ordinary revival scheme (without evidence of good health)  Ordinary revival scheme (with evidence of good health)  Special revival scheme  Revival by installment Loan-Cum-Revival Scheme Ordinary revival scheme (without evidence of good health): it allows revival a) If arrears are paid within 6 months of the date on which the first unpaid premium was due b) If arrears are paid within last 12 months of the date of maturity c) If arrears are paid within 12 months of the date on which the first unpaid premium was due provided the policy had been in force for the last 5 years 285

Ordinary revival scheme (with evidence of good health) Under this scheme, the insurer asks for a satisfactory declaration of good health from the life insured (called DGH) a) If a new proposal on the same life for a similar type of policy can be considered without any medical examination b) If arrears received within 12 to 24 months prior to date of maturity c) If policy is in force for at last 10 years and the arrears are paid within 12 to 18 months from the date of lapse Different insurance companies may modify the rules of revival looking into the type of plan, the period the policy has remained in force, sum assured involved, the age of the life assured etc. Special Revival Scheme This scheme is designed to meet the needs of those policyholders who are not in a position to pay the arrears. The revival under this scheme may be allowed if following conditions are satisfied: a) The policy must not have acquired the surrender value b) Lapsation period should not be less than 6 months or more than 3 years c) Revival under this scheme allowed once during the life of the policy A new date of commencement will be fixed by dating back by the period for which premiums were received under the policy. Plan and term will remain same but the date of maturity shall not exceed the maximum allowable. New premium will be charged as per age on the new date of commencement. The assured will have to pay the accumulated difference between the old and revised premium. Revival by Installment This is similar to ordinary revival. The scheme can be availed of: If the assured is not entitled to revive under special revival scheme The arrears of premiums are more than one year A sum equal to six months premium should be paid immediately The balance should be paid in current policy year and next two policy years 286

3.5.4 Loans Against Life Insurance Policies Loan facility is provided in most of the policies.  Loans can be given up to 80% or 90% of surrender value.  Policy loan is interest bearing  Loan may be repaid in full or in part during the currency of the policy or else it will remain as a debt on policy recoverable with interest from claim amount.  Payment of interest is not compulsory. If premiums are paid regularly, with the payment of every subsequent premium, surrender value will increase and would always be more than the outstanding loan with interest any point of time. Loan facility is not available on all policies: Rules regarding availability of loan under policies vary from insurer to insurer. However, a few examples of non-availability of loan are - 1. Policies like term assurance and annuity policies 2. Some Insurance don't extend the loan facility under money back policies; 3. Children's Deferred Assured policies during the deferment period. Policy is got assigned absolutely in favour of the Insurer at the time of payment of loan.  Assignment in favour of the insurer for the purpose of loan does not cancel existing nomination.  Interest on loan is payable as per terms of sanction of loan by the Insurer. 287

3.5.5 Exclusions and Restrictions Include those conditions, which go on to reduce the scope of the coverage under the policy. The conditions that talk about suicide, war, hazardous occupations, age admission, forfeiture in certain conditions, and other exclusions from the basic cover that the policy provides fall under this category of restrictive conditions. Almost all life insurance policies have a restriction that the death of the life assured due to suicide, attempted suicide (whether sane or insane at that time), intentional self injury and such other causes will not be covered for a specified period of say 1 year from the date of commencement of risk under the policy. Similarly, insurers also exclude the risk of death due to war or war-related developments, whether war be declared or not whenever there is a possibility of a war looming large and when a war is being waged. Normally the age of the life insured is verified and admitted in the policy with a recognised proof of date of birth at the proposal stage. But whenever, age has been taken on the basis of the declaration of the proposer in the proposal or application form, the policy is issued with a condition that in case the age is found to be different on verification anytime later, the policy would be subjected to changes that are required including cancellation of the policy and rarely, forfeiture of premiums paid. 288