How To Read a Life Insurance Policy?

If you are an earning member of the family and plan to purchase an insurance policy, your responsibility does not end with merely purchasing and receiving the policy document. To understand the myriad terms that are used in a life insurance policy, it is important to know some fundamentals first. 

How To Read a Life Insurance Policy?

When you receive your life insurance contract, your financial professional must take the time to sit down with you and review the main sections of the policy. However, it is also a good idea to read through the entire policy yourself, so that you have a comprehensive understanding of how it operates.

If there are any questions you have, do not hesitate to contact your life insurance professional. Financial professionals should always be willing to clarify any questions or concerns you may have.

Life Insurance Contract Terms and Inclusions

To make it clear for you, here are the important things to read in a life insurance policy.

1. General Information

The first part of your policy document is generally the policy schedule. This section contains information discussed during the application process. It typically includes: 

• The benefit amount is called “Sum Assured,” which is the amount payable in the event of the death of the insured.
• The amount you are paying is the premium.
• Frequency of payment whether it is yearly, half-yearly, quarterly or even monthly.
• Understanding Sections In A Policy Document
• Benefit Illustration
• The Insurance Regulatory and Development Authority of India (IRDAI) has mandated benefit illustration to be a part of the policy document for certain products to avoid mis-selling. The benefit illustration is aimed at helping you understand how the return on your policy money will fetch at different rates of returns (4% or 8%) or how the amount of the investible portion of the premium is computed. 
  

2. Death Benefit

The death benefit section spells out the details of the death benefit. The “exclusions” section should be read carefully along with other sections as it states the circumstances or factors that can invalidate or limit a death benefit, with suicide being the major one. Most policies will not pay a death benefit if the insured commits suicide within the stipulated period. In case of riders, some of the benefits will be subject to stated exclusions. 

3. Free Look Period

A prudent policyholder should go through the same to ensure seamless payment at the time of claim. You will also be able to find out if this policy is aligned with the benefits explained by the insurance representative. If not, you can return the policy document within the free look period. The free look period is usually 15 or 30 days from the date of receipt of the “Policy Document” by the policyholder depending upon the mode of policy issuance. 

4. Unit Linked Product

In the case of a unit-linked product, the policy document shall contain the details of the investment fund. The insured should be aware of the fund in which the premium is allocated and in which proportion. Generally, there is a provision to switch the fund into any other fund or a combination of funds.

5. Understanding the Legal Language

Life insurance policies are written in legal language which can be confusing, so all policies include a definitions section that defines words used in the policy. Refer to the “definitions” section when reading your policy and ask about anything you don’t understand. Never shy away from clearing all your doubts and queries about the policy.

6. Nomination

The “life insured” can name the person or persons to whom the policy benefit would be payable in the event of his death. The person could be your kids, spouses or parents, for example.

7. Claims Section  

The claims section provides instructions on how a beneficiary can make a claim and the choices available for receiving the policy’s benefit.

8. Claiming the Policy

Under a lapsed policy, the policyholder loses all his rights and benefits. However, if the policyholder wishes to reinstate the policy with full benefits (full force), they can do so by payment of due premiums with a penalty as decided by the company. This procedure is called “revival.” Revival is possible within three to five years from the date of lapse depending upon the nature of the plan.

9. Lock-in Period

Insurance is a long-term contract, and the policyholder has entered with an agreed duration.  Hence, there is a lock-in period during which the policyholder will not be able to exit or withdraw funds. In due course, the policyholder may require funds due to some exigency and is not in a position to wait until maturity. In such exceptional cases, there is a provision to surrender or encash the policy. The terms and conditions of surrender should be read properly as it may lead to loss of policy value and the goal may remain unfulfilled.

10. Tax Benefits 

Due to the inherent benefit of a life insurance plan in providing protection, the Income Tax Act provides tax benefits to the policyholder both on payment of premium and on the maturity amount depending on the type of plan. However, tax laws are subject to changes as per prevailing laws. A policyholder should ideally consult a tax advisor on taxation issues.

Conclusion

An individual’s financial goals do not remain constant. They may vary due to marriage, the birth of a child or a job change. Hence, it is essential to review your life insurance needs from time to time and adjust your life coverage accordingly. Please remember to factor in inflation whenever you are assessing financial goals. 

Also read: 

Life Insurance or Fixed Deposits? Which Is Better?

Why Life Insurance Is A Must Have For Home Makers?

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.