1. What is a life insurance policy ?

A life insurance policy is the document that signifies that there is a contract of life insurance between the insured and the insurer. This contract benefits the beneficiaries of the insured in the event of the death of the insured. The objective of this type of insurance is to protect your loved ones from the financial burdens that could arise from your untimely demise, if you are the principal earning member of the family.

2. Do I need life insurance ?

Yes, if you have people in your life who depend on you for financial support. Insuring your life is a crucial part of your financial planning if your family members are financially dependent on you, or if you owe significant debts. You may have to take into account loans, mortgages, children’s education, medical expenses, etc. Setting aside a small premium every month could save your family from financial hardships later.

3. What kind of life insurance should I purchase ?

Not all life insurance policies are the same, and it is important to read the fine print before you settle on one. It is wise to mull over a few policies before you decide the right life insurance policy for your needs. Life insurance policies could be of two types: term insurance or permanent insurance.

4. What is ‘term life insurance’ ?

Under a term insurance policy, the insurer will pay your dependents a predetermined amount in case you die during the term of the policy. Term insurance usually has lower premiums, but if you survive during the term of the policy, you will not receive any returns. Term insurance does not build up ‘cash value’, i.e., the cash amount that your insurer pays you on cancellation of the life insurance policy in certain cases.

Term life insurance is sometimes referred to as ‘temporary insurance’ because it covers you only for a specified time period. After that, you must renew your insurance policy.

5. What is ‘permanent life insurance’ ?

A permanent life insurance policy is a combination of an insurance policy and a savings plan. You can also use the cash value that you build up as collateral on loans. Though permanent life insurance comes with premiums higher than term life insurance, you get assured returns and long-term financial protection.

6. What is ‘cash value’ in the context of life insurance ?

‘Cash value’ is the amount that your life insurance company will pay you if you wish to cancel your contract. In such contracts, a percentage of the premium is set aside as a savings plan for the insured. You receive this amount if you survive, and your dependents receive it in the event of your death.

However, there are certain life insurance companies that pay only the death benefit to your beneficiaries. Even if you have accrued a high cash value, your dependents may receive only the death benefit. Check your policy and look for one that pays both the death benefit as well as the cash value in the event of your death.

7. How much cash value am I entitled to on my policy ?

The answer to this question should be in your life insurance policy. If you are not sure about your exact cash value amount, call your insurance agent.

8. Which life insurance policy should I choose ?

It depends on several factors, such as: the percentage of your contribution to the family income, the debts you owe, your family’s disposable income. You should get a permanent life insurance policy if you can afford it. If you have limited resources set aside for your insurance policy, term life insurance may be your best bet.

9. When does my life insurance policy get ‘paid up’ ?

Your life insurance policy is paid up when you do not have to pay any more premiums. This happens when your policy includes a provision for guaranteed interest rates or dividends that the insurance company pays on your premiums. Your premiums must earn a certain amount (which is usually a large sum) before your policy gets paid up.

10. Who can take out a life insurance policy for me ?

In the insurance world, you cannot insure something unless you have an ‘insurable interest’ in it. A stranger who has nothing to gain or lose from your death cannot take out an insurance policy on your life. Your family members certainly have insurable interest in you life. Your employers, and your business partners may also have insurable interest in certain cases.

11. Who can be my beneficiary ?

When you buy a life insurance policy for yourself anyone can be a beneficiary on your life insurance policy. You could even name someone who has no insurable interest in your life as your beneficiary.

12. Do all life insurance companies require me to undergo a physical exam ?

Since life insurance companies have to pay your beneficiaries in the event of your death, they usually like to check the state of your health before they issue your policy. However, there are some insurance companies that waive the physical exam and require you to answer questions about your health on your insurance application. These policies may be more expensive than the ones that require a physical exam. This is because the insurance company is taking a higher risk with the policyholder who has not been examined.

13. What is a ‘guaranteed issue’ policy ?

Some insurance companies offer you the option of paying a much higher premium in exchange for privacy regarding any medical issues that you may have. They ask you no questions about your medical history before issuing a ‘guaranteed issue’ policy in your name. If you die within two years of buying this policy, your beneficiaries might receive return equivalent to the premiums you have paid. However, if this does not happen then you end up paying higher premiums than the insurance amount your beneficiaries will receive after your death.

14. What is a contestability period ?

How does it affect my policy ?

The first two years of your insurance policy is the ‘contestability period’ of your policy. If you die during this period, your insurance company can investigate all the claims in your application. A life insurance policy is a contract of utmost good faith, and it is imperative for you to answer all the questions on your application as accurately as possible. If you have left any of your answers incomplete, or answered them inaccurately, your insurer’s obligation is diminished. In such a case, your insurance company can refuse to pay death benefit to your dependents.

15. What is a ‘participating policy’ ?

A participating policy is a life insurance policy in which the insurance company shares its profits with the policyholder. The insurance company typically pays the policyholder these dividends on an annual basis. You could also check if your insurer offers a final payment of dividend, which is typically paid when the policy matures. Some participating policies also include a predetermined dividend amount, which is guaranteed to be paid to the insured.

16. Permanent life insurance costs so much more than term life insurance. Is it wise to ‘buy term and invest the difference’ ?

The answer to this question depends on your financial situation. If you buy term with the aim of investing the difference, you may have to use that money to pay for premiums for either a term or permanent insurance policy later. But as you grow older, your premiums will increase. On the other hand, if your health degenerates you might not be eligible to purchase life insurance, and might have to shell out a much larger amount for a guaranteed issue policy.

17. If I do not die during the term of my policy, what amount will I be entitled to ? Will it be an aggregate of all the premiums I have paid over the years ?

No, you will not be entitled to an amount that is the aggregate of all your premiums. You will only be entitled to the cash value. This may be significantly less than the total premiums you paid, but you have paid the remaining amount for insurance.