What is Life Insurance?
Life is precious and unpredictable. Loss of life is the biggest trauma we face especially if it is of a family member. We always protect our loved ones from every contingency and death is by far the most appalling so life insurance provides safety net for our spouse, children and dependents when we are not there.
Life Insurance Policy is therefore a contract between the insurance company and the policyholder under which the insurance company guarantees to pay an assured amount of money to the nominated beneficiary upon the death of the policyholder during the policy period. In return, the policyholder pays a predefined sum of money as premium at regular intervals spread across the period of policy. Some policies may also include critical or terminal illness as conditions for payment of insured amount.
How much life insurance cover do I need?
Buying life insurance policy is a crucial decision and a number of factors need to be considered:
Annual income & lifestyle: The purpose of life insurance is to ensure that your family members continue to enjoy the same lifestyle after you are no more. So calculate the amount of money your family needs to maintain the lifestyle and your contribution to the family income.
Liabilities: consider your debts like home loan, car loan, and education loan for your child’s education or personal loans taken by you that need to be repaid.
Future Expenditure: Consider future expenses of your family that you need to provide for like education & marriage of children, building of home, spouse’s old age & illness, etc.
Affordability: Another important factor is affordability. How much can you afford to pay for life insurance? Some policies can be really expensive with high premiums.
So consider all the above factors and decide the best policy for you & your family.
Types of life insurance
Term Insurance – It is the most widely purchased life insurance globally. A pure risk cover product, term insurance pays a death benefit when the policyholder dies during the policy period which is fixed 15 or 20 years but in the event he survives the policy period he is not paid anything by the insurance company. Though not a money back policy, it is popular because it is the cheapest form of life insurance with very small premium.
Endowment Plans: Traditional life insurance plans quite popular in India, Endowment plans combine risk cover and investment or saving. The policyholder enjoys a dual benefit; one his beneficiaries receive the assured sum in case of the policyholder’s death during the policy period, second, if the policyholder survives the policy period he gets assured sum and also bonuses as per the policy benefits. Moreover, returns in endowment plans are guaranteed so these are good option for risk-averse individuals.
Whole Life Plans: These offer insurance cover for the entire life of the policyholder and pays the assured sum to the nominated beneficiary after the death of the policyholder. The age limit is fixed by the insurance company and is generally above 85 years or even 100 years in some cases.
Children Plans: A unique product designed to meet the children’s future financial needs like higher education, marriage etc even when the policy holder i.e. the parent is not alive. These plans cover the life of the parent and in case of death of parent provide the cover amount to the child. In some cases the insurance companies also fund the future premiums and child gets the accumulated value at the end of policy period.
Unit Linked Plans (ULIP): Under ULIP a part of the premium paid by the policy holder is used for proving life cover and the rest is invested in the capital market. Since the investment options are chosen by the policy holder so the risk of investment is also borne by him. ULIPs provide the benefit of regular saving.
Pension Plans: These plans offer regular income after retirement. The policyholder either invests a lump sum amount or regular annual premiums over a period of time and after retirement receives regular income. In case of death of policyholder the nominee receives the cover amount.
Money Back Plans: One of the post popular life insurance policies in India in the recent years, money back policy offers a part of the cover amount along with bonuses to the policyholder at fixed intervals during the term of the policy and in case of death of the policyholder the nominee is paid the full cover amount and accumulated bonuses.