Survival benefit

The workbook says a life insurance product can give two kinds of benefit.

Death cover pays only if the insured dies within a specified period. If death does not occur, nothing is paid.

Survival benefit is the other kind. It pays when the insured survives a specified period.

A term insurance policy provides only the death benefit. Survive the term and there is no payout.

An investment cum insurance policy provides a combination of the two. It pays on death, and it pays something if the insured lives.

That is why it costs more. The premium has to fund a payout that will almost certainly happen.

The trigger. Payment of the sum assured is made on the occurrence of a specific event: the death of the life insured, which is the death benefit, or the expiry of the term of the policy, which is the survival benefit. Whether the sum assured is paid as a lump sum or as instalments is specified in the contract.

Which products carry it.

The workbook's own module question puts it directly: the benefits the insured gets from an investment cum insurance policy are both death cover and survival benefits.

What rides along with it. For an investment cum insurance policy, bonus is an amount added to the sum assured, announced periodically as a percentage of the sum assured, and it is paid out along with the maturity value or on the occurrence of the insured event. A guaranteed bonus is paid for the first few years of the policy period, say five years, as a percentage of the sum assured, and is generally received at the end of the term. A reversionary bonus is declared at the insurer's discretion, after the guaranteed bonus period, on participating policies. All three are relevant only to investment cum insurance policies - which is to say, only where there is a survival benefit to attach them to.

Payout options. The workbook notes that many products in the market offer various options in tenure, type of bonuses and payout options at various times, popularly called money back policies.

One estate-planning consequence worth knowing. Where a policy has been bought under the Married Women's Property Act, 1874, and it carries a survival benefit - an amount payable even while the insured person is alive - that amount is paid to the nominees and not to the insured person. The insured has bought a policy whose living payout he cannot receive himself. That is set out on the MWP Act insurance trust page.

And the reduced version of it. If premiums stop on an investment cum insurance policy, one option is to make the policy paid-up: the sum assured is reduced in the proportion that the premiums paid bear to the total premiums due. The survival benefit shrinks with it.

The workbook's own paid-up example, which is a survival benefit being cut down. Surinder takes a 25-year investment cum insurance policy with a sum assured of Rs 10,00,000, premiums half-yearly. Twenty-five years half-yearly is 50 premium payments. After 5 years, that is 10 premiums, he cannot continue.

So the survival benefit he will collect at the end of the 25 years is Rs 2,00,000, not Rs 10,00,000.

Now the comparison that matters to an adviser. The workbook's real-life figures for a Rs 1 crore cover over 30 years with the same insurer:

The endowment premium is about 34 times the term premium, and the whole of that difference is buying the survival benefit. The death cover is the same Rs 1 crore in both.

And where the survival benefit does not reach the insured. If the endowment policy had been written under the MWP Act, the amounts payable while Surinder is alive would go to his nominees, not to him.

Chapter 2 (Features of Life Insurance Products), section 2.1, defines survival benefit against death cover as the two benefits a life insurance product can give, and section 2.1's elements list attaches it to the expiry of the term in the payment-of-sum-assured clause, then sets out bonus, guaranteed bonus, reversionary bonus and the paid-up formula that all depend on it. Section 2.5 adds the MWP Act consequence. Chapter 2's module questions include the direct one: which benefits does an investment cum insurance policy give. Expect that, and a paid-up computation of the reduced sum assured.

• Survival benefit pays on SURVIVING the period; death cover pays on dying within it. The two are defined as a pair, and questions swap them.
• Term insurance has no survival benefit at all. Survive the term and nothing is paid. That is why it is the cheapest way to buy a large death cover.
• Bonus, guaranteed bonus and reversionary bonus exist only on investment cum insurance policies. They are additions to a survival benefit, so a term plan cannot carry them.
• Under an MWP Act policy the survival benefit goes to the nominees, not the insured. A living payout the policyholder cannot take is counter-intuitive and examinable.
• Paid-up reduces the survival benefit proportionately, in the ratio of premiums paid to premiums due - 10 out of 50 gives one-fifth of the sum assured.
• Money back is a payout pattern, not a separate benefit. The workbook describes money back policies as products with payout options at various times.
• The mode of payment is in the contract. A survival benefit may be a lump sum or instalments; do not assume a lump sum.