Don’t skip your life insurance illustration

The life insurance policy kit is a thick bundle of documentation. It consists of your policy contract, an illustration, a copy of your completed proposal form and servicing forms. Within these documents I want to highlight the relevance of the illustration. This document full of numbers can be daunting to interpret. However, it has information that you must review to understand the insurance you have bought.

You should have seen the illustration before buying the insurance and a signed copy must be part of the policy kit. This illustration sets out your premium payments and likely benefits. The format and contents of this illustration are specified by the regulator. The main items to review in an illustration are your premium payment term, likely benefits, surrender costs and guaranteed benefits.

The number of years for which your premium must be paid is listed in the illustration. A frequent issue in life insurance is that buyers think that premium payment is for a limited period, but it turns out to be for a longer term. This can be seen immediately in the illustration.

The potential benefits that you get in life insurance can be for maturity or death. Death benefits by year are listed in the illustration but so are maturity benefits that you get on survival. These maturity benefits depend upon returns that insurers earn on investments they make. The law requires that insurers assume a range of returns, between 4 and 8% per annum and share your likely outcomes at these values. Do note that this does not mean you will earn 4 and 8%. In fact, your returns will be less because the insurer will deduct expenses before paying you. Your returns are an expected outcome and not guaranteed. If you are given an illustration that is illustrated at higher than 8% it's fake.

Surrender costs are important because they indicate what it will cost you to prematurely close an insurance. In traditional insurance policies a guaranteed surrender value is specified but insurers may give a special surrender value higher than the guaranteed amounts. In unit linked products no surrender charges may be levied five years after you bought the insurance.

Guaranteed benefits are specified in the illustration. The illustration will have three guaranteed benefits, if they are offered. A guaranteed amount on maturity which is the amount that you will be paid when the insurance completes its term. It does not depend upon interest rates or company performance. The guaranteed amount on death is different from, and generally higher, than the maturity amount. This will be paid to your nominee. The surrender value is the amount you will receive if you surrender the insurance. This will have a penalty for early closure. The longer you stay in the insurance the less the penalty.

The illustration is not a general document but specific to your age and product. Review your personal details carefully. Insurers consider an illustration the most important tool in setting reasonable policy holder expectations. These expectations are then built into product pricing.

Other than the illustration you should review the copy of your completed proposal form that is enclosed in the policy kit. Ideally, this document should have been completed by you, however, many give a signed blank form to the advisor. Do make sure that the information filled in is accurate. If you do find an error in the illustration or the proposal form write to the insurer immediately informing them. You should write to the customer service email that is listed on the policy or website. You are allowed a free-look period of 15 to 30 days, depending upon the insurance, to return the policy.

The other documents in the policy kit are less important. For example, the policy contract is standardised and the only exclusions allowed are suicide in the first year. After you have reviewed these documents you may carefully file them away. Make sure you pay your premiums on time to renew the insurance.

The writer is co-founder, www.securenow.in