Facilities available under Life Insurance Policies

Life insurance contracts are not merely death‑benefit instruments; they embed several ancillary facilities that add flexibility for the policyholder during the policy term. The most common facilities are policy loans, surrender (full or partial), assignment of the policy, nomination changes, conversion to a different product, and reinstatement after lapse.

Each facility is governed by the terms of the policy document, the insurer’s internal guidelines, and the regulatory framework set by SEBI and IRDAI. For the NISM exam, candidates must know the definition, eligibility criteria, calculation method (where applicable), and the impact on the surrender value or death benefit.

Exam questions frequently present a scenario – for example, a policyholder wants to take a loan and later surrender the policy. The correct answer hinges on knowing how interest on the loan is computed and how the outstanding loan reduces the surrender value. Memorising the key steps and common pitfalls will help you avoid traps.

• Facility – a right or service attached to the policy that can be exercised by the policyholder.
• Impact – any facility that alters the cash value, death benefit or tax treatment must be disclosed to the client.

A policy loan allows the insured to borrow against the surrender value of a life insurance contract while keeping the policy in force. The insurer typically permits a loan up to 90% of the vested cash value, subject to a minimum loan amount and a credit appraisal.

The loan interest is charged on a simple‑interest basis, usually annually, and is payable either by periodic instalments or by deducting from the eventual surrender or death benefit. If the loan, together with accrued interest, exceeds the cash value, the policy may lapse.

For the exam, remember: (i) loan amount cannot exceed the eligible cash value, (ii) interest is simple interest unless the policy specifies otherwise, (iii) outstanding loan reduces the surrender value and death benefit. Questions often test the calculation of interest or the effect of a loan on the final payout.

Surrender is the termination of the policy before its maturity, resulting in a cash payout called the surrender value. Full surrender terminates the contract entirely, whereas partial surrender (if permitted) allows the policyholder to withdraw a portion of the cash value while keeping the policy alive.

The surrender value is calculated as the vested cash value minus any applicable surrender charge and outstanding loan balance. Factors influencing the amount include the policy’s age, the sum assured, the bonus accrued, and the insurer’s surrender charge schedule.

In NISM questions, you may be asked to compute the net surrender value after a loan or to identify the correct penalty for early surrender. Remember that the surrender charge is higher in the early years and gradually reduces.

Assignment transfers the ownership rights of a life insurance policy to a third party, typically a bank or a financial institution, as security for a loan or as part of a structured product. The assignee gains the right to receive the death benefit, but the original policyholder may retain certain rights such as changing the nominee.

Assignment can be absolute (full transfer) or conditional (e.g., the policy reverts to the original owner upon repayment of a secured loan). The insurer must be notified in writing, and the assignment deed is recorded in the policy schedule.

Exam focus: differentiate between assignment and nomination, understand that an assigned policy cannot be surrendered without the assignee’s consent, and know the documentation required for a valid assignment.

Nomination allows the policyholder to name one or more persons who will receive the death benefit in case of the insured's demise. The nominee can be an individual, a legal heir, or a trust.

Changing a nominee is permissible at any time during the policy term, provided the policyholder submits a written request and the insurer updates the policy schedule. Some insurers may impose a nominal processing fee.

For the exam, remember that a nominee does not acquire ownership rights; therefore, a nominee cannot assign, surrender, or take a loan on the policy unless also the owner. Questions may ask about the effect of a nominee change on pending loans or surrender value.

Conversion permits the policyholder to switch from one type of life insurance product to another (e.g., from a traditional endowment to a Unit‑Linked Insurance Plan) without losing the accrued benefits. The conversion must be exercised within a specified window, often before the policy reaches a certain age.

Reinstatement allows a lapsed policy to be revived by paying the overdue premiums along with interest and any applicable penalties. The insurer may also require proof of insurability if the lapse period exceeds a certain duration.

Exam relevance: understand the conditions under which conversion is allowed, the impact on bonuses and surrender value, and the procedural steps for reinstatement, including the calculation of interest on overdue premiums (simple interest).

Beyond the major facilities, life insurers offer several ancillary features that enhance policyholder convenience. These include flexible premium payment options (monthly, quarterly, yearly), a free‑look period of 15 days during which the policy can be terminated with a full refund, and a grace period of up to 30 days for late premium payment without policy lapse.

The free‑look period is a statutory right under IRDAI regulations, whereas the grace period is a contractual provision. Both are critical for advisors to explain to clients to avoid unintended policy lapses.

Exam tip: Questions may ask which period allows a full premium refund (free‑look) versus which merely prevents lapse (grace period). Remember the exact durations prescribed by IRDAI – 15 days for free‑look and up to 30 days for grace.

SEBI’s Investment Adviser Regulations and IRDAI’s Insurance Regulations require advisors to disclose all policy facilities, associated costs, and the impact on benefits. The policy document must contain a clear schedule of charges for loans, surrender, and assignment.

Advisors must obtain explicit consent before initiating any facility on behalf of a client and must maintain records of the client’s instructions as per KYC and AML norms.

For the exam, remember that non‑disclosure of surrender charges or loan interest rates can be deemed a violation of the fiduciary duty. Questions often test the advisor’s responsibility to explain the financial implication of each facility.