Money Matters

Money Matters
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First Published: Mon, Apr 13 2009. 09 35 PM IST
Updated: Mon, Apr 13 2009. 09 35 PM IST
What is the eligibility criteria for a loan against an endowment policy?
SUBODH MAHAJAN
A loan against a life insurance policy is basically an advance against the cash value of the policy. The surrender value at the time of the loan application is basically the cash value of the policy.
The amount of loan granted is always less than this cash value. In an endowment policy, for instance, the loan amount may be up to 90% of the surrender value. The insurance company assigns and holds the policy to secure repayment of the loan. The loan amount needs to be repaid before the maturity of the policy.
In case the total amount of advance against the policy becomes more than its surrender value at any time, the insurance company has the right to terminate the policy after giving one month’s notice to the policyholder. This is commonly called foreclosure. If the policyholder dies and a claim arises, the insurer is entitled to deduct the balance amount of the loan with interest from the policy money due.
I am 25 and have an annual salary of Rs3 lakh. What is the maximum amount of sum assured in a life insurance policy?
—JYOTI BANERJEE
There is no upper limit on the amount of insurance an individual can take for his life. However, insurers worldwide put ceilings for the amount of insurance a person can take to avoid over-insurance. Various methods are followed to determine this limit. The most common is the annual income method: a life cover of up to 20 times the annual income if the person seeking insurance is between 20-35 years, up to 15 times the annual income for 36- to 50-year-olds, and up to 10 times the annual income for older people. The most important aspect insurers consider is the ability of the insured to pay the premium.
My father has nominated my elder brother as a nominee of his life insurance policy. Will my brother become the sole owner of the policy proceeds if my father dies?
—PARITOSH SHUKLA
No. The life insurance proceeds in case of the death of a policyholder pertain to his legal heirs or beneficiaries. As per law, a nominee is just entitled to give a valid discharge to the life insurance contract and receive the proceeds on behalf of the legal heirs of the insured. A nominee may or may not be a beneficiary and is not entitled to hold the proceeds as his estate.
Your brother will be able to give a valid discharge to the policy in the event of your father’s death and the policy proceeds shall be divided among all the legal heirs of your father as per his will.
I want to save money for my daughter’s education. How do children’s endowment plans fare as compared with other investment options?
—JITENDRA LAKHOTIA
A child insurance plan is especially designed to help a parent generate the money needed for his child’s higher education and marriage. Usually, annual premiums are paid from the date the policy is bought till the child turns 18. The sum assured is paid with bonuses for four years from the child’s 18th year to the 21st year. It is best to take this plan when the child is very young so that you can customize it to achieve the desired corpus of money when you expect to need it. The premium in a child plan is directly dependent on the final sum assured and the policy term.
Compared to other financial instruments, child insurance plans have the unique feature of making funds available for the benefit of the child in case the parent dies prematurely. After the parent’s death, the child becomes the policyholder, further premiums are waived and the policy continues till its maturity.
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First Published: Mon, Apr 13 2009. 09 35 PM IST