Published in Mint on 1 December, 2015, Written by Abhishek Bondia
What is a guaranteed reversionary bonus in a term plan? Do all life insurance covers offer this?
A typical term plan is a death only benefit, with no survival benefits. So, the concept of bonus is not applicable in term insurance. In fact, bonuses of all kinds in life insurance are restricted to traditional endowment plans. Unit-linked insurance plans (Ulips), too, generally don’t have bonuses.
Bonuses in traditional insurance can be expressed in many ways. The most common is a reversionary bonus where the bonus increases the sum assured to be paid when the insurance matures. So, a 10% reversionary bonus generally implies that the sum assured on maturity will be increased by 10%.
Other forms of bonus are also possible but less common. For example, a cash bonus is paid immediately in the year it is announced. Generally, the amount of reversionary bonus depends on the performance of policyholders’ fund managed by the insurer. A guaranteed reversionary bonus is declared at the time of policy inception and the amount does not depend upon the insurers’ performance.
What is surrender benefit in a life insurance plan?
If you want to stop paying premiums and liquidate the insurance before the maturity date of a plan, then you can discontinue and liquidate the policy. A typical term plan has no surrender benefits. Ulips have a surrender benefit equal to value of the underlying funds. Surrender charges in a Ulip are nil after five years. You can surrender anytime after that.
Traditional endowment insurance has high surrender charges and low returns. The charges tend to be opaque. Every plan defines a unique surrender schedule. Based on the number of years of paid-up premium, the policy acquires a surrender value. In several traditional endowment plans, you may not even get your premiums back in the initial years. The most important step is to understand the surrender value before you buy the insurance. If you need to surrender a traditional insurance, then the first step is to have the insurer tell you the exact charge at that time. If you are in the very early stages of the insurance, then you may be better off paying the charge rather than locking yourself into a low-yielding product for the long term. However, if you are nearing the end of the policy term and the surrender charge is high, then it might be better to pay through maturity.
Can I buy an annually renewable term life insurance policy like a health insurance plan?
A life insurance plan is a long-term contract as compared to a general health insurance plan, which is a one-year contract. Most insurers offer term insurance with a minimum tenure of 10 years, with some offering a term of five years as well.
In a health insurance plan, premium increases with age. Life insurance premium remains fixed for the term of the policy. So, taking a longer term policy benefits you. Also, the contract does not oblige you to renew. If you want to discontinue it after a year or two, it is at your discretion.
I would recommend a longer term policy. As one grows old, the propensity to fall ill increases. At older ages, the premium increases substantially. Insurers are conservative in underwriting if you have contracted any chronic ailment over the years