Life Insurance: Products, Terms and the Public Sector
Traditional Plans: Term, Whole Life, Endowment, Money-Back
Term assurance pays only if death occurs within the chosen term. There is no maturity benefit, which is why it is cheap; a variant called return of premium refunds the premiums on survival, at a visibly higher premium. Whole life has no fixed end: cover continues to a very advanced age and the sum assured is paid whenever death occurs. Endowment pays the sum assured (plus bonus) on death in the term or on survival to maturity, whichever comes first, so a payment is certain.
Money-back plans pay a fixed percentage of the sum assured as survival benefits at set intervals, and the balance, with bonus on the full sum assured, at maturity. The point examiners test: if the holder dies during the term, the full sum assured is paid, and the survival benefits already received are not deducted.
Plans are also with-profits (participating), sharing in the insurer’s surplus through bonuses, or without-profits, with fixed benefits only. Term plans are normally without profits; most endowment and money-back plans in the traditional range are with profits.
ULIPs, Annuities, Group and Micro-insurance
A Unit Linked Insurance Plan (ULIP) splits each premium: charges first, then the rest buys units of a fund chosen by the holder at the net asset value (NAV). The holder bears the investment risk, can switch between funds, and cannot withdraw before the five-year lock-in. Charges include premium allocation, fund management, mortality and policy administration. Units bought = amount invested ÷ NAV. Example: premium ₹1,00,000, allocation charge 5%, NAV ₹19. Invested amount ₹95,000; units = 95,000 ÷ 19 = 5,000.
An annuity turns a sum of money into an income. An immediate annuity starts paying soon after a lump sum is paid; a deferred annuity first accumulates money during an accumulation phase and starts paying at the vesting date. Common options are a life annuity (for the holder’s life), an annuity with return of purchase price to the nominee on death, and a joint-life annuity that continues to the surviving spouse. Pension plans are deferred annuities sold for retirement. The risk an annuity covers is longevity: outliving one’s savings.
Group insurance covers many members under one master policy held by an employer, a society or a lender, usually as one-year renewable term cover with no individual policy for each member. Micro-insurance means low-premium, small-sum cover designed for low-income households and sold through channels close to them; IRDAI has issued separate micro-insurance regulations that define the limits.
The Life of a Policy: Terms You Must Know
| Term | Meaning |
|---|---|
| Grace period | Extra time after the due date to pay without losing cover. LIC’s policy conditions give not less than 30 days for yearly, half-yearly and quarterly modes and 15 days for monthly mode |
| Lapse and revival | Unpaid after grace, the policy lapses. Revival restores it on paying arrears with interest, usually with proof of good health; the window is set by the plan |
| Paid-up | After enough premiums, the policy continues with a reduced sum assured and no more premiums |
| Surrender value | Cash paid when the holder ends a savings policy early. A pure term plan has none |
| Free-look period | Days after receiving the policy document to cancel if the terms are unsuitable; IRDAI’s 2024 master circular on policyholder protection raised it from 15 to 30 days |
| Policy loan | A loan against the policy’s surrender value, repaid with interest |
In a free-look cancellation the insurer refunds the premium after deducting the proportionate risk premium for the period on cover, the medical examination cost and the stamp duty. A rider is an optional extra benefit bought for an additional premium on a base policy: accidental death benefit, critical illness, waiver of premium and term riders are the usual ones.
Nomination and assignment are different. Under the Insurance Act, 1938, nomination (section 39) is the holder naming who receives the proceeds on death; the policy remains the holder’s own. As amended by the Insurance Laws (Amendment) Act, 2015, a nominee who is a parent, spouse or child is beneficially entitled to the proceeds. Assignment (section 38) transfers rights in the policy itself, by endorsement or a separate document with notice to the insurer, as when a policy is given to a bank as security; an assignment ordinarily cancels a nomination. Section 45, as amended in 2015, bars an insurer from calling a life policy in question after three years from its issue.
Bonus and the Arithmetic of Maturity
A with-profits policy shares the insurer’s surplus through bonuses. Simple reversionary bonus is declared each year as a rupee rate per ₹1,000 of sum assured, added to the policy and paid only at maturity or death. Terminal (final) bonus is an extra payment at exit, not guaranteed and declared only at claim. Bonus rates are the insurer’s own declaration, so an exam stem always gives the rate.
- Maturity value = sum assured + (sum assured ÷ 1,000 × rate × years) + terminal bonus. Example: sum assured ₹2,00,000, rate ₹48, 25 years, terminal bonus ₹30,000. Yearly bonus = 200 × 48 = ₹9,600; over 25 years ₹2,40,000; maturity = 2,00,000 + 2,40,000 + 30,000 = ₹4,70,000.
- Paid-up value (simple form) = sum assured × premiums paid ÷ premiums payable. Example: 15-year policy, sum assured ₹3,00,000, six yearly premiums paid, then stopped: 3,00,000 × 6 ÷ 15 = ₹1,20,000. Real policies also add vested bonus in proportion; the exam uses this simple form.
- Money-back. Sum assured ₹5,00,000, 15 years, 15% paid at the end of years 3, 6, 9 and 12. Survival benefits total 60% = ₹3,00,000, the balance 40% = ₹2,00,000 at maturity (with bonus on the full ₹5,00,000). Death in year 7 after two payments: ₹5,00,000 plus bonus, with the ₹1,50,000 already received not deducted.
LIC: History, Structure and the Public-Sector Landscape
| Year | Event |
|---|---|
| 1818 | Oriental Life Insurance Company, the first life insurer on Indian soil |
| 1870 | Bombay Mutual Life Assurance Society, the first Indian life insurance company |
| 1912 | Life Insurance Companies Act, the first statute to regulate life insurance |
| 1938 | Insurance Act consolidating earlier laws to protect the insuring public |
| 19 January 1956 | Life insurance nationalised: management taken over by an Ordinance |
| June 1956 | Parliament passes the Life Insurance Corporation Act |
| 1 September 1956 | LIC formed with ₹5 crore from the Government, 5 zonal and 33 divisional offices |
| 2022 | LIC listed on the stock exchanges on 17 May 2022 after a public offer in which the Government sold about 3.5% of its holding |
LIC took over 245 entities: 154 Indian insurers, 16 non-Indian insurers and 75 provident societies. It is a corporation created by its own Act, the LIC Act, 1956, whose section 37 provides a Central Government guarantee for the sums assured and bonuses under its policies. The corporate office is in Mumbai, with zonal and divisional offices below it. Until 2022 the Government owned all of it; the listing sold only a small part, and the Government’s current holding changes, so quote none without a date. LIC’s exclusive position ended when the IRDA Act, 1999 opened the sector to private insurers, which began business from 2000.
In the public sector, LIC is the one life insurer set up by statute. A second public channel is Postal Life Insurance (PLI), begun in 1884 as a welfare scheme for postal employees, and Rural Postal Life Insurance (RPLI), permitted from 1995 for rural customers after the Malhotra Committee’s recommendation; both run through the Department of Posts and not as an insurance company. All other life insurers are private companies.
Key takeaways
- Every life plan mixes protection and savings: term is pure protection and cheapest; endowment and money-back add savings; whole life covers to a very advanced age; ULIP links the fund to the market; an annuity turns money into income.
- In a money-back plan, death pays the full sum assured and survival benefits already received are not deducted. In a ULIP, units = invested amount ÷ NAV, the investment risk is the holder’s, and the lock-in is five years.
- Unpaid after the grace period, a policy lapses; revival needs arrears with interest and usually health proof. Paid-up means reduced cover without more premiums; surrender value is cash for ending a savings policy early.
- Nomination (section 39) names who receives the money on death; assignment (section 38) transfers the policy itself. After the 2015 amendment, section 45 bars questioning a life policy after three years from issue.
- Bonus is per ₹1,000 of sum assured: maturity = sum assured + sum assured ÷ 1,000 × rate × years + terminal bonus. Paid-up value (simple) = sum assured × premiums paid ÷ premiums payable.
- LIC: Ordinance on 19 January 1956, Act in June, Corporation on 1 September 1956 with ₹5 crore, taking over 245 entities (154 + 16 + 75); listed in May 2022. Private life insurers entered from 2000; Postal Life Insurance dates from 1884.
Practice questions (18)
Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.
A with-profits endowment policy has a sum assured of ₹5,00,000 and runs for 15 years. The insurer declares a simple reversionary bonus of ₹40 per ₹1,000 sum assured for every year, and no terminal bonus is paid. What is the maturity value?
Show answer
Answer: C — ₹8,00,000
Bonus per year = 5,00,000 ÷ 1,000 × 40 = ₹20,000; over 15 years = ₹3,00,000. Maturity = 5,00,000 + 3,00,000 = ₹8,00,000. ₹5,20,000 counts the bonus of only one year, the tempting slip; ₹3,00,000 is the bonus alone without the sum assured.A 20-year endowment policy has a sum assured of ₹6,00,000 with yearly premiums. After 9 premiums are paid the holder stops paying, and the policy becomes paid-up. Using paid-up value = sum assured × premiums paid ÷ premiums payable (ignore bonus), what is the paid-up sum assured?
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Answer: D — ₹2,70,000
Paid-up value = 6,00,000 × 9 ÷ 20 = ₹2,70,000. ₹3,30,000 uses the 11 premiums still unpaid instead of the 9 paid, which is the commonest slip; ₹3,00,000 would be right only if half the premiums had been paid.A ULIP buyer pays a yearly premium of ₹1,20,000. The premium allocation charge is 4%, and the whole remaining amount buys units at a NAV of ₹24. How many units are allotted?
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Answer: D — 4,800
Invested amount = 1,20,000 − 4% = ₹1,15,200; units = 1,15,200 ÷ 24 = 4,800. 5,000 ignores the charge and buys with the full premium; 5,200 wrongly adds the charge to the premium.A 20-year money-back plan has a sum assured of ₹4,00,000 and pays 20% of the sum assured at the end of years 5, 10 and 15. The holder dies in year 12 after receiving two instalments. Taking the plan’s usual terms, that death pays the full sum assured with survival benefits not deducted, and ignoring bonus, what is the death benefit?
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Answer: B — ₹4,00,000
The full sum assured of ₹4,00,000 is paid. The two instalments already received (₹1,60,000 in all) are not deducted. ₹2,40,000 is the tempting answer that subtracts them, which is how some other products work but not the money-back feature described.As per LIC’s policy conditions, which pair correctly gives the grace period for premium payment?
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Answer: A — Not less than 30 days for yearly, half-yearly and quarterly modes; 15 days for monthly mode
LIC’s conditions allow at least a month (not less than 30 days) for yearly, half-yearly and quarterly premiums and 15 days for monthly premiums. The reversed pair is the tempting wrong answer: a shorter period goes with the more frequent payment, not the less frequent one.Arrange these events in life insurance in India from earliest to latest:
P) LIC formed as a Corporation;
Q) the Insurance Act, 1938;
R) the Life Insurance Companies Act, 1912;
S) the Ordinance nationalising life insurance.Show answer
Answer: A — R, Q, S, P
The order is the 1912 Act (R), the 1938 Act (Q), the Ordinance of 19 January 1956 (S) and the formation of LIC on 1 September 1956 (P). The commonest slip swaps S and P: the Ordinance came first and the Corporation months later.At its formation in 1956, LIC took over 245 entities: 154 Indian insurers, 16 non-Indian insurers and how many provident societies?
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Answer: D — 75
154 + 16 + 75 = 245, so 75 provident societies. The other values do not add up to the total of 245 that LIC states.Which company is described as the first Indian life insurance company, as distinct from the first life insurer on Indian soil, founded in 1818?
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Answer: B — Bombay Mutual Life Assurance Society
Bombay Mutual Life Assurance Society, begun in 1870, is the first Indian life insurance company. Oriental Life (1818) is the tempting answer, but it was the first on Indian soil, not the first Indian one.Ravi pledges his life policy to a bank as security for a business loan, signing an endorsement in the bank’s favour and informing the insurer. Which concept does this show?
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Answer: C — Assignment, because rights in the policy itself pass to the bank
Transferring rights in the policy by endorsement with notice to the insurer is assignment (section 38 of the Insurance Act, 1938). Nomination only names who receives the proceeds on death and leaves the policy with the holder, which is why it is the tempting wrong answer.Consider these statements on nomination and assignment under the Insurance Act, 1938, as amended by the Insurance Laws (Amendment) Act, 2015.
P) Nomination names the person who receives the proceeds if the holder dies.
Q) A nominee who is a parent, spouse or child of the holder is beneficially entitled to the proceeds.
R) An assignment under section 38 ordinarily cancels an earlier nomination.
S) Nomination transfers ownership of the policy to the nominee during the holder’s lifetime.
Which are correct?Show answer
Answer: D — P, Q and R only
P, Q and R are correct. S is false: nomination changes nothing about ownership while the holder lives, which is what assignment does. Option P and R only is tempting because it omits the 2015 beneficial-nominee rule in Q.As amended in 2015, section 45 of the Insurance Act, 1938 bars an insurer from calling a life policy in question on the ground of misstatement or suppression of a material fact after how long from the date of issue?
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Answer: C — Three years
After the 2015 amendment the period is three years from the date of issue. Two years is the tempting answer because it was the earlier period before the amendment.Which of these is NOT a feature of a unit linked insurance plan (ULIP)?
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Answer: C — A maturity value fixed in rupees at the time of issue, whatever the markets do
A ULIP pays the fund value, which moves with the market, so a fixed rupee maturity value is not a ULIP feature; the holder bears the investment risk. Fund switching, units at NAV and the five-year lock-in all belong to it.Match each plan with its feature.
P) Term;
Q) Endowment;
R) Annuity;
S) ULIP. Features:
i) pays the sum assured on death or on survival to maturity;
ii) pays only if death occurs in the term;
iii) pays regular income;
iv) buys units at NAV.Show answer
Answer: B — P-ii, Q-i, R-iii, S-iv
Term pays only on death in the term (ii), endowment pays on death or maturity (i), annuity pays regular income (iii) and a ULIP buys units at NAV (iv). The pairing of term with i is wrong because term has no maturity payment.Meena pays a small extra premium on her base policy so that an additional sum is paid if she dies in an accident. What is this extra benefit called?
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Answer: A — A rider
An optional extra benefit bought for an additional premium on a base policy is a rider, here an accidental death benefit rider. A terminal bonus is declared at claim for with-profits policies and carries no extra premium.At 60, Sunita pays a lump sum of ₹10 lakh to an insurer and starts receiving a monthly payment for life from the following month. Which product is this?
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Answer: D — An immediate life annuity
A lump sum that starts a lifetime income almost at once is an immediate life annuity. A deferred annuity is the tempting answer but it first accumulates money and pays only from the vesting date, not the next month.A buyer cancels a newly issued life policy within the free-look period. Under IRDAI’s policyholder-protection rules, which amount may the insurer deduct from the premium it refunds?
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Answer: A — The proportionate risk premium for the period on cover, plus medical examination cost and stamp duty
The permitted deductions are the proportionate risk premium for the days covered, medical examination expenses and stamp duty. A flat percentage penalty or the whole premium would defeat the purpose of a free look, which is to let the buyer withdraw from unsuitable terms at little cost.On what date and with what capital from the Central Government was the Life Insurance Corporation of India formed?
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Answer: C — 1 September 1956, with ₹5 crore
LIC was formed on 1 September 1956 with ₹5 crore from the Government. 19 January 1956 is the date of the nationalising Ordinance, which is the tempting wrong date, and the Act was passed in June.Consider these statements on public-sector life insurance in India.
P) Postal Life Insurance began in 1884 as a welfare scheme for postal employees.
Q) Rural Postal Life Insurance was permitted from 1995 for rural customers.
R) Postal Life Insurance was merged into LIC when LIC was formed in 1956.
S) In its 2022 public offer the Government sold its entire holding in LIC.
Which are correct?Show answer
Answer: C — P and Q only
P and Q are correct. R is false because Postal Life Insurance continued as a Department of Posts scheme after 1956, and S is false because the Government sold only a small part, about 3.5%, in the 2022 offer, a figure dated to that offer.