Before you buy an insurance policy, you should understand the basics. The life insurance policy is a legal contract between you and the life insurance company. This piece of paper is a legally binding document and outlines your rights and obligations.
While price is an important consideration, the terms and conditions of the contract are of utmost importance. And it is important that you understand what you are signing.
If you have a good insurance agent, he will remind you to read the fine print and make sure that you understand the policy, its terms and conditions, limitations and exclusions before you accept the policy.
As a policyholder, it is important that any ambiguity in the contract should be clarified, preferably in writing, before you sign. Some life insurance contracts are relatively 'simple,' whereas others are highly complex legal-financial documents.
As a rule, you should always read your policy carefully, cover to cover, including the 'fine-print.' This will prevent any surprises in case you need to make a claim.
General terms and conditions of a policy contract
As the terms and conditions may not be exactly the same for every life insurance product, you should check the details of your policy with your agent.
Policy contract
Life insurance is a contract signed between you and a life-insurance company. You pay a certain amount (a premium) for a definite period. In return, the insurance company will pay an agreed amount to your nominee if you become permanently disabled or any other specified event occurs.
Rider
A rider gives you extra protection at lower cost and you can add it to a basic insurance plan such as a whole-life, endowment or investment-linked policy if you pay additional premiums.
Making the policy void
After your policy has been in force for a certain period of time (usually one-two years), the insurance company cannot treat the policy as if it had never been issued (i.e. it can't contest the policy).
However, if the insurance company can prove fraud, they have the right to terminate the policy at any time, even after the given time.
Suicide
If you commit suicide within a period specified in the policy, the insurance company won't be liable to pay the policy proceeds. For e.g., in case of HDFC Standard Life will not entertain a claim if an individual commits suicide within one year of taking the policy.
Incorrectly stated age
If you provide incorrect information about your age in the policy document when you bought it, the insurance company may adjust the policy proceeds accordingly.
Free-look period
You have 15 days to review your policy. If you decide that the policy is not suitable for your needs, the company will refund all your premiums less medical and other expenses they have had to bear. You will need to send them a written notice within 14 days from the date of you receiving the policy.
Grace periods in premiums
The company will give you extra time (usually 30 days), after the premium due date, to pay your premium to renew your policy. During this period, the policy continues to be in force and the insurance company will expect you to pay the premium.
Reinstating your policy
If your policy comes to an end, you may reinstate it within a certain period of time (usually two years), as long as you meet certain conditions.
Assignment
You can transfer your policy to another person. This is called assignment. You must write to the insurance company about the assignment, otherwise it would not be valid when it comes to paying an insurance claim.
However, the insurance company is not responsible for ensuring that the transfer is valid.
Policy loan
You may apply to your insurance company for a loan as long as the policy has a cash value. The insurance company will charge interest on the policy loan. This option may not be available for certain types of insurance.
'With profits' and 'without profits'
A 'with-profits' policy shares the profits in the company's 'life fund.' Your share of the profits is paid in the form of 'bonus' or 'dividend.'
Bonuses or dividends are not guaranteed as they depend on how the life fund's investments are performing, how many claims are made on the fund and any expenses. A 'without-profits' policy is not entitled to any profits the life fund may make.
Surrender value
The cash value (surrender value) is the amount you will be paid if you cash in (surrender) your policy. Whole-life and endowment policies usually build up cash values after a minimum period (usually at least three years).
Cash values for investment-linked plans depend on the current value of their units, while term-insurance plans do not have any cash value.
Paid-up value
If your policy has earned cash value, this condition allows you to change your policy to a paid-up policy. In this case, you can stop paying premiums and your policy will stay in force for a reduced sum insured for the rest of the policy term.
Exclusions
Then comes the section that a lot of potential policy holders often gloss over or merely glance at, simply because there are too many long words here in really small print (not a good idea).
Unlike the coverage section, exclusions detail what is not covered. This is very important as it highlights the policy's limitations. Read this section carefully. Find out exactly what you are not covered for.
You do not want to find out you are lacking coverage you thought you had when you have to make a claim. Lot of problems between insurance companies and policyholders arise because the latter don't read this particular section.
Definitions/general provisions
Finally, there is the broad section for definitions or general provisions. This is the section where the rights of the policyholder and the insurance company are defined. This area is another section of 'fine print' that can be equally as tricky as 'exclusions,' as it can trip you when you are making claims.
Spend some time on your policy document, as this will make your life easier in the long run.
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