Ch. 11: What are Exclusions & Inclusions of ULIP Plan

Imagine that you received a 50% discount coupon from a store since you purchased products worth more than a certain amount. The next day, you visited the same store and loaded all your favourite items in the cart since you had a coupon. When you reached the cash counter to pay the bill, the cashier informed you that the coupon wasn't valid and pointed to the back side of the coupon that enclosed exclusions (products not covered) and inclusions (products covered). Consequently, none of your products qualified for the discount. As a result, you had to shoulder the entire expense yourself.

Similarly, ULIPs do not cover certain situations. In this case, suicide is the only exception.

Previously, we discussed the various riders available with ULIPs. This article will examine the types of deaths that are covered and not covered under the plan in detail.

What are Exclusions?

Exclusions are situations or conditions that are outside the scope of coverage of the policy and hence will never be covered under an insurance policy. Thus, if you file a claim under these circumstances, the insurer will not pay for it.

Deaths Covered by ULIP Plan

When it comes to ULIPs, there is one exclusion you should be aware of -

Death by Suicide
Suicide is the only cause of death that can result in a denial of the claim. Deaths caused by suicide occurring within the first year of a policy are not covered by a ULIP.

In this case, your nominee is not entitled to receive the Sum Assured as the death benefit. A death due to suicide within 12 months from the date of commencement of the policy or from the date of revival of the policy, whichever is earlier, will allow the nominee to claim the Fund Value that’s available on the death intimation date.

It is important to keep in mind that since this is the first policy year and the Fund Value depends on the ever-fluctuating NAV, it may be lower than the premium you have paid. Also, the charges associated with your policy are significantly more in the initial years, hence the Fund Value would be even lesser in the first year. This will, in turn, result in a significant loss and might prove to be financially distressing for your nominee.

Any charges other than the Fund Management Charges, imposed after the date of death, will be added back to the policy fund value calculated on the date of death intimation.

For example, Rajesh purchased a ULIP Plan for a duration of 25 years. He needs to pay an annual premium of Rs 1 lakh for the same. An amount of Rs 5000 is deducted from his annual premium as part of charges. Hence, the investable amount is Rs 95,000. He commits suicide within 8 months after purchasing the policy.

Assuming that the Net Asset Value of the units was Rs 500 on the date of policy purchase,

Total units = (Amount invested-Charges)/Net Asset Value
= 95,000/500
= 190 units.

In this case, Rajesh’s nominee shall receive the fund value as death benefit - since he passed away due to suicide within the first year of the policy term. His nominee will not be eligible for the sum assured.

Fund value = NAV x Total Owned Units.

His total owned units = 190

And, let’s assume that the NAV on the date of his passing away is Rs 400.

Therefore, Fund Value on the day of passing = NAV x Owned Units = 400 x 190 = Rs 76,000

Note: All charges, except the Fund Management Charge, that have been recovered after the date of death (if any) will be added to the fund value.

Therefore, Rajesh’s nominee will receive a death benefit of Rs 76,000.

Keep in mind: Death from suicide is covered from the second year of a policy.

Deaths Not Covered by ULIP Plan

ULIPs cover deaths due to -

Natural Causes ULIPs cover -
Natural deaths, which include death due to illness, serious disease, or health conditions. HIV / AIDS-related deaths and other sexually transmitted diseases. Any underlying health condition should be disclosed to the insurer when purchasing a ULIP in order to avoid any complications at the time of claim.

For example
Megna bought a ULIP in 2012 for a policy duration of 20 years. Her annual premium for the plan is Rs 1,00,000. An amount of Rs 5,000 is deducted from his annual premium as part of charges. Hence, the investable amount is Rs 95,000. Assuming that the Net Asset Value of the units was Rs 300 on the date of policy purchase,

Total units = (Amount invested-Charges)/Net Asset Value
= 95,000/300
= 317 units.

Note: The entire premium amount doesn’t get invested in the funds. Some amount shall be deducted for charges. However, we have mentioned the entire amount here for understanding purposes.

In 2020, she underwent a sudden cardiac arrest and passed away. In this case, her nominee shall receive the Sum Assured or the Fund Value, whichever is higher as death benefit.

Let’s assume that the sum assured is 10 times of the annual premium.

Hence, Sum Assured = 10 x Annual Premium
= 10 x 95,000
= Rs 9,50,000

The fund value = NAV x Total Owned Units. Say she accumulates another 1200 units from the premiums she invests till the date of his death.

Total units accumulated between 2012 and 2022 = 1200+317 =1517

And, let’s assume that the NAV on the date of her passing away is Rs 800 .

Therefore, Fund Value on the day of passing = NAV x Owned Units
= 800 x 1517
= Rs 12,13,600

Therefore, since the Fund Value is higher than the Sum Assured, Megna’s nominee will receive a death benefit of Rs 12,13,600.

Accidents

In the event of accidental death, coverage is provided regardless of where it takes place - on the road, at home, or in public.

For example, Bhargav owns a ULIP for a policy duration of 20 years. His annual premium is Rs 50,000. He was on his way to work when a speeding truck crashed into his car. Unfortunately, Bhargav died on the spot.

In this case, his nominee will receive the death benefit. This may be (depending on the product) -

Sum Assured or the Fund Value, whichever is higher
OR
Sum Assured along with the Fund Value

Involvement in Illegal Activities

Death resulting from unlawful actions or crimes is covered under ULIPs. Any chosen riders, however, may not cover any deaths caused by these activities.

Participation In Hazardous Activities

The ULIP covers deaths caused by risky or adventurous activities such as

• Paragliding
• Skydiving
• Kayaking
• Mountaineering
• Scuba Diving
• Snorkelling, and so on.

Note that riders may not cover deaths that result from such activities.

Intoxication

Deaths resulting from excessive use of alcohol, drugs, and narcotics are covered by ULIPs. Rides, however, may not cover deaths caused by alcohol or drugs.

For example, Raghav buys a ULIP and an accidental death benefit rider of Rs 10 lakhs. One night, he was returning from a party in his car under the influence of alcohol and drugs. Suddenly, he lost control and crashed into a bus. Unfortunately, he died on the spot.

Since the policy is still in effect, his nominee shall receive the death benefit. This may be (depending on the product) -

Sum Assured or the Fund Value, whichever is higher
OR
Sum Assured along with the Fund Value

However, the add-on rider won't provide coverage as it does not cover deaths caused by intoxication. Thus, his family will get the fund value but not the 10 lakh rider benefit.

Natural Calamities

ULIP policies cover deaths caused by natural disasters, including tsunamis, earthquakes, landslides, floods, and other calamities.

For example, Diya has a ULIP for a policy duration of 30 years. Her annual premium is Rs 50,000. A sudden landslide destroyed Diya's house, and she tragically died after battling serious injuries. The rest of her family also sustained severe wounds. In this case, her nominee shall receive the death benefit. This may be (depending on the product) -

Sum Assured or the Fund Value, whichever is higher
OR
Sum Assured along with the Fund Value

Man-made Disasters

Under a ULIP, death caused by man-made catastrophes like war, terrorism, invasion, riots, protests, civil disturbances, and military intervention is covered.

Wrapping up!

All types of deaths are covered by the ULIP except suicide. Nevertheless, suicidal deaths are covered from the second year of the policy period. Riders, however, may not offer coverage in certain situations. Read your policy wordings thoroughly and understand what your policy covers and what it doesn’t. And, ensure you choose the right policy that best fits your needs.