What is life insurance?
Life insurance is a contract with an insurance company. You pay a small amount regularly (the premium), and the company promises that if you die during the agreed period, your family or the person you name (the nominee) will receive a large sum. In effect, many people each pay a little, and the families hit by a death are helped from that pool.
Some policies give only this protection; many also include savings. You do not own an asset; what you hold is the company’s promise, written in the policy document.
Say Karim is the only earner in his family. He takes out a policy: a premium of Tk 1,000 a month and a sum assured of Tk 5 lakh. If he died suddenly five years later, his wife, as nominee, would receive Tk 5 lakh, even though Karim had paid only Tk 60,000 by then. If Karim stays alive and well, the premiums simply pay for the protection, or, depending on the type of policy, some money comes back at the end. The numbers are only an example.
How it works
When you take out a policy, you choose an amount called the sum assured. Based on your age, the term and your health, the company sets the premium. Premiums are usually paid monthly, quarterly, half-yearly or yearly.
If the insured person dies during the term, the nominee receives the sum assured (plus any bonus, if the policy has one). That is the core job of life insurance: helping a family absorb the financial shock of losing an earner.
In Bangladesh most policies are linked to savings, meaning money comes back at the end of the term if you survive. Premiums are much higher for these, because they combine the cost of cover with a saving element.
Say you take out a policy at 30 with a sum assured of Tk 10 lakh. A term policy, which only covers the risk of death, has a comparatively low yearly premium but pays nothing back at the end. An endowment policy with the same sum assured costs several times more each year, and in return pays the sum assured plus bonus at maturity. Actual figures differ by company, age and term, so do the sums with the numbers in your own proposal.
The main types
- Term policy
- Covers only the risk of death. Premiums are low, and nothing is paid back if you survive the term. Besides individual policies, it often comes attached to loans or as group cover.
- Endowment (savings) policy
- Pays the sum assured on death, and the sum assured plus bonus if you survive to maturity. The most common type in Bangladesh.
- Money-back (instalment-return) policies
- Part of the sum assured is paid back at intervals during the term, and the rest at maturity.
- Islamic life insurance (takaful)
- Run on principles of mutual help and profit sharing; the structure can look much like an endowment policy.
- Group cover and bancassurance
- Group cover through an employer, or insurance sold through banks (under Bangladesh Bank and IDRA guidelines from December 2023). The policy is still the insurer’s obligation, not the bank’s.
Stopping halfway: surrender value
If premiums stop, the policy lapses. Endowment policies usually build a surrender value only after at least two years of premiums; drop out before that and you may lose almost everything you paid.
Even after two years, the surrender value is usually well below the total premiums paid, especially in the early years, because agents’ commission and costs are taken out at the start. Many policies let you borrow against the surrender value, or convert to a smaller paid-up policy instead.
Claim settlement: what to know
Under the Insurance Act 2010, claims are meant to be settled within a set time (90 days) once all required documents are in. In practice, some companies have failed to pay claims for long periods. IDRA data show that in 2024 about two-thirds of the life sector’s total claims were settled, and the rate ranged from nearly all to very little depending on the company.
So before buying, look at the company’s record on paying claims; IDRA publishes this regularly. If a claim gets stuck, you can complain to IDRA. A separate KhanFT video on checking a company’s financial health is planned.
What return to expect
The “return” on life insurance cannot be stated as a single rate the way an FDR’s can. What an endowment policy pays at maturity depends on the bonuses the company declares, and those rise and fall with its earnings and financial health. The figures in a sales illustration are usually projections, not guarantees.
Work out your own policy’s numbers: how much you will pay in total, when, and what you are due at maturity. From that, find the effective yearly rate and compare it with an FDR or Sanchayapatra of the same length. Remember that part of each premium pays for the death cover, so a comparison with pure savings is not the whole picture.
A term policy has no return, and that is the point: large cover at low cost. Some people follow the idea of “buy term and invest the rest separately”; it is one approach, not the only answer for everyone.
Why people choose it
- A term policy gives a family large financial protection at low cost.
- An endowment policy builds in the discipline of saving regularly.
- Premiums can qualify for a tax rebate, within limits.
- Shariah-based (takaful) options are available.
Points to weigh
- Leaving an endowment policy early is costly; in the first two years you can lose almost everything.
- What you get at maturity depends on bonuses and is not guaranteed.
- Some companies have a poor record of paying claims.
- Complaints about misleading or exaggerated sales promises are common.
- When inflation is high, the real value of the maturity payment shrinks a lot.
Tax
Life insurance premiums are one of the items that count towards the investment tax rebate. Under the Income Tax Act 2023, in recent years yearly premiums on policies for yourself, your spouse or minor children have counted up to 10% of the sum assured.
The rebate is the smallest of a few limits: a set percentage of your income, a percentage of your eligible investment, and a fixed maximum in taka. These percentages and limits are set in the Finance Act and have changed several times.
Whether the money received at maturity or on a claim is taxable depends on the income tax law in force. Check the latest rules when you file your return.
Tax rules can change with each year’s Finance Act. Before a big decision, check the latest rules or speak to a tax adviser.
How to get started
- First decide what you want: protection for your family, savings, or both. That tells you which type to look at.
- Check that the company is registered with IDRA and look at its record on paying claims.
- Read and fill in the proposal form yourself; give true health information, or a claim may be refused later.
- Documents: national ID card, photographs, and your nominee’s ID and photograph; a medical check may be needed depending on age and sum assured.
- Pay premiums through a bank or an approved mobile or online channel and keep every receipt. When the policy document arrives, check its terms against what you were told.
Check before you start
- Have I worked out how much cover I actually need?
- Can I keep paying the premium for all these years?
- Do I know which figures are guaranteed and which are only projected (bonuses)?
- Do I know what happens if I stop before two years?
- Have I looked at the company’s claim settlement rate?
- Is a nominee properly recorded, and does my family know where the policy is kept?