Life Insurance
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About Life Insurance

What is Life Insurance? 

Life insurance is protection against loss resulting from insured Individual’s death. Life insurance provides you and your family the financial security and certainty to deal with the aftermath of any unseen unfortunate events. 

Why should I buy life insurance?

Life Insurance provides you and your family with protection against all the risks involved in the event of your death, moreover providing you an opportunity to grow your investments. It could be viewed as a long-term investment to provide for your child’s future expenses or your expenses, post retirement.

Why do I need Insurance?

You need insurance for Family that is financially dependent on you: If you have a family that is financially dependent on you, then you definitely need to insure yourself. The most common reason to buy life insurance is it provides protection to your family in case of any unforeseen events. The life insurance proceeds can be used to support your family members with the expenses. 

Loans or liabilities: It is critical to insure yourself if you have taken a loan or mortgaged your assets. It not only provides peace of mind but also a steady source of income for your family

Compulsory saving-cum-investment: A life insurance policy could be used as a disciplined saving-cum-investment instrument. Proceeds from the insurance policy could be used to fund future expenses such as child’s higher education or retirement funds or even a well-deserved holiday.

Partner in a firm or Self-employed: It is highly needed by people who are partners in a firm or have their own proprietor firms. Life insurance can be a critical component for specialized business applications - such as funding a buy-sell agreement. The proceeds of a life insurance policy could be used to provide cash for the purchase of a deceased owner’s interest in the business or to pay off business liabilities.

Other than the RBI Bonds, insurance products are the only other investment products that guarantee yields over a range of time - from 5 years to 25 years. Insurance companies offer single premium investment products as well as regular investment-cum-insurance products that guarantee high yields over a period.

Whom should I insure?

Breadwinner - If you are the breadwinner of the family, you should insure yourself first.

Working spouse - If you have a working spouse who could use an insurance policy, both of you could insure yourselves in a joint-life policy. It could serve as a low-cost policy which covers both of you, and which either of you could use for tax-saving purposes as well.

Children - If you have children you could buy an insurance policy in their name. This would ensure that your children receive a certain sum of money in their needy years of higher education. The major advantage in such a policy is that your child or family receives a guaranteed amount of money at a specified period in life.

This type of a policy helps since the earning parent may not be alive later when the child needs money for higher education and the spouse may not be in a position to provide such a large sum of money. Moreover, a policy of this kind ensures a compulsory saving for the child’s future.

Partner/Key-person in the organization: If you have a working partner in your firm or a key-person(s) in the organization, your firm/organization could buy life insurance for them. Such a policy would insure your firm against any financial loss that would be incurred in the event of your partner/key-person’s death.

When should I insure?

If you have people dependent on your income, you should insure yourself. The younger the age, the lower is your premium. Even if you are single, earning and intending to marry, you should think of buying a policy now, as it costs less now than it will when you marry. 

Remember, it is never too late to buy an insurance policy. Even if you are 45, and are not insured, you could choose insurance products that provide benefits to your family and provide income during your retirement period.

For how long should I insure?

Ideally, you should insure yourself for as long as you are the critical or crucial breadwinning member of the family.

With the growing nuclear families and the typical Indian sacrificing mothers/wives. It may be prudent to ensure that the working man covers himself for his whole life; to ensure that his wife receives a lump sum upon his death.

What are the basic elements of Life Insurance?

The two basic elements to all individuals are

• Risk coverage (i.e. Term Insurance) 

Savings for future (i.e. Pure Endowment)

How much does life insurance cost?

 The cost of buying an insurance policy depends on:-

  • Your age, health and the nature of work you do

  • Policy type selected.

  • Sum assured.

  • Policy term.

  • Premium paying term.

  • Premium payment frequency.

  • Riders (if any) attached to the policy.

How do I reduce the cost of buying life insurance? 

The cost of a policy could be lowered if you 

  • Buy insurance at an early age (while the risk is lower)

  • Insure yourself for a long period

Insure yourself for a large sum assured; offer to pay premium annually, thereby receiving discounts

Select a low cost policy such as a Term product, which offers negligible to minimum returns upon maturity. 

Do not buy riders or additional benefits that do not seem to add value to you or are available as other insurance policies at lower prices.

What are the various types of insurances?

The insurance sector is classified into Life and Non-life (or General insurance as we know it). 

Under Life insurance, an individual’s life is covered i.e., the insured’s nominee receives a certain sum of money if the insured individual dies within a specified time.

Under General Insurance, everything but an individual’s life is covered. Thus, an individual could insure himself for his health, home, automobile, travel, office, shop, and even pets.

What type of insurances should I have? 

To ensure you are safe, the least you should do is to ensure that you have

- Health insurance

- Life insurance, Accident Insurance

- Automobile insurance

- Home insurance

What do I get if I insure? 

Peace of mind, that you have secured your family from major risks – be it death, illness, accidents, theft or natural calamities

In monetary terms, you can claim tax-deductions .

Survival benefits or Interim benefits, i.e. money received during the term of a money back policy are tax-free.

Maturity benefits or the amount received at the end of the term of a policy is also tax-free.

Regular pension received under pension policies is taxable. However, the lump-sum cash option available under these policies is tax-free.

Proceeds of a life insurance policy, received by the nominee, are tax-free.

Moreover, the money you receive from the insurance company, during the term of the policy and/or upon maturity, is tax-free (with the exception of the pension policies).

Should I use insurance as an investment?

You could use some of the insurance policies as investment products. 

Insurance companies now offer a variety of products that allow the insured to choose his investment option. There are policies that offer a fixed guaranteed rate of return, some offer a market-linked rate while some allow the insured to select his investment option. In the current state of the market, yields from insurance products can be expected to vary in the range of 6.5 -7.5 - 8% per annum (pre tax). 

What is Group Life Insurance?

Life insurance usually without medical examination, on a group of people under a master policy. It is typically issued to an employer for the benefit of employees or to members of an association, for example a professional membership group. The individual members of the group hold certificates as evidence of their insurance.

Which type of policy is best suited for me ?

The type of policy that suits you best depends on many factors, such as your insurance objectives, your income, assets, liabilities, number of dependent members in your family and family expense. Life insurance policies are broadly classified in to three categories

Endowment policies 

Whole life policies 

Pension policies 

Endowment policies 

Endowment policies cover the insured for a specified period. Thus, the insured may select to insure himself until retirement; e.g. if he is 25 years old, he may choose to insure himself for 35 years, until he reaches the age of 60.

Upon the death of the insured (during the term of the policy), the nominee receives the sum assured plus the bonus, if any. Bonus is paid for the number of years the policy was in force. 

Upon surviving the term of the policy, i.e. upon maturity, the insured receives the sum assured plus the bonus for the term of the policy, if any. Thereafter, the insured is not covered by the policy. 

Endowment policies are usually more expensive in comparison to whole life policies. Endowment policies are broadly classified into two types - Endowment - Without profit and Endowment - With profit. 

Endowment - Without profit or Term products - offer the nominee the sum assured only, upon death of the insured. Upon surviving the term of the policy or upon maturity, the insured may receive the sum assured or a portion of the sum assured or a refund of the premium only. Typically, such policies are low-cost policies. 

Endowment - With profit policies - offer a bonus (which could be guaranteed) in addition to the sum assured, upon death of the insured or at the end of the term of the policy. These policies cost more than the Endowment - Without profit policies. Currently, four types of Endowment - With profit policies are offered in the market: 

Endowment with profit policies

Upon death of the insured, the nominee receives sum assured plus bonus for the number of years the policy was in force. 

Upon surviving the term of the policy or upon maturity, the insured receives sum assured plus bonus for the term of the policy. The amount receivable upon maturity is tax-free. 

Many people prefer to buy such policies for terms that mature during their retirement period. Often, the maturity amount is utilized to supplement the pension income (pension income is taxable). 

Money back policies

During the term of the policy, the insured receives a fixed portion (percentage) of the sum assured at regular intervals. This money received during the term of the policy is tax-free. 

Upon surviving the term of the policy or upon maturity, the insured receives the balance amount of the sum assured plus bonus for the term of the policy. 

Upon death of the insured, the nominee receives full sum assured plus bonus for the number of years the policy was in force. (Money received by the insured during the term of the policy is not deducted from the amount paid to the nominee.) 

Money back policies cost more than Endowment - With profit policies. Many people prefer to purchase such a policy to utilize the money receivable for going on a holiday, re-furnishing their homes or even re-investing the same amount. 

Child Plans

The child receives sum assured plus bonus (if any) at a pre-determined time. This money is receivable irrespective of the fact that the proposer is dead or alive. 

The proposer for such a policy could be the parent/guardian/grand parent; he pays the premium for the policy. 

In the event of death of proposer, usually no further premiums need to be paid by the family. However, depending upon the policy type, the child may or may not receive the sum assured upon the death of the insured. However, the policy continues and the child receives the sum assured plus bonus, if any, at the pre-determined time of the policy. 

Upon survival of the term of the policy, the child receives money at the pre-determined time.

Such policies are best suited for planning children’s higher education and marriage expenses.

Unit-linked Insurance Plans

A portion of the premium is invested in the stock market or in a mutual fund. Thus, the returns earned on such a policy are transparent (unit-linked) since they can be tracked on a daily basis. 

The company utilizes balance part of the premium to cover insurance and administrative costs.

In the event of death of insured, the nominee receives sum assured plus returns earned in the market by the insurance company. 

Upon surviving the term of the policy, the insured receives the returns earned in the stock market by the insurance company.

Whole life Plans

Whole life policies provide insurance until the death of the insured person.

Upon the death of the insured, the nominee receives the sum assured plus the bonus, if any. 

Whole life policies typically offer no survival benefits, since there is no definitive term to the policy. However, the insured could make withdrawals or take loans against the cash value of the policy. 

Typically, the cash value (the interest or bonus earned on the premium) of a Whole Life policy is higher than that of an Endowment with Profit policy. 

Moreover, the premium for a Whole Life policy is paid for a longer duration of time (since the insurance coverage term is longer). However, the insured has the option of selecting the premium paying term. 

Pension Plans

Pension policies provide a regular sum of money to the insured or to his nominee for a fixed period. 

The insured has the option of selecting when and for how long (term) she or he would like to receive the pension amount. 

In the event of death of the insured during the term of the policy, the nominee has the option of taking a lump sum amount or receiving a regular pension for the remaining term of the policy. 

It is advisable to have a portfolio of policies with varied benefits, as a single policy cannot meet all your insurance objectives.

What is Term Insurance?

Term Insurance covers “Risk” and Risk means “Death”. Here a lump sum amount is payable only if death occurs during a selected period. If the insured survives till the end of the selected period, nothing becomes payable.

What is Endowment product?

The insurer will receive a lump sum amount either at death during the term or at maturity of the term.

What is a Whole Life insurance product?

whole life insurance risk covers the death of the insured, whenever it may happen. It means that there is no fixed term under whole life insurance. Most policies provide a dividend to the policy holder which helps with retirement.

There are two variations in the whole life insurance products i.e.

Pure Whole Life Insurance: - where premiums are payable continuously throughout the life of the insured till death. Risk coverage is for the entire duration of life and the life insured amount is paid on the happening of the death of the insured at any time. 

Limited Payment Whole life Insurance: - where premiums are paid for a limited and shorter period and the option of the insured or till death if earlier. Risk coverage is however throughout the life of the insured.

What is a Money Back plan?

Unlike endowment plans, in money back policies, the policy holder gets “periodic payments" during the term of the policy and a lump sum amount on surviving its term. In the event of death during the term of the policy, the beneficiary gets the full sum assured, without any deductions for the amounts paid till date, and no further premiums are required to be paid. These type of policies are very popular, since they can be tailored to get large amounts at specific periods as per the needs of the policy holder.

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