Life insurance undoubtedly forms an essential part of life, as well as a key element for sound financial planning. It offers several advantages that are not provided by any other financial instrument.
Every responsible person keeps his family’s security above everything else and he works hard to provide comfort and luxuries to them. He also plans financial security so that his family members will have same lifestyle when he is not with them. Life insurance is one of the convenient and safest way to provide financial security to the family after the breadwinner’s demise. Under the term of life insurance policy the insurance company assures to pay a sum of money to the policyholder’s family.
What is Life Insurance?
Life insurance provider and an individual sign a contract in which the insurance provider assures to pay a specific amount of money i.e. sum assured, to the nominee in case of insured’s death. In order to get this fortification, the policyholder pays a premium.
The main purpose of life insurance is to provide the financial security to an individual or insured’s family after his or her demise.
Types of Life Insurance Plans
- Term Insurance
- Unit Linked Insurance Plans (ULIPs)
- Endowment Policies
- Whole Life Policies
- Money Back Plans
- Annuity/Pension Plans
Term insurance is a pure protection plan, which provides a life cover to the policyholder for a limited period of time. If the insured person unfortunately dies during the policy term then the amount of sum assured is paid to the nominee that may be a family member.
In case if the policyholder survives the policy term no amount is paid because in term insurance maturity benefit is zero. Usually, term plans are brought by those who want large life cover at a low cost of the premium.
Let’s consider an example. Suppose, you’ve purchased a 20-year term policy with a promise of Rs. 1 Crore and the premium is Rs.600/year. Assuming you are current on your premium payment, if you die within the 20-year period, then your beneficiary will receive Rs.1 Crore, completely tax-free.
Unit Linked Insurance Plans (ULIPs)
ULIP is integrated plan of both insurance and investment offered by insurance companies. In ULIPs the investment is done in stocks, mutual funds and bonds etc so ULIPs are risk associated. Policyholder can manage both the parts (Investment and Protection) according to his requirements and choices.
Unit Linked insurance plans also offer tax benefits under section 80C of Income Tax Act. Also, ULIPs are the best way to save money and to also ensure the growth of the saved amount.
Endowment plans are divided into two categories-
Endowment plans without profits: Same as term insurance plan. Nominee receives sum assured amount only after the death of the policyholder, No maturity benefits.
Endowment plans with profit: These types of endowment plans have maturity benefits. Nominee receives the sum assured with bonus until the policy is in force in case of insured’s demise. If the policyholder survives the complete policy term or on maturity insured receives sum assured amount with a bonus.
Whole Life Policy:
As the name suggests whole life insurance plans cover your entire life. In this plan, the insured have benefits of life cover and bonus. A part of the premium paid by the policyholder is used by the insurer to provide him protection and the remaining invested by the insurance company to make profits which are paid in the form of bonus to the policyholder.
There are two types of whole life insurance policy:
Pure Whole Life Insurance: The premium is paid by insured until his death. The life cover is for whole life and sum assured is paid to the nominee after the demise of the policyholder.
Limited payment Whole Life Insurance: The only difference in this plan is premium payable for a limited period of time which is chosen by the insured person.
Money Back plan:
The Money Back plans are also investment cum insurance plan. It provides life coverage and maturity benefits which comes in instalment on the specified interval of time. After a few years from the start of the plan, the money back plans start to pay an amount as survival benefits to the policyholder till the maturity of the money back plan. In case of unfortunate death of an insured person, these survival benefits do not pay anymore, only maturity amount as a death benefit is paid to the nominee of the policyholder.
Thus, the money back plan is a good source of regular income as a survival benefit with life protection cover.
Pension or Retirement plans are good investment plans that secure your life after the retirement. An amount is paid on regular basis or as a lump sum to the individual after the maturity of the plan. These retirement plans provide you with a regular income after the employment years.
The Need for Life Insurance in Your Life
Before pondering upon whether you need to buy life insurance or not, ask yourself one simple question: “Will someone in my life get adversely affected from a financial standpoint, in case I have an untimely death?”
Although people are quite aware how much vital it is to buy a life insurance plan, they mostly tend to procrastinate it until they face an important life event that pushes them to buy the same. Moreover, there exist a lot of significant benefits of buying a life insurance policy early on, especially if one has debts, or is planning to get married, or has been planning to start a family soon, or is the owner of a particular business firm.
Here is where the actual need for buying a life insurance policy occurs.
- Life Cover: If you die tomorrow, who would repay all your debts? Your next of kin (spouse/ parents/ siblings/ children) will become responsible for all your personal liabilities. Life cover is nothing but the amount that your insurance company pays to your nominee in case of any unfortunate event that might happen to you during the policy term. And this amount ensures that the future of your loved ones will be completely secure, even in your own absence. This is, by far, the most important benefit provided by any life insurance plan.
- Long-term savings: Have you got a family to take care of? Are you planning to have kids soon? Then you must undertake a life insurance policy, in order to not put the future of your entire family at risk. Life Insurance is the best way to save and build wealth systematically for the future, and can also help you meet your financial needs after retirement or even fulfil a future goal such as your child’s marriage. Hence you’re getting double benefits of protection as well as savings with life insurance.
- Succession plans for your Business: What would happen to your business if something happens to you all of a sudden? If you’re a business owner and do not have a succession plan, you must speak to a financial adviser as soon as possible. He would provide suggestions regarding what kind of life insurance product you must purchase, and advise you to create documents determining who would inherit your business along with all its assets and liabilities.
Where Can You Get Life Insurance?
There are a lot of insurance companies available in the market, and you can undertake a life insurance plan from any one of those companies by physically visiting there. But it’s better to speak to a financial advisor prior to this. He can assess your situation and guide you towards a life insurance policy that would make the most sense for you. In case you have an old policy lying around, you may also to get it reviewed by your financial advisor. But beware of “captive agent”-s, who work for a particular insurance company and would compel you to buy that company’s insurance only, without taking consideration of what you actually need.
Nowadays, life insurance policies are also available over the internet. Life insurance online has made it easier for a customer to take a closer look at the available plans of a particular company and then choosing one to move forward with, without the need to physically appear at the said company. You just need to fill up a form, and life insurance online will be done at the click of a button. Buying life insurance online is much advantageous over the traditional procedures of buying insurance.
Common Aspects Related to Life Insurance Policy:
Premium: A premium is the amount of money that an individual must pay for an insurance policy. It depends upon the coverage of policy that you choose at the time of buy.
Nominee: A person to receive the policy money in the event of the death of the Policyholder.
Policy Term: It is a certain period of time in which insurance policy provides protection to the policyholder.
Sum Assured or Death Benefits: This is the money received by nominee after the policyholder’s demise.
Policy Paying Term: The time duration for which policyholder have to pay the premium.