Why is life insurance important? Is it something that you should consider? Have you thought about your family's financial state, or your security after you've retired? How will you take care of them, or yourself?
Before we get into the whys of life insurance, here's a brief overview:
Types of Insurance
There are four types of insurance: Life, Fire, Marine and Miscellaneous Insurance. Life insurance is treated separately, while Fire, Marine and Miscellaneous insurance all fall within the General Insurance umbrella.
What is Life Insurance?
Life insurance is a policy that may be bought from a life insurance company, which helps beneficiaries financially after the owner of the policy dies. It is a contract between the policy owner (you) and the insurer (the life insurance company), which assures the paying out of a sum of money in the event of the policy holder's death, or terminal or critical illness.
Specific exclusions are often written into the contract to limit the liability of the insurer; for example claims relating to suicide, fraud, and war. The cost or premium on your life insurance decides the type and kind of coverage you get under a life insurance plan.
Life Insurance can also be a form of savings in the long run, which we will discuss shortly, or it can be tied in with a pension plan. Life insurance can provide security, protect home mortgages, and facilitate other retirement savings.
Life Insurance in India
The Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999, have made life insurance in India a federal matter. Therefore, all life insurance companies in India have to comply with the strict regulations laid out by Insurance Regulatory and Development Authority of India (IRDA), irrespective of whether they are state-owned (Life Insurance Corporation of India) or private (ICICI Prudential Life Insurance, Bajaj Allianz Life Insurance Company).
Types of Life Insurance
Taking out a life insurance policy covers the risk of dying early, by providing for your family in the event of your death. It also manages the risk of retirement providing an income for you in non-earning years. Choosing the right policy type with the coverage that is right for you therefore becomes critical.
There are a variety of policies available in the market, ranging from Term Endowment and Whole Life Insurance, to Money Back Policies, ULIPs, and Pension plans. Let's see what each of these is about, so that you can consider the one that best suits you.
Term Insurance, as the name implies, is for a specific period, and has the lowest possible premium among all insurance plans. You can select the length of the term for which you would like coverage, up to 35 years.
Payments are fixed and do not increase during your term period. In case of an untimely death, your dependents will receive the benefit amount specified in the term life insurance agreement.
You can customise Term life insurance with the addition of riders, such as Child, Waiver of Premium, or Accidental Death.
Endowment Insurance is ideal if you have a short career path, and hope to enjoy the benefits of the plan (the original sum and the accumulated bonus) in your life time.
Endowment plans are especially useful when you retire; by buying an annuity policy with the sum received, it generates a monthly pension for the rest of your life.
Whole Life Insurance
Whole Life Policies have no fixed end date for the policy; only the death benefit exists and is paid to the named beneficiary. The policy holder is not entitled to any money during his or her own lifetime, i.e., there is no survival benefit. This plan is ideal in the case of leaving behind an estate.
Primary advantages of Whole Life Insurance are guaranteed death benefits, guaranteed cash values, and fixed and known annual premiums.
In a Money-Back plan, you regularly receive a percentage of the sum assured during the lifetime of the policy. Money-Back plans are ideal for those who are looking for a product that provides both - insurance cover and savings.
It creates a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax except under specified situations.
Unit-linked Insurance Plans (ULIPs), introduced by the private players, are hugely popular, because they combine the benefits of life insurance policies with mutual funds. A certain part of the premium is invested in listed equities/debt funds/bonds, and the balance is used to provide for life insurance and fund management expenses.
Insurance companies offer two kinds of pension plans - endowment and unit linked. Endowment plans invest in fixed income products, so the rates of return are very low.
Unit-linked plans are more flexible. You can stop contributing after 10 years and the fund will keep compounding your corpus till the vesting date. You can opt for higher exposure in the stock market for your plan if your risk appetite allows it. Lower risk options like balanced funds are also offered.
Riders: Comprehensive coverage
In addition to the insurance plan of your choice, you might want to consider additional risk covers, in which case you can you can opt for riders: additional benefits that can be purchased with an insurance policy.
Examples of riders include the Term rider, the Accidental Death Benefit rider, and the Critical Illness rider. Choosing the right set of riders ensures a comprehensive insurance cover.
When considering a life insurance policy with riders, make sure to understand the exclusions in the policy. For example, under Term Insurance, if the insured person commits suicide, whether sane or insane, within one year from the date of commencement of a term policy, the cover will become void, i.e. the nominee cannot claim the sum assured.
Only the premiums paid up to the date of death will be refunded; after deducting the expenses incurred by the insurer for issuing the cover.
As important as it is to buy Life Insurance, it is even more important to pay your premiums on time. A life insurance company provides the insured with a grace period of 30 days, i.e. a period of 30 days after the start date of the policy.
The insured can pay premium on any day during this grace period. In case the insured dies during the grace period, the insurer is liable to pay the death benefit to the nominee less any amount outstanding (including the unpaid premium). This provision helps the insurer to minimise the risk of policy lapse unintentionally.
In these uncertain times, you're better off planning ahead, and securing the future for yourself, and your family. Arm yourself with the facts for an assurance of a lifetime of security.
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