Life insurance takes care of a family in case bread-winner was to die too early and takes care of bread-winner if he or she were to live too long. Buying life insurance is like buying a peace of mind for self and family.
Before purchasing a life insurance policy, we should consider our financial situation and the standard of living we wish to provide to our dependents, the kind of provision we want to make for our children education, children marriage and to take care of our retirement days.
Life insurance can take care of loss of income, pay-back outstanding loans or keep the business running just in-case of the death of life insured.
It would be wise to re-evaluate life insurance policies once a year may be on our birthday or when we experience a major event in life such as marriage, child birth, and purchase of a house or commencing a business.
Premium of life insurance depends upon the age, health and the nature of work of an applicant, policy type selected, sum assured, policy term, premium paying term, premium payment frequency, riders (if any).
One can buy life insurance by paying low premium if it’s bought at an early age, insured for a long period and for a large sum assured. We get discounts if premiums are paid in an annualised mode.
In ULIP, the investments made are made in the capital markets. This investment risk is borne by the policy holder. Unit Linked Insurance Plans are investment cum protection plans that offers an opportunity to avail market linked returns while providing life insurance protection. Depending on your risk appetite, you have the option of choosing from host of funds (Equity, Debt, Balanced etc.) having varied degree of risk exposure. 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 an 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 market by the insurance company. ULIP offer a wide range of flexible options such as:
Child plans are structured in two ways. In case of ULIP the survival benefit is outcome of the fund value and sum assured plus bonuses in case of Traditional Plans. Death benefit varies across these structures.
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/grandparent who pays the premium for the policy.
In an event of proposer’s death, usually no further premiums need to be paid by the family if WOP-Weaver of Premium rider is opted with the plan. 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 pre-determined time of the policy.
Such policies are best suited for planning children’s higher education and marriage expenses.
Pension policy provides a regular sum of money to the insured or to his nominee for a fixed period.
The insured has an option to select when and for how long he or she would like to receive the pension amount. In the event of death of the insured during the term of the policy, the nominee has an option of taking a lump sum amount or receiving a regular pension for the remaining term of the policy.
In the case of pension plans, a third of this corpus is commuted, meaning it is paid to you on maturity. This amount is tax-free. The rest is used to give you regular income through an annuity plan; this income is taxed.
Pension plans come in both the wrappers of unit-linked and traditional.
Traditional plans are more oriented towards investment in debt funds. They put around 60 % in government securities, as these have to give certain guaranteed sum assured to policyholders.
In the case of a unit-linked or market-linked pension plan, a policyholder can choose the investment limit between equity and debt investments. Ulips also give the policyholder an option to switch between debt and equity.
As per IRDA, both ULIP and Traditional pension plans have to provide minimum guaranteed returns, as these policies are meant to build retirement corpuses. Traditional plans guarantee a minimum sum assured, along with bonuses, if any, while Ulips provide a minimum guarantee of about 4.5 per cent.
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.
These plans are of fixed income return, risk cover, tax benefit. These are suitable for individuals who do not want to risk on their investments in the market-linked returns.
These insurance plans offer assured amount of corpus along with bonuses. However, the declaration of bonus is at the discretion of the insurance company and that may vary year-on-year depending on the profit made by the company. In case of untimely and unpredictable death of the policyholder, the insurance payout is given to the beneficiary.
Large part of the premium needs to be invested in risk-free securities as the plan offers guaranteed returns. The investment done under traditional plans are at the discretion insurance company.
The insurer would be paid a lump sum amount either at maturity of the term or on death.
Endowment policies cover the insured for a specified period. Thus, the insured may select the tenure of insurance policy e.g. if he is 26 years old, he may choose to insure himself for 32 years, until he reaches an ideal age of retirement i.e. age 58.
During the term of insurance if the insured dies, the nominee receives the sum assured plus the bonus, if any. Bonus is paid for the number of years the policy was in force.
If the insured survives till the term of the policy, i.e. upon maturity, the insured receives the sum assured plus accumulated bonus (if any) through entire term of the policy.
Endowment policies are broadly classified into two types: Endowment without profit and Endowment with profit.
Endowment without profit (non-participating): offer the nominee the sum assured only upon death of the insured; no bonuses are paid here. 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 : On death of the insured or at the end of the term of the policy i.e. on maturity, in addition to the sum assured, policy offers bonus (which could be guaranteed) for the number of years the policy was in force. These policies cost more than the Endowment without profit policies.
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.
In money back policies, the policy holder gets periodic payments at pre-scheduled intervals during the term of the policy. Upon surviving the term of the policy or upon maturity, the insured receives the balance amount of the sum assured plus bonus for entire term of the policy.
In an event of death of the policy holder during the term of the policy, the beneficiary/nominee gets the full sum assured plus bonus accumulated till the policy was in force. This is over and above the pre-scheduled payments made till then, and no further premiums are required to be paid.
Basis money required to meet our financial goals, money back policies can be customized to give lump sum amount at regular intervals to the policy holder. This money received during the term of the policy is tax-free.
Many people prefer to purchase such a policy to utilize the money receivable for going on a holiday, re-furnishing their homes etc.
Whole life insurance risk covers the death of the insured till life time, generally till the age of 99. 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: Here premiums are payable 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: Here 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.
Policy premiums are typically fixed, and, unlike term, whole life has a cash value, which functions as a savings component and may accumulate tax-deferred over time.
Whole life can also be used to do estate planning tool to preserve the wealth we plan to transfer as legacy to our beneficiaries. 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.
In Pure term policy a sum assured is paid only if death occurs during a selected period. If the insured survives till the end of the selected period, nothing becomes payable.
If premium paying capacity is low and personal liabilities to be taken care are high, then term insurance is a best option, as by paying a small premium breadwinner can take large insurance cover to protect his family's financial future considering an event of sudden death.
Term insurance can be taken to hedge risk such as housing loan or a person who has invested substantially in business by borrowing at high interest rates or by mortgaging property.
Term insurance can also be used by employers to provide life cover to their employees as a welfare measure at low cost. Companies can claim the premium paid on such policies as a business expense / revenue write-off in the books of account.
It pays out a fixed lump sum if insured were to die during the policy term. So one knows exactly what any dependents will be left with in the event of his /her death.
This policy insurance factors rising cost of living, and therefore opts for an increasing term insurance. The sum insured either increases by a fixed amount each year or rises in line with the Wholesale Prices Index (WPI) measure of inflation. However, as the sum insured rises over time, so do the premiums.
If you are looking for life insurance to cover a debt that will gradually reduce over time, such as a mortgage loan then, decreasing term insurance is a good option.