NISM Series X-B · Chapter 2: Features of Life Insurance Products

L1 · Foundation

Foundation — The elements of a life insurance contract, minimum sum assured, bonuses, lapse, surrender and paid-up

Death cover versus survival benefit, the nine elements of an insurance contract, the IRDAI minimum sum assured multiples, guaranteed and reversionary bonus, what happens on lapse, the surrender value scales and the paid-up formula worked in full.

22 min read · Worth 6% of the paper · Written from pages 39–57 of the official NISM workbook · Updated 18 September 2026

2.1 The two benefits that define every life product

There are only two:

Benefit	When it is paid
DEATH COVER	The benefit is paid ONLY ON THE DEATH OF THE INSURED WITHIN A SPECIFIED PERIOD. IF DEATH DOES NOT OCCUR, THEN NO BENEFIT WILL BE PAID.
SURVIVAL BENEFIT	The benefit is paid WHEN THE INSURED SURVIVES A SPECIFIED PERIOD.

Every product in this chapter is one or the other, or both. Fix that and the classification questions become easy.

The elements of an insurance contract

Insured

Note the vocabulary: the INSURED is the life covered; the PROPOSER or POLICY HOLDER is the buyer. They may be different people, and where they are, insurable interest is required.

Term of the contract

Sum assured — and the IRDAI minimum multiples

The minimum sum assured rules are among the most examinable numbers in the chapter:

Policy term	Age of the individual	Minimum sum assured
MORE THAN 10 YEARS	Below 45 years	10 TIMES the annual premium
MORE THAN 10 YEARS	Above 45 years	7 TIMES the annual premium
LESS THAN 10 YEARS	All individuals	5 TIMES the annual premium

The IRDAI Regulations require ALL LIFE INSURANCE PRODUCTS WITH TERMS OF MORE THAN 10 YEARS to provide a minimum sum assured of 10 TIMES THE ANNUAL PREMIUM FOR INDIVIDUALS BELOW 45 YEARS OF AGE AND 7 TIMES THE ANNUAL PREMIUM IF AGE IS ABOVE 45 YEARS. IF THE TERM IS LESS THAN 10 YEARS THE MINIMUM SUM ASSURED SHALL BE 5 TIMES THE ANNUAL PREMIUM FOR ALL INDIVIDUALS.

A changing sum assured. The insurance contract may also specify situations, if any, when the sum assured will change. For example, IF A REDUCING TERM INSURANCE POLICY IS TAKEN TO COVER OUTSTANDING MORTGAGE PAYMENTS, THE SUM ASSURED WILL DECREASE AS THE OUTSTANDING LOAN DECREASES.

Payment of sum assured

Premium payable

And the lapse and revival rule:

A recent change to memorise: ALL LIFE INSURANCE AND REINSURANCE POLICIES ARE EXEMPTED FROM GOODS AND SERVICES TAX (GST) WITH EFFECT FROM SEPTEMBER 22, 2025. (The same date applies to individual health insurance, from Chapter 1.)

Bonus, guaranteed bonus and reversionary bonus

All three are RELEVANT ONLY TO INVESTMENT CUM INSURANCE POLICIES. Term insurance has no bonus.

Hold the sequence: GUARANTEED bonus comes FIRST, for the first few years; REVERSIONARY bonus comes AFTER the guaranteed period, is DISCRETIONARY, depends on the INSURER'S PERFORMANCE, and belongs to PARTICIPATING policies — which cost MORE than non-participating ones.

Policy lapse, surrender value and paid-up

But an investment cum insurance policy may have acquired value:

The surrender value scales — three separate figures:

Policy type	Guaranteed surrender value
Regular premium traditional policy	MINIMUM 30% OF ALL PREMIUMS PAID, GOING UP TO 90% IN THE LAST TWO YEARS
SINGLE PREMIUM policy	70% OF TOTAL PREMIUM PAID if surrendered WITHIN THE FIRST THREE YEARS, to 90% IN THE LAST TWO YEARS
ULIP	Surrendering before 5 years is POSSIBLE even though there is a LOCK-IN OF 5 YEARS. A DISCONTINUATION CHARGE is levied, WHICH IS A MAXIMUM OF RS 6,000. Post deducting this charge, THE BALANCE FUND IS TRANSFERRED TO A DISCONTINUATION POLICY FUND.

Additionally: the insurers may also pay an amount based on THE CURRENT VALUE OF THE ASSETS HELD AGAINST THE POLICY. In case of unit-linked insurance plans, THE POLICY HAS A LOCK-IN OF 5 YEARS AND THE SURRENDER VALUE IS PAID ONLY AT THE END OF THE LOCK-IN PERIOD.

The paid-up option

The workbook's worked example — learn the arithmetic, because it is set as a numerical:

Surinder had taken a 25-YEAR life insurance policy (investment cum insurance) with a SUM ASSURED OF RS 10,00,000, premiums being paid in a HALF-YEARLY mode. After paying the premium for 5 YEARS, Surinder is unable to continue.

The sum assured would be Rs 10,00,000 ONLY IF PREMIUMS ARE PAID FOR 25 YEARS; on a half-yearly basis, that would be 50 PREMIUM PAYMENTS.
Since only 10 PREMIUMS have been paid over a period of 5 years, the sum assured will be READJUSTED TO RS 2,00,000 — that is, Rs 10,00,000 × 10 ÷ 50.

The formula: PAID-UP SUM ASSURED = ORIGINAL SUM ASSURED × (PREMIUMS PAID ÷ TOTAL PREMIUMS DUE). Note that the count is of premium instalments, not years — a half-yearly mode doubles both numerator and denominator, but the ratio is what matters.

Nomination

Remember that last freedom — it is precisely what a policy under the Married Women's Property Act gives up, as Chapter 2.5 will show.

Think of it like this

Two doors out of every life policy

Every life insurance product is built from just two benefits. DEATH COVER pays only if the insured dies within a specified period — if death does not occur, no benefit is paid. SURVIVAL BENEFIT pays when the insured survives a specified period. Term insurance has only the first door. Investment cum insurance policies have both.

Ten, seven, five

The minimum sum assured is a three-number rule. Term over 10 years and age below 45 → 10 times the annual premium. Term over 10 years and age above 45 → 7 times. Term less than 10 years → 5 times, for everybody. The multiple falls as age rises and as the term shortens — because in both cases the insurer is taking less mortality risk for the money.

The bonus that is promised and the bonus that is hoped for

GUARANTEED BONUS is paid for the first few years, say five, as a percentage of the sum assured, and forms part of the benefits. REVERSIONARY BONUS comes after that period, is declared AT THE DISCRETION OF THE INSURER based on ITS PERFORMANCE, and belongs only to PARTICIPATING policies — whose premium is HIGHER than non-participating ones. Promise first, hope afterwards.

Surinder's ten premiums out of fifty

A 25-year policy paid half-yearly means 50 premium instalments. Surinder paid for five years — 10 instalments. So his Rs 10,00,000 sum assured becomes Rs 10,00,000 × 10 ÷ 50 = Rs 2,00,000. The policy does not die; it shrinks in exact proportion to what was paid. That is what paid-up means.

Thirty, seventy, ninety

Three surrender-value numbers, easily muddled. A regular premium traditional policy gives a minimum of 30% of all premiums paid, rising to 90% in the last two years. A single premium policy gives 70% if surrendered within the first three years, rising to 90% in the last two years. The single premium policyholder starts far better off — he paid everything up front.

The ULIP you can leave but cannot collect

A ULIP may be surrendered before 5 years even though there is a lock-in of 5 years — but the money does not come out. A discontinuation charge of a maximum of Rs 6,000 is levied, and the balance fund is transferred to a DISCONTINUATION POLICY FUND, with the surrender value paid only at the end of the lock-in period. You may walk out of the room; the door to the street stays shut for five years.

The proposer and the insured are not always the same person

A father insures his son; a company insures its key employee. The INSURED is the person whose life is being insured — individuals, minors or joint lives. If the life insured differs from the buyer, the buyer is the PROPOSER or POLICY HOLDER, and must have an INSURABLE INTEREST in the individual being covered. The insurable interest rules of Chapter 1 do the work here.

The nomination you can change as often as you like

Nomination can be made at the time of taking the policy or subsequently at any time during the term, AND CAN ALSO BE CHANGED ANY NUMBER OF TIMES. Hold on to that freedom, because section 2.5 describes a policy where it is deliberately surrendered: under the Married Women's Property Act the nominees CANNOT BE CHANGED after the policy has been bought — not even after a divorce.

Key terms in this chapter

Accelerated sum insured: A structure in which the life insurance cover is reduced by the amount paid out under a critical illness rider. It is cheaper than a rider paying independently of the death claim.
Accrued bonus: The actual return on an endowment policy, normally calculated and declared every year but paid only at the end of the tenure. It is not pre-defined at the commencement of the policy.
Claim settlement ratio: A ratio published by IRDAI and used as a criterion in choosing an insurer, although the workbook notes it may not be very important if full disclosure has been made by the insured.
Death cover: A benefit paid only on the death of the insured within a specified period. If death does not occur, no benefit is paid.
Discontinuation policy fund: The fund to which the balance of a ULIP is transferred when it is surrendered before the five-year lock-in, after levying a discontinuation charge of a maximum of Rs 6,000. The surrender value is paid only at the end of the lock-in.
Discounting rate for HLV: Computed as one plus the post-tax return divided by one plus the income growth rate, minus one. Where the two rates are equal, the discounting rate is zero and HLV equals current income times the years to retirement.
Endowment policy: An investment cum insurance plan with the same premium every year, returning the investment portion with actual returns on survival. Bonus is declared yearly as accrued bonus but paid at the end of the tenure.
Group insurance: Cover taken for a group such as all employees of a company, where the premium is lower than an individual policy of the same coverage and claim processing may be simpler, with the employer facilitating the process.
Guaranteed bonus: A bonus paid for the first few years of the policy period, say five, as a percentage of the sum assured, forming part of the benefits and generally received at the end of the term.
Guaranteed insurability option rider: A rider enabling the insurance cover to be enhanced without further medical examination, useful for young persons expecting higher income but possible medical issues later.
Human Life Value: The present value of the expected income over the working life of an individual that is available for the dependents. It rests on two assumptions, the rate of income increase and the post-tax return on the sum assured.
Income benefit rider: A rider allowing the policyholder's nominee to receive a specific amount periodically as fixed income on the policyholder's death, instead of a lumpsum.
Level premium: A term insurance premium that remains the same every year, as distinct from one that increases as the insured gets older.
Married Women's Property Act policy: A life policy declared under the MWP Act, 1874, whose nominees can only be the spouse or children or both, cannot be changed, acquire all rights to the claim, and receive even survival benefits. Its enduring value is protection from the insured's creditors.
Minimum sum assured rule: IRDAI requires life products with terms over 10 years to provide at least 10 times the annual premium for individuals below 45 and 7 times if above 45; for terms under 10 years the minimum is 5 times for all individuals.
Mortgage insurance: A policy where the sum assured keeps reducing with time, suitable for covering a housing loan. In practice it is often not cheaper than a level term plan, and the premium is wasted where the loan is prepaid.
Needs-based approach: A method assuming insurance proceeds will meet the expenditure needs and liabilities of the insured, met first from investments and other assets excluding the residential house and personal jewellery, with existing life insurance then deducted.
Official illustration: The document obtained from the insurance company's website that is the only official statement of the probable returns on an investment cum insurance policy, and which identifies which portion is guaranteed and which is not.
Paid-up policy: A policy in which the sum assured is proportionately reduced to the same proportion that the number of premiums paid bears to total premiums due, so that cover continues without further premiums.
Policy assignment: Transferring the interests in a policy, normally to take a loan against it. An assignment cancels an existing nomination, except where made to the insurer itself, and the nomination revives on re-assignment.
Policy lapse: The state that arises when premium due is not paid even within the grace period, after which no claim is payable on the policy.
Proposer: The buyer of a policy where the life being insured is a different person. Also called the policy holder, and required to have an insurable interest in the individual being covered.
Reversionary bonus: A bonus based on the performance of the insurer and declared at its discretion after the guaranteed bonus period, applicable to participating policies, whose premium is higher than non-participating policies.
Surrender value: The cash value returned to a policy holder. A traditional policy acquires it after being in force at least three years, or two years where the term is less than ten years, with full premiums paid.
Survival benefit: A benefit paid when the insured survives a specified period. Investment cum insurance policies combine this with death cover; term insurance has only death cover.
Telescopic premiums: The principle that premiums do not rise in the same proportion as the sum assured, so a larger sum assured carries a lower rate of premium per thousand. Telescopic rates stop after a certain level, say Rs 2 crores.
Term insurance: A pure risk cover product paying a benefit only if the policy holder dies during the insured period. Premiums are typically low because there is no investment component, making it the most affordable form of life insurance.
Term insurance with return of premium: A variant where the premium is much higher than a regular term policy, the difference being invested by the insurer to fund the return of premiums at the end of the term. Its inherent return is computed with the RATE formula on the extra premium.
ULIP Type II: A structure under which on death before maturity the ULIP pays the sum assured plus the fund value, while on maturity the fund value alone is payable.
Unit-linked insurance policy: A policy allowing the insured to decide the portfolio mix the insurer maintains for the savings portion. Risk cover charges are deducted from premium, the balance invested, and a Net Asset Value announced daily.
Waiver of premium rider: A rider triggered where there is a disability or loss of income that makes it difficult to pay the premium.
Whole life insurance: An investment cum insurance policy providing cover for the entire life of the insured or up to an upper age limit specified by the insurer, whichever is earlier, with the premium fixed throughout. It was originally designed to pass wealth without estate duty.

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Original explanatory writing based on the official NISM workbook for Series X-B, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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