What is life insurance?
Life insurance ensures that your family will receive financial support in your absence. Put simply, life insurance provides your family with a sum of money should something happen to you. It protects your family from financial crises.
In addition to serving as a protective cover, life insurance acts as a flexible money-saving scheme and also as an ideal tax-saving scheme.
What are the various types of life insurance policies?
Given below are the basic types of life insurance policies. All other life insurance policies are built around these basic insurance policies by combination of various other features.
Term Insurance Policy
Term insurance is the simplest and most fundamental insurance product. Term insurance plans are designed to ensure that in the event of the policyholder’s death, the family gets the sum assured (the cover amount).
Term life insurance ensures that your family receives a large lump sum amount, called the sum assured, in the unfortunate event of death of the policyholder. By offering this benefit at extremely competitive rates, Term insurance plans provide an opportunity to get the protection of insurance cover at extremely affordable prices
- Increasing liabilities: People today prefer to take loans to fulfilling their needs, instead of waiting to save for the future. Hence, in your absence, your family needs to take care of the outstanding loans.
- Nuclear family structure: Earlier, people could depend on their extended joint family system to take care of their near and dear ones in case of their absence.
- Increasing lifestyle diseases: The share of lifestyle diseases in India is increasing. Also, people in senior management are more prone to lifestyle diseases, as per an ICRIER Study.
- Income Security : In your absence, your family needs regular income for their needs and necessities so that their life is peaceful and without difficulties.
- One should have adequate cover for dependents. It’s better to be prepared and ensure that the financial needs of your loved ones are taken care of, in the unfortunate event of death.
- With age, the premiums tend to increase and therefore buying term insurance becomes more expensive. Taking the policy earlier is better as you get low premiums
- Apart from the benefit of protection for your dependents, also enjoy tax benefits under Sec 80C up to Rs. 1,00,000.
Typically the cover you take should be the sum total of the following
- All your outstanding liabilities like (Housing loans + Vehicle Loans + personal loans + All other loans and liabilities + Average credit card outstanding etc. )
- Future requirements of family which have not yet been provided for.
- Corpus required to fund the regular income requirement of the family etc..
If the life cover is inadequate, it defeats the whole purpose of insurance.
- The tenure of the term plan is almost as important as the amount of cover. An insurance policy should cover a person till the age he intends to work. Till a few years ago, this was 60 years. “However, a person may continue working beyond the age of 60,” Moreover, late marriages and having children at a higher age mean responsibilities do not end at 60.
- Don’t take a short-term cover of 15-20 years that ends when you are in your 40s. The premium will be very low because you will be insuring yourself for the non-risky years. In the 40s, the need for life cover is at its zenith. If you take fresh insurance at that age, it will cost you a bomb. You might even be denied the cover if you have not been keeping well.
There are many reasons you should have multiple insurance policies.
Benefits of Multiple Covers:
- As a hedge against claim rejection
- To diversify across insurers
- To have plans with different maturities to adjust cover according to changing liabilities
- To break down a large cover into smaller ones
While buying multiple policies, make sure you diversify across companies, coverage and different maturities as well. However, if you are just starting you can go for one immediately and add another later based on the increased requirement. This will, of course, turn out to be costlier but worth the small cost.
Whole Life Policy
- A whole life policy covers a policyholder against death, throughout his life term. The advantage that an individual gets when he / she opts for a whole life policy is that the validity of this life insurance policy is not defined and hence the individual enjoys the life cover throughout his or her life.
- Under this life insurance policy, the policyholder pays regular premiums until his death, upon which the corpus is paid to the family. The policy does not expire till the time any unfortunate event occurs with the individual.
- Increasingly, whole life policies are being combined with other insurance products to address a variety of needs such as retirement planning, etc.
- Premiums paid under the whole life policies are tax exempt.
- Combining risk cover with financial savings, endowment policies are among the popular life insurance policies.
- Policy holders benefit in two ways from a pure endowment insurance policy. In case of death during the tenure, the beneficiary gets the sum assured. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses.
- In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/ education endowment plans.
- The concept of providing the customers with better returns has been gaining importance in recent times. Hence, insurance companies have been coming out with new and better ULIP versions of endowment policies. Under such life insurance policies the customers are also provided with an option of investing their premiums into the markets, depending on their risk appetite, using various fund options provided by the insurer, these life insurance policies help the customer profit from rising markets.
- The premiums paid and the returns accumulated through pure endowment policies and their ULIP variants are tax exempt.
Money Back Policy
- This life insurance policy is favoured by many people because it gives periodic payments during the term of policy. In other words, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.
- In case of death during the policy term, the beneficiary gets the full sum assured.
- New ULIP versions of money back policies are also being offered by various life insurers.
- The premiums paid and the returns accumulated though a money back policy or its ULIP variants are tax exempt.
- ULIPs are market-linked life insurance products that provide a combination of life cover and wealth creation options.
- A part of the amount that people invest in a ULIP goes toward providing life cover, while the rest is invested in the equity and debt instruments for maximising returns. .
- ULIPs provide the flexibility of choosing from a variety of fund options depending on the customers risk appetite. One can opt from aggressive funds (invested largely in the equity market with the objective of high capital appreciation) to conservative funds (invested in debt markets, cash, bank deposits and other instruments, with the aim of preserving capital while providing steady returns).
- ULIPs can be useful for achieving various long-term financial goals such as planning for retirement, child’s education, marriage etc.
Annuities and Pension
In these types of life insurance policies, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against financial risks as well as provide money in the form of pension at regular intervals.