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How do I understand a life insurance Policy?

It is necessary to know the following terms in order to understand a life insurance policy:

Premium - the amount of money you have to pay to continue your insurance coverage.
The premium amount depends upon
Your age
Policy selected
Mode of premium payment
Term of premium payment
Term of the policy

You could choose to pay premium monthly (as a deduction from your salary), quarterly, half yearly or annually. However, there are Single premium policies where you pay premium once only (hence you do not have the facility to make the effort of paying premium regularly).

Term - the number of years you choose to insure yourself.
The longer the term the lower the premium. Policy terms vary from a single year to a maximum of 55 years. Not all policies offer you a range of terms.

Premium paying term - the number of years you pay premium on your policy.
The longer the premium paying term, the lower the premium. Usually the premium paying term is the same as the policy term. However, some policies offer you the option of selecting a premium paying term that is lower than the policy term.

Sum Assured / Face amount - the amount of insurance cover you have or the minimum amount your family receives in the event of your demise.
Your family could get more than this amount based on the type of policy or riders that you select.

Bonus / Participating profit - is declared by the insurance company each year as a proportion of the sum assured. This amount could vary; it could be different for different policies and terms.
Although declared each year, the bonus is a lump sum payment made to the insured person upon maturity or to his family upon death, in addition to the sum assured.

Bonus is based on an insurance companys assumptions about the future performance. Like any other assumption, actual results will be more or less favourable. The longer the time being projected, the greater the likelihood of variance from the predicted values. Not all companies guarantee the amount of bonus on each policy.

Guaranteed Addition - is a declaration made by the insurance company; it states that irrespective of the financial results of the company, the company will pay the guaranteed amount of money, to the insured or his nominee.
Like the bonus amount, this is a lump sum payment made to the insured upon maturity or to his family upon death, in addition to the sum assured.

Survival Benefit - is the amount of money received at pre-fixed, regular intervals by the insured person, upon survival of the term of the policy.
Often, money received upon maturity or at the end of the term of the policy is also referred to as Survival benefit.

Maturity Benefit - is the amount of money received by the insured, upon survival of the term of the policy.
In case of policies that offer a bonus, the sum assured plus the bonus for the term of the policy is paid to the insured upon maturity. In addition, some policies offer a loyalty addition, which is paid as a proportion of the sum assured and is based on the term of the policy.
In case of policies that offer no bonus, upon maturity, the sum assured or a refund of the premium or no money is receivable by the insured (depending on the type of policy selected).

Cover or Death Benefit - is the amount of money the nominee receives from the insurance company upon the insureds death. In addition to the sum assured, this would include the bonus, if any.
If additional riders such as Accident Death Benefit or Additional Sum Assured have been selected, the amount of money receivable by the nominee could be higher.

Returns or Pre-tax yields - Interest earned on the premium, on a compounded basis, is the pre-tax yield.

Post-tax yields - If the premium paid for a life insurance policy is used as a tax deduction under section 80C, then the effective premium paid by the insured is lower. Interest earned on the effective premium, on a compounded basis, is known as the post-tax yield.

Source: SBI Life Insurance

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