Life Insurance in Nepal
Everything you need to know
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Hundreds of questions pop up in your mind when you think about getting life insurances and thousand more uncertainties follow suit when you decide to actually get one. With the current situation of COVID-19 , it has been more important to get yourself with the right life assurance plans. This daunting task of getting life insurance can be made easier once you have accurate details.
Here, we help you know everything that you need to know about life insurance and also guide you to decide on a LIC plan that is best suitable for you.
What is life insurance?
Life insurance can be termed in different words such as, LIC, life assurance, mortgage protection insurance, premier insurance. It is termed as “jeevan beema” in Nepal. In simpler words, it is an insurance provided for a life incase of uncertainties. It is a legally binding contract for insurance holders with the insurer.
In other words, life insurance is a special contract with an insurance agent, where they promise to pay the designated beneficiary a sum of money in exchange for a premium, upon the death of an insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.
For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities. For a life insurance policy to remain in force, the policyholder must pay a single premium up front or pay regular premiums over time. When the insured dies, the policy’s named beneficiaries will receive the policy’s face value, or death benefit.
Common terms used in Life Insurance
Before proceeding to buy Life Insurance, you should take a look at these common terms used in Life Insurance:
Policyholder
The one who buys the life insurance plan/policy and pays the premium is the policyholder. The policyholder may buy insurance for themselves or someone else.
Life Assured and Nominee
The person who is protected by the life insurance policy is referred as Life Assured. The insurance plan covers the untimely death of life assured. Life assured may not be the policyholder as policyholders can protect another’s life through an insurance plan. For instance: a husband may buy an insurance plan for his wife. Here, the husband is the policyholder whereas the wife is life assured. Nominee is the heir of the policyholder. It is nominated by the policyholder who will receive the pay as well as benefits in case of untimely death of life assured. The nominee must claim the life insurance policy, after the untimely death of life assured.
Premium
The sum of the amount you need to pay to keep a life insurance plan active is premium. The premium depends on factors like age of life assured, sum assured, duration of policy. Premium is paid on a timely basis as agreed upon and if the policyholder fails to pay on time or grace period then policy will be lapsed
Sum Assured
Sum assured is the amount that is guaranteed to the nominee in case of unfortunate death. The financial loss that arises due to unfortunate death decides the sum assured. it is chosen by the policyholder at the time of purchase of life insurance policy.
Policy Tenure and Maturity Age
It is the duration for which life insurance coverage is provided by the policy. Policy tenure can be a whole life or term life of 1 to 100 years, depending on the term and condition of insurance company. Maturity age is the time when life insurance policy ends. It is similar to policy tenure. For instance, you buy term life insurance with maturity of 65 years at the age of 25, then policy will end when you are 65 years old and have policy tenure of 40 years.
Death Benefit
Death benefit is the sum paid to the nominee when life assured dies during policy tenure. It is different from sum assured as death benefit can be higher than sum assured and may include other benefits if policy has any.
Grace Period, Lapsed Policy and Revival Period
Grace period is the time provided by the insurance company after the premium payment is due. If the policyholder fails to pay premium during the grace period then life insurance policy will be lapsed. After the policy is lapsed, there is a specific time duration given to the policyholder to re-activate the policy which is known as a revival period.
Claim Process
In case of death of life assured during policy tenure, nominees need to lodge a claim to receive the death benefit. This process is known as the claim process.
These are some of the most used common terms while discussing life insurances. While some people don’t understand these terms correctly, they interpret the meaning into something else. These results in creating myths. Some of these myths about life insurance are widespread and deeply rooted.
Types of life assurances available in Nepal
Different people may have different states of affairs. There are different types of life assurances for you to suit in different situations. They are:
Whole life insurance is a type of life insurance meant to last for the entire life of the insured person of the policy. It does not expire as term life insurance does. If the whole life policy is purchased from a mutual company, it is also an ownership stake in the company itself. In return for the ownership stake, whole life insurance pays dividends payments. Whole life insurance is the original form of life insurance.
An important feature of whole life and a way that it differs from term life insurance is that it has a cash value. In other words, the policy can actually be surrendered for the cash value of the policy, or a loan can be taken from it. If you apply for a loan or need to produce a personal balance sheet for any reason, a whole life policy is listed as an asset. The value of the policy grows over time as the cash-value account grows with age. When the policy is mature the cash value will equal the death benefit and the policy pays out the full benefit.
Because whole life policies are guaranteed to remain in force as long as the required premiums are paid, the premiums are typically much higher than those of term life insurance where the premium is fixed only for a limited term. Whole life premiums are fixed, based on the age of issue, and usually do not increase with age. The insured party normally pays premiums until death, except for limited pay policies which may be paid up in 10 years, 20 years, or at age 65.
Features of whole life insurance
- It is meant to last for the entire life of the insured person, no matter how long that person may live.
- Premium payments to a whole life insurance policy are level, but an owner may have the option of paying an additional premium into the policy in order to build cash value faster.
- It has a cash surrender value, meaning the policy itself builds value over time.
- It is eligible to receive dividend payments from the company.
- The death benefit of a whole life insurance policy can be received tax-free by the beneficiaries.
Term life insurance is a temporary insurance contract between a person and an insurance company. The insurance policy stipulates that in return for payment to the insurance company, the contract will pay a specified death benefit if the named insured dies while the contract is in force. Term life insurance is temporary coverage. It is not meant to last for an entire lifetime, so it is much less expensive than whole life insurance.
Term insurance contracts do not have any cash value, typically are not eligible to receive dividends, and will expire at some point in the future. A term insurance contract is the least expensive type of life insurance coverage that you can buy and it allows for the insured person to provide for their beneficiaries in an economical way. Typically, the low premium payments will be level through the guaranteed life of the policy and are guaranteed by the policy not to rise.
Features of term life insurance
- It offers coverage for a limited period of time, typically 10-30 years.
- It forces potential policyholders to undergo a medical examination before issuing a policy.
- A great benefit of all insurance types is the ability to pass on wealth tax-free and avoid estate taxes.
- It may either increase or decrease based on your proposed earnings, tenancy, disbursals and mortality.
- The policy offers convertibility from the original term life insurance policy into an individual universal, whole life term, or annual renewable insurance policy.
Universal life insurance is a type of life insurance that lasts your entire life into your 90s and beyond. It’s sometimes known as cash value life insurance. That’s because it has a savings account inside the policy. You pay into this savings account whenever your insurance premium is due (the premium is the monthly cost that keeps the insurance going). If you’ve built up cash value, you’re free to take some out—like you would with a regular bank account.
With universal life insurance, you pay a monthly fee that splits into two parts: One covers life insurance and the other goes into savings and investment.
It’s meant to be more flexible by allowing you, the policy holder, to choose how much premium you pay within a certain range. The minimum amount is set by the cost of insurance, which includes your death benefit and administrative fees. Anything you pay over this premium is added to your cash value, which is guaranteed to grow according to a minimum annual interest rate set by the insurance company (though it can grow faster depending on how well the market is doing).
Many people choose to pay the maximum premium possible, in the early years so they can build a larger cash value (and then use that cash to cover premiums later in life). But this is a risky move since the cost of insurance will increase the older you get.
Features of universal life insurance
- It is priced like a permanent form of non- level term life insurance.
- Its contracts have a flexible premium structure.
- It allows clients to take withdrawals from the cash value, or to take loans from the policy against the value.
- When well-funded, has the potential to grow faster than a whole life insurance policy over time.
Variable universal life insurance (VUL) is a permanent life policy whose cash value depends in part on the performance of variable sub-accounts within the insurance contract. The variable sub-accounts are usually modeled after mutual funds but may contain their own separate fee structures. A variable universal life insurance contract may be attractive to those clients willing to bear a little extra risk in their life insurance contract for the opportunity to have a higher cash value, over time, with market-rate returns.
Variable life insurance can be thought of as an annually renewable term life insurance policy, with a cash value component that gets invested into stocks and bonds via mutual fund-like investments. The idea is that you can get a higher rate of return on your investment than whole life insurance, while still getting the benefits of permanent life insurance. While this approach may be a positive investment for some people, it comes with a higher risk, higher fees, and doesn’t serve the best interests of most clients.
Features of variable universal life insurance
- It does not necessarily require policy owners to always make premium payments.
- It has an added element of investment risk, and this risk is not for everyone.
- It covers the policyholder and provides a death benefit at any time during the course of the policyholder’s life – no matter the age of the policyholder.
- It pays a death benefit to the beneficiaries assigned by the policyholder – spouse, family, children or other loved ones.
Why is life insurance beneficial for you?
People are usually hesitant to purchase life insurance and most of them even think it to be fraud schemes to loot people. They seem to think it as unnecessary expenses and is of no use as they are healthy and young enough to face any consequences. They contemplate purchasing after reaching a certain time frame, when they are not as healthy enough as before. Everytime they regard purchasing life insurance, they question themselves with a – why?
So, why should you purchase life insurance? The best answer for this question would be, it is the best way to protect your loved ones. It’s a financial decision…kind of. It’s an emotional decision…sort of. It’s about love and caring and the future…most definitely.
As you grow older, get married, start a family, start to work or do business you may realize that life insurance is intriguing and fundamental to a sound financial plan. Over the years, life insurance will give you a peace of mind knowing that money or financial aid will be available to protect your family. Other few reasons to purchase life insurance would be it can serve as the best investment option for saving, the younger and healthier you are premium will be cheaper, you are only the provider or earner in your family and so on.
Most insurance companies don’t tell you why. But we have made a list of the things why life insurance saves your loved ones or makes you a lot of money.
See our post on why you need life insurance done Today!
How to calculate cost and benefits of life insurance?
The cost of life insurance is dependent upon person to person. Some may require to pay more while others may require to pay less for the same life insurance plan. This is mainly because the cost of life insurance is fluctuated with three major variables. They are:
Mortality
Mortality concept is based upon a large number of individuals sharing the cost of the risk of death. The cost to each member is calculated by understanding the amount of risk. Insurance companies use mortality tables in order to provide a general estimation of how much they will need to pay each year for death claims. The mortality table allows a life insurer to determine life expectancy, on average, for each different age group.
Interest
Life insurance companies invest all insurance premiums into stocks, bonds, mortgages, real estate, etc. The assumption is of course that they will earn a certain amount of interest upon those investments.
Expenses
Expenses include operating costs, paying for claims, and investing the premiums. This in turn equates to employee salaries, compensation to agents, legal fees involved in the processes, office rental, postage fees, and more besides. Each policy’s operational costs are charged under the term of “expense loading”. The costs do vary depending on the life insurance company’s operational costs as well as efficiency.
Now, let’s check some factors which insurance companies considers to calculate the cost of insurance premiums:
Your Age
Age is a major factor that insurance companies look after before providing you with an insurance plan. Your age can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have a higher chance of needing more medical services.
Type and amount of coverage
In general, you have several options when you buy an insurance policy. The more comprehensive coverage you get, the more expensive it will be. Similarly, the less coverage you get, the cheaper the premiums will be; no matter what you’re insuring for.
Personal Information
The last factor is personal information. The insurance companies look after your personal information such as; your claims history, driving record, credit history, gender, marital status, lifestyle, family medical history, health, smoking status, hobbies, job, where you live and so on; to calculate the cost of your insurance premium.
Now let’s know how we benefit from insurance policies.Benefit is the investable portion of the premium that earns the return and not the total premium which you pay. So, when you pay a premium for an insurance policy, several charges are deducted towards mortality, GST, fund management charges (FMC) and only the balance premium gets invested.
Insurance companies provide you with policy benefit illustrations which illustrate how you gain benefits while buying life insurance. It is aimed at helping you understand how the return on your policy money/amount of investable portion of premium is computed. The benefit illustration basically shows how returns on the money invested will be earned/calculated. The projected investment rate of return shown can be guaranteed as well as non-guaranteed. Therefore, you should read it carefully.
So, how do you determine whether the rates of returns are guaranteed or not? A guaranteed rate of return on your investment means that the investment will grow as shown and the insured will receive the invested amount as stated in the benefit illustration. Also, if the life insurance policy offers guaranteed benefits, then it is clearly marked as ‘guaranteed’ in the benefit illustration table.
On the other hand, the non-guaranteed projected rate of return on your investment is dependent on the performances of the investments, therefore, the rate is assumed in the policy benefit illustration.
Best choice of Life Insurance plan for you
With different types of life insurance plans provided by various life insurance companies, it’s difficult to choose the right one as these plans are confusing at first. But most of these life insurance plans can be categorized into two types: term life insurance and whole life insurance. Once you know about these two in general, you can easily understand different plans provided by the insurance companies.
Whole life insurance,as its name suggests covers for your entire life. It provides both cash value and death benefit. They are costlier than other life insurance plans, while a lump sum is paid after a specific term or if life assured meets unfortunate death.
Term life insurance provides coverage for a specific duration of time and is more affordable than whole life insurance. Since it is for a specific time period only if the life assured meets unfortunate death in this time period will the nominee get death benefits. The maturity benefit is not available under term life insurance plans but may have different options provided by the insurance company.
So, after having general idea about whole and term life insurance, below are some pointers to help you choose right plan:
Whole Life Insurance
- If you are planning for a long period of time then whole life is the best option as it covers for as long as you live.
- Under this policy, death benefit is paid to the nominee whether you die tomorrow or after 100 years.
- If you want to accumulate savings from different sources. These savings can be used to pay for premiums for a long time and leave large death benefits that can act as collateral for your debts.
Term Life Insurance
- If you are planning for a limited time period. For instance: you want to save up for your children’s college fee then you can buy 15 year of term life insurance.
- When you have a limited budget but you need quite a large sum of insurance then term life can do that for you as it pays only if you die in that specific time period.
The premium in term life insurance is lowest and increases upon renewal when you age while the premium for whole life insurance is usually high but remains the same no matter your age. You must make a complete plan before buying life insurance. You must know the answers to ‘who, when and where’ questions regarding life insurance where; ‘who’ questions ‘who needs life insurance’; ‘when’ questions ‘when to buy life insurance?’ and ‘where’ questions ‘where to start?’.
You also should compare the various plans provided by different life insurance companies, discuss with agents and access your needs and benefits and decide which one is the right plan for you. You should never hasten it if you are sure of buying one.
How much worth of Life Insurance should you get?
Buying life insurance will definitely ensure your financial need that arises in near future in your family. But, before you buy one, you should know how much life insurance you need to buy. Generally following the rule of thumb, you should buy ten times what your income is but this doesn’t apply to all as different factors are involved in determining life insurance amount. You first analyze your financial situation to determine the sum of money required to maintain your standard of living and fulfill your family’s needs.
So, what’s the ideal amount you require? Let us go through some factor and decide.
Your assets (inherited plus earned) and income is the resource you have. These are major factors in determining your life insurance amount. If you have high resources then you might require less life insurance. But, you must consider your debts also.
Debt is something that won’t disappear even after your demise. Your family may be obligated to pay your debt after you die. They won’t be able to pay for something they didn’t sign up for. For this reason you might want to leave some sort of promise to pay off the debts which are fulfilled by life insurance. After paying debt, the remaining amount will be inherited by your family. Hence, you need to calculate how much debt you have while deciding how much life insurance you require.
Raising children and caring for parents is no simple matter. It involves a lot of expenses and sometimes these expenses tend to be higher than you expect. So, you need to carefully calculate how much expense it is required to support dependents.
You must consider the expenses required to support the education of your children. Higher education may cost high and it does ensure better living standards for your children and often open better opportunities. But, paying tuition fees is one of the major expenses in parental life. Carefully plan the education cost incurring in the future and decide your life insurance worth.
Even in your death there is an expense involved. The funerals at times tend to be costlier than expected. You need to cover for firewood cost or burial cost.
Now to sum the expense and deduct your resources from it, you will get the rough amount of how much life insurance you need. It might differ according to your situation. For instance: you may have Rs. 10,00,000 resources and all your expenses plus debt amounts to Rs. 50,00,000 then you roughly require Rs. 40,00,000 worth of insurance.
Steps to buy Life insurance in Nepal
You need to be wise and have proper planning before you purchase a life insurance plan. Here are some of the steps you can follow for securely getting life insurance:
When you decide on buying life insurance, you need to make sure that the insurance policy you get is sufficient as per your needs and provides enough benefit for the price you paid. Life insurance is not just a lifelong commitment but also an afterlife beneficier. If you were to die tomorrow, the life insurance plan you choose in going to play a major role in providing for the family you left behind after your death. So, you are required to calculate for the life insurance plan that is going to fulfill your insurance needs.
After you compare and analyse the quotes you got from different insurers, you are required to choose the product that is the best match for you.
Once you understand the policy type that’ll work best for you and have calculated how much life insurance you should have, review your budget. While you want to buy enough coverage to meet your needs, it should fit within your budget. If you are unsure, a qualified insurance agent or company representative can help you design a plan that considers both your needs and companies’.
Knowing which life insurance plan you decide to get is not enough. You need to decide the best insurance company which should be reliable and provides you with your selected plan. There are some best life insurance companies in Nepal that you can choose from.
Once you decide the insurance agent as well, you need to get answers on things with that insurers such as how the company bills your premiums (monthly, quarterly, or annually), policy rider options, and who you can contact for policy changes, updates, and billing questions. Then only can you proceed with completing the insurer’s application.
Most life insurance companies will require a medical exam. The life insurance medical exam is essentially a physical: A technician comes to your house or workplace to take basic measurements (height, weight, pulse, blood pressure), some blood and possibly a urine sample. It’ll take about 30 minutes. Make sure to follow any instructions from the medical team such as fasting for a certain amount of time, drinking enough water, avoiding caffeine or strenuous exercise and so on.
Once your medical exam is complete, an underwriter will use its results, along with your health records and financial information, to approve or deny your policy and set your official premiums. Underwriting usually takes anywhere from three to eight weeks. If you get approved, you can review the final cost required to get your life insurance.
After you get an acceptance response and decide on the final cost, all that’s left is for you to receive, review and sign your policy. It’ll officially become effective when you pay your first premium. If you’re unhappy with the final rates, your agent can help you determine whether to re-shop for a different policy
Settlement process of LIC in Nepal
Settlement process usually means a process to claim life insurance. Claim can be death claim, maturity claim or rider claim. Insurance Companies provide claims on the basis of rules and regulations set by the organization’s committee or from the laws formulated by the government.
Following are the some provisions provided by Nepal Government against Life Insurance Claim:
- The Insurer shall issue a discharge voucher in the name of the Insured who has already paid the last installment of the Life Insurance Premium requesting him to come to collect payment against the claim along with the Insurance Policy and other documents required for making payment against such Life Insurance claim within fifteen days from the date of payment of such installment.
- In case an Insured submits the Insurance Policy and other documents including the discharge voucher to the Insurer for the payment of claim against the Life Insurance claim pursuant to sub-rule (1), the Insurer shall conduct an inquiry as required and make a payment against the Life Insurance claim within seven days from the date of expiry of the period of the Life Insurance Policy.
- In case any person who has taken up an Insurance Policy dies before the expiry of the period of the Insurance Policy, the person designated by him, if any, and in case no person has been designated, the nearest heir from among the persons mentioned in sub-section (1) of Section 38 of the Act shall submit an application for the payment against the claim to the Insurer to receive the amount of the Life Insurance stating the details as follows:-
- The details relating to the claim,
- A Certificate of death of the insured,
- In case the insured has died in an accident and if such risk is covered by the Life Insurance, the postmortem report of the government physician relating to the cause of death, and if there is no such report, a report of the police,
- A certificate of relationship with the insured,
- The documents regarding the certification of the age in case the age has not been certified,
- Other details specified by the Board.
- After the receipt of the application pursuant to sub-rule (3), the Insurer shall make an inquiry into the details including the documents submitted regarding to the claim of Life Insurance, and shall examine other matters also if necessary, and shall determine the liability within fifteen days from the date of receipt of such documents by it and shall issue the discharge voucher in the name of the applicant requesting him to come to collect the payment against the claim. The Insurer shall make the payment against the Insurance claim within fifteen days from the date of receipt of the discharge voucher from the applicant.
- If it is found, while making an inquiry into the details pursuant to sub-rule (4) that the Insurance claim need not to be paid by determining the liability, the Insurer shall provide a written information to the applicant clearly stating the reasons thereof.
Generally settlement process include four step:
The claimant must notify the insurance company as soon as any incident occurs to initiate the settlement process. It may require you to submit a written intimation which includes policy number, name of the insured, date of death, cause of death, place of death, name of nominee. etc.
- Death Certificate
- Original Policy Statement
- Proof of age of the life assured
- Relationship certificate
- Treatment paper from hospital
The complete documentation must be submitted by the claimant as soon as possible for the purpose of faster claim. In some cases, you may require to attend a medical examination before claiming.
As per the regulation, after all the documents have been submitted the company must settle the life insurance in a 15 days time frame. After the claim has been paid, a proper record must be maintained through claim receipt.