What is Life Insurance?
Life can be unpredictable and planning for unforeseen events is an essential part of financial planning. Life insurance ensures that the family and loved ones are covered in the unfortunate event of the insured’s demise. It is a contract between the insured and the insurance company, where the insurer promises to pay a sum of money in exchange of the individual paying a premium at regular intervals. The insurer pays the family if the insured passes away or after a stipulated period.
What are the Types of Life Insurance?
Term insurance is a type of life insurance that provides a higher life coverage at affordable premiums, for a specified period of time known as ‘term’.
Term life insurance plans are pure protection insurance plans which cover the risk of premature death. These plans have a definite tenure and pay a death benefit when the insured dies within the selected tenure. Term life insurance is very affordable when compared to another type of life insurance and provide high coverages at very low premiums. In this type of insurance policy, the sum assured is offered to the family or dependents of the policyholder, thereby helping them in managing finances after the primary earner passes away.
Unit Linked Insurance Plans (ULIPs)
The Unit Linked Insurance Plans (ULIPs) is a type of life insurance that is structured to offer dual benefits of coverage and investment. A part of the premium paid is invested in different options, offering the insured market linked returns. The remainder of the premium is used as life coverage.
Traditional Life Insurance
Traditional Life Insurance is a type of life insurance that offers numerous benefits, including tax benefits and fixed income returns. They are considered to be risk-free as they offer a fixed return in the case of the untimely death of the insured or at maturity.
A child plan is a version of the ULIP where the insured can invest and grow their wealth for their child’s higher education plans. The plan offers flexibility to invest into different funds based on current financial conditions and long-term finance goals.
The endowment plan offers dual benefits as it is a combination of both, life insurance and a savings plan. When investing in an endowment plan, the insured will receive the assured sum at maturity as well as earn bonuses periodically.
Retirement plans are a type of life insurance that help the insured build their wealth for their life after retirement. The beneficiary of the insured will receive immediate payments in the case of the insured’s untimely demise. If the insured outlives the term of the plan, they will receive the vesting benefit.
Whole Life Insurance
Non-participating Whole Life Insurance
A non-participating whole life insurance policy that has a level premium as well as face amount during the entire life of the insured. The fixed costs and low out-of-pocket premium payments are its benefits. However, it does not pay any dividends.
Participating Whole Life Insurance
The participating whole life insurance pays dividends. It isn’t mandatory to receive dividends, but if they are paid, they will be paid in cash. This cash is either used to reduce the premium payment amount or will accumulate and earn interest at a predetermined rate. The insured also has the option to use the dividends to purchase paid-up additional insurance, increasing the value of the face amount.
Group Life Insurance
A Group Life Insurance policy is a collective cover for a group of people. The people need to be part of the same company, association, a group of depositors at the bank, etc. These are popular as the cost of insuring a group of people is significantly lower than individually insuring each member of the group. Most employees are offered Group Life Insurance Schemes to incentivise them. In India it is mandated by the Employee Provident Fund Organisation for employers to insure their employees under the Miscellaneous Provision Act 1952 and the Employee’s Provident Fund. Subscription to the group life insurance scheme can be either contributory or non-contributory. The contributory group insurance requires the member to contribute in some proportion towards the premium. The non-contributory group life insurance, on the other hand, does not require members to pay anything to avail of the benefits of the insurance policy.
Who all can Buy Life Insurance Policies?
Men and women between the ages of 18 and 65 can buy life insurance in India as per the terms and conditions of life insurance policies.
Parents with minor children
Parents with adult children
Young and single adults
People with a home loan
Life insurance for parents
BENEFITS OF BUYING LIFE INSURANCE AT A CERTAIN AGE
More coverage at a lower premium, which will provide financial assistance for payments such as education loans, etc.
Financial security for the family along with regular income based on the policy invested in.
Plan for life’s milestones such as children’s higher education, retirement, etc.
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Helps in paying financial debt as well as earn other benefits.
What are the Benefits of Life Insurance?
Secure Financial Future
Life insurance policies offer a secure future for the family by providing an assured sum in the event the insured passes away. The money claimed can help the family stay afloat in the insured’s absence.
The premiums paid on life insurance policies are eligible for a tax deduction under Section 80C of the Income Tax Act, 1961, to the amount of Rs. 1.5 lakhs.
Financial Planning & Life Goals
As life insurance policies are aligned with the financial goals, the policy provides the financial support to achieve them even in the case of the insured’s untimely demise. Investing early will help plan for all of life’s milestones.
Return on Investment
With an average annual rate of return on a whole life policy is 1.5% as reported by Consumer Reports, it offers a better return on investment than the interest rate of other banking instruments including savings accounts and money market accounts.
Invest to Create Wealth
Life Insurance policies that invest part of the premium such as ULIPs, provide the insured life cover as well as the returns on investment.
Higher Education Plan for Children
Planning, saving and investing for a child’s higher education is a priority for most parents. Life insurance policies can help achieve this milestone securing a child’s future financially.
More Coverage for Low Cost
Life insurance policies, especially the term insurance, provides significant coverage at a considerably lower premium, based on the insured’s age and health.
Taking a loan against certain life insurance policies is becoming a popular choice as it offers a lower rate of interest than a personal loan. Along with providing protection coverage, return on investments, this is an additional benefit.
The critical illness rider can be opted for when getting life insurance to provide coverage in the case of critical health ailments, such as cancer, heart disease, kidney failures, etc. This benefits the insured in the case of an emergency as the finances are taken care of.
How to Choose the Best Insurance Policy?
Assess life insurance goals
Calculate the optimal insurance cover needed02
Determine the amount that needs to be paid as premium and find the policy offering the best deal
Select the correct policy term04
Do not conceal facts from the life insurance provider
Understand all the terms and conditions clearly, before making the final commitment06
Buy life insurance at an early age
Choose a comprehensive plan08
Evaluate the life insurance needs regularly
Factors You Should Keep in Mind While Choosing the Cover
When selecting a life insurance policy, these are the factors that should be taken into consideration.
- Active Working Years
A life insurance plan works as an instrument to replace income. Calculate the number of active working years that need to be replaced when selecting the assured sum.
- Identify Recurring Expenses
The assured sum will need to cover all the long-term expenses, such as household expenses, utility bills and loan EMIs. The expenses will highlight how much the sum assured should be.
- Family Milestones
Milestone events such as weddings, retirement, buying a house require a large investment. The sum assured should be able to cover them within the stipulated time.
It is never too late or too early to invest in a life insurance policy. At every stage of life, starting from the 20s, it is beneficial to provide cover and security through life’s different situations.
- Regular Income
With the right life insurance coverage amount, one can support their family financially with a premium that aligns with regular expenses.