Life Insurance Products: formula sheet

Key formulas

Insurable interest in life insurance

Insurable interest must exist at the time the policy is taken

In life insurance it is needed at inception. It need not exist at the time of claim. In general insurance it is needed at the time of loss.

Indemnity

Claim payable = lower of actual loss and sum insured

Applies to general insurance. Not applicable to life insurance, which pays the agreed sum assured.

Utmost good faith

Duty to disclose all material facts, by both parties

Non-disclosure or misstatement of a material fact can make the contract voidable at the option of the insurer.

Insurable interest over one's own life

A person is presumed to have unlimited insurable interest in their own life

Spouse and dependent children are commonly accepted as having insurable interest through natural love and affection or financial dependence.

Law of large numbers

Larger group → actual claims closer to expected claims

Basis of premium pricing and risk pooling.

Human life value (income replacement) method

Cover needed ≈ Present value of the future income the family depends on, less existing assets

Use a discount rate that reflects inflation-adjusted returns. Then subtract existing life cover and investments earmarked for the family.

Needs-based cover

Cover needed = Outstanding liabilities + Future goal costs + Family living expenses (capitalised) − Existing assets and cover

Liabilities include loans. Goals include education and marriage. Existing cover includes employer group cover.

Simple income multiple rule of thumb

Cover ≈ Annual income × a multiple chosen by age and need

A rough guide only, not a regulatory rule. Exams may give the multiple in the question.

Return of premium benefit

Amount returned on survival = Premiums paid (as per policy terms)

Usually no interest. Check treatment of taxes and rider premiums in the question.

Survival payout under basic term

Maturity benefit = ₹0

Pure term plans pay only on death within the term.

Endowment benefit on death

Death benefit = Sum assured + vested bonuses (participating)

Non-participating plans pay the guaranteed sum assured only. Always check whether bonuses are mentioned.

Endowment benefit on maturity

Maturity benefit = Sum assured + vested bonuses + terminal bonus (if any)

Applies to participating plans. Non-participating plans pay the guaranteed amount.

Reversionary bonus

Bonus = Bonus rate per ₹1,000 sum assured × (Sum assured ÷ ₹1,000) × years

Rates are quoted per ₹1,000 of sum assured. Only works if the rate is constant across years.

Money-back maturity payment

Final payment = Sum assured − survival benefits paid + bonuses (when the plan is structured so that survival benefits are paid out of the sum assured)

This is an assumed structure, not a general rule. Under it, as per policy terms, the death benefit is the full sum assured plus bonuses. The maturity payment is the remaining sum assured (after survival benefits) plus bonuses, and bonuses accrue on the full sum assured. In some products, survival benefits are paid in addition to the full sum assured at maturity, so the maturity payment is not reduced. Always follow the policy terms stated in the question.

Plan comparison

Endowment: fixed term, pays on death or survival. Whole life: lifetime cover, pays on death.

Key distinction students are tested on.

Policy fund value

Fund value = Number of units × NAV

Units are credited after the premium allocation charge is deducted.

Amount invested from a premium

Amount invested = Premium − Premium allocation charge

Other charges such as mortality and administration are usually met by cancelling units.

Units purchased

Units = Amount invested ÷ NAV

NAV is the unit price on the allocation date.

Lock-in rule

Lock-in = 5 years

Applies to ULIPs under IRDAI rules. Partial withdrawal is generally allowed only after it.

Risk bearer

ULIP: policyholder bears investment risk

The insurer does not guarantee the fund value.

Immediate annuity

Lump sum paid now → income starts after one payment period

No accumulation stage. Suits someone already retired.

Deferred annuity

Accumulation stage → vesting → annuity payout stage

Vesting is the date the pension starts, not the date of purchase.

Annuity trade-off

More features (survivor, return of capital, increases) → lower starting payout

Plain life annuity gives the highest starting payout.

Joint life, last survivor

Paid until the death of the second annuitant

Suits a couple where the spouse depends on the income.

Return of purchase price

On death, nominee receives the purchase price

Lower payout than a plain life annuity. Some versions deduct payments already made, so read the terms.

Rider rule

Rider = optional add-on + extra premium + attached to a base policy

A rider cannot exist alone and ends with the base policy.

Free look refund

Refund = Premium paid − (stamp duty + medical expenses + proportionate risk premium for period on cover)

Charges are deducted only as allowed by regulation. For unit-linked plans, fund value changes are also adjusted.

Free look period

Generally 30 days from receipt of the policy document

Check the current IRDAI regulations for any shorter period for specific policy types.

Grace period

Commonly 30 days (15 days for monthly mode) after the due date

Cover continues during grace, and a death claim is payable less the unpaid premium.

Nomination vs assignment

Nomination = right to receive money on death; Assignment = transfer of policy rights

Assignment is absolute or conditional. Nomination is not a transfer of ownership.

Surrender value

Payable only after the policy acquires surrender value

Typically after a minimum number of premium years. The amount is usually lower than total premiums paid in early years.

80C overall ceiling

Maximum 80C deduction = ₹1,50,000 (all eligible items combined)

Old regime only. Not available under Section 115BAC.

Eligible premium, policy issued on or after 1 April 2012

Eligible premium ≤ 10% × actual capital sum assured

15% for severe disability (Section 80U) or disease specified under Section 80DDB (policies from 1 April 2013). Policies issued on or before 31 March 2012: 20%.

10(10D) premium test

Exempt only if annual premium ≤ 10% of sum assured (20% for policies issued 1 April 2003 to 31 March 2012)

The test is for any year of the policy. Failing it makes maturity taxable, but not death proceeds.

High-premium non-ULIP limit

Policies issued on or after 1 April 2023: aggregate annual premium across all such non-ULIP policies > ₹5,00,000 → maturity taxable

Exemption is lost only when the premium exceeds ₹5,00,000. Taxable amount = maturity proceeds − total premiums paid. Death proceeds exempt.

High-premium ULIP limit

ULIP issued on or after 1 February 2021: aggregate annual premium > ₹2,50,000 → maturity not exempt

Gains taxed as capital gains. Death proceeds exempt.

Death proceeds

Death benefit under a life policy: exempt under 10(10D) regardless of the premium percentage

Exception: keyman insurance.

Quick revision

• Term insurance pays only on death during the term and has no maturity value if the policyholder survives.
• Term is usually the cheapest way to buy a high amount of cover.
• Insurable interest must exist for a valid life insurance contract.
• Life insurance is a contract of utmost good faith, so material facts must be disclosed.
• In a ULIP, the policyholder bears the investment risk, unlike in a traditional plan.
• ULIPs have a lock-in period, so check the exact lock-in in the workbook.
• Endowment plans pay on survival to maturity or on death during the term.
• Annuities convert a lump sum into regular income, often for retirement.
• Riders add benefits for an extra premium and depend on the base policy.
• The free-look period lets you cancel a new policy; check the exact days in the workbook.
• Grace period protects a policy from lapsing when a premium is paid late.
• Tax treatment depends on the product and conditions, so verify each rule before answering.

Common mistakes

• Saying indemnity applies to life insurance. Fix: Remember that life has no measurable money value. Life policies pay the agreed sum assured. Indemnity applies to general insurance.
• Believing insurable interest must exist at the time of claim in life insurance. Fix: For life insurance it is required at inception. For general insurance it is required at the time of loss.
• Saying a basic term plan pays a maturity benefit. Fix: Remember pure term pays only on death within the term. Survival means no payout.
• Calling ROP the best option because money comes back. Fix: ROP premium is much higher and the refund has no growth. It is costly protection plus a low-return deposit.
• Treating bonuses as guaranteed from the day the policy starts. Fix: Only declared (vested) reversionary bonuses are assured. Future bonuses depend on the insurer's surplus.
• Saying non-participating policies pay bonuses. Fix: Non-participating means no share in surplus. Benefits are fixed at the start.
• Saying the insurer guarantees the ULIP fund value. Fix: Remember that the policyholder bears the investment risk in a ULIP, because the value follows the NAV.
• Applying all charges to the premium. Fix: Only the premium allocation charge comes off the premium. Mortality and administration are usually met by cancelling units, and fund management is inside the NAV.
• Treating vesting as the policy start date. Fix: Vesting is when accumulation ends and the annuity or pension begins.
• Thinking a plain life annuity returns capital on death. Fix: A plain life annuity stops at death with no refund. Only the return-of-price option pays the nominee.

Exam tips

• Always state whether the question is about life or general insurance before choosing a principle.
• Memorise the timing of insurable interest: inception for life, time of loss for general.
• Watch for options that say indemnity applies to life insurance. These are almost always wrong.
• Learn the life versus general insurance differences: term, payment basis, savings element and indemnity.
• On NISM X-B negative marking is 25% of the marks of the question, so skip only when you cannot eliminate at least two options.
• Look for the words pure protection, no maturity benefit and death within the term. They signal basic term.
• For ROP, expect options that call it cheap. The correct statement is that it costs more than plain term.
• Match the variant to the need: loan to decreasing, inflation to increasing.