Understanding Life Insurance
Meaning and Importance – A contract that is made between an insurer and the insurance policy holder when the latter pays a fixed premium to the insurer and insurer ensures to give benefits of the same to the insured upon his death. However, benefits may not be restricted only to the death of the insured. The benefits may also occur in case of critical illness or terminal illness depending upon the type of contract both the parties have signed.
Life Insurance is important as it buys peace of mind for your loved ones. Once your life is insured, you become sure that even your absence would not bring any kind of financial hardships for your loved ones. A regular premium is paid by you to the insurer in order to gain this peace of mind.
The mode of paying your premium could be lump sum or regular monthly, quarterly or half yearly investments as per your choice. Expenses like funeral expenses are also being covered in few life insurance policies that are being offered in market at present. Life insurance is important as it dilutes your risk and secures you and your family preparing you to face the uncertainties that life throws at you.
Life insurance may be of no use to you if there is no one who is dependent on your earnings. If the salary generated by you is not significantly important in supporting your family then also you may as of now opt out from investing in a life insurance policy.
Benefits of Life Insurance – Life insurance offers you the following benefits
- Life insurance shields you and your family from the uncertainties that life has to offer. It serves as a risk cover for your family against any unpredictable event.
- Life insurance also comes handy when you plan your life needs. Plans like Guaranteed Cash Values, Money Back etc help you achieve your targets of building a home, getting your daughter married, providing your children with higher education or in planning your nest egg.
- If you opt for health insurance plans through life insurers they also ensure that you sail through easily in event of any medical emergencies that may arise. With the cost of health expenses rising steadily, it offers good benefits.
- You cannot ignore the fact of disciplined saving when you opt for life insurance. As life insurance is a long term investment and you pay fixed installments for a specific period of time it ensures that the habit of disciplined saving gets cultivated within you.
- Life insurance also serves as an instrument for planning your retirement as it offers assured incomes through annuities. While you get into the habit of saving as you earn today, it helps you to provide you with a source of income when you enter your golden years.
- Life insurance plans also churn out tax benefits for you under Section 80C up to maximum limit of Rs 1 Lac and Section 10(10)(D).
Types of Life Insurance
Life Insurance in India is a federal matter. All national and private life insurance companies in India are governed by Insurance Regulatory and Development Authority of India (IRDA).
- Whole Life Insurance – This is the type of insurance that provides security for the entire life of the policy holder. The beneficiary gets the benefit only at the event of death of the policy holder. It is also known as permanent coverage. By investing in this you are able to build a cash reserve for your loved ones.
- Term Insurance – As the name says, term insurance is for a fixed period of time. Once the policy lapses, it is at the will of the insured to get it renewed or to let it go. The benefit is provided at the death of the policy holder. However, the death needs to take place within the specified time period. It comes handy when you have limited amount that can be invested and limited years to be covered.
Term Insurance may also include
i) Level Term – If you opt for a term insurance and your premium is fixed for anything more than one year then it is a level term insurance plan. If long term budgeting is in your mind then this could serve your purpose. There is an option of renewing the policy after the expiry of the specific guaranteed period.
ii) Annual Renewable Term – This is a policy that has a fixed term of one year. You are exempt from providing evidence for insurability in case you wish to get it renewed for longer duration but it will cost you higher premiums.
- Universal Life Insurance – Universal Life Insurance is also a permanent policy and is often referred to as adjustable life or flexible premium insurance. The premiums, amount of protection and cash values can be altered by you during the contract term as per the change in your needs and requirements.
- Variable Life Insurance – As the name says the cash and death benefits in this plan may vary. While you invest in variable life insurance program you are able to accumulate cash that can, in turn, be invested in any of the choices that the insurance company offers to you.
- Variable Universal Life Insurance – It is nothing but a combination of Universal and Variable plans. It provides you with the flexibility of altering your premiums, amount of protection and cash values along with the choice of investment where you wish to put in your money.
- Limited-Pay Insurance – The name says it all. These types of plans are those in which you need to pay your premiums for a specific period of time. It is a kind of permanent insurance but after the specified period you are not liable to pay any further premiums. It usually varies for a period of 10 years or 20 years and gets paid out at 65 years of age.
- Endowment Insurance – These plans are ones that help you sail through smoothly especially when your paid work ends. If you buy an annuity policy with the sum received, you will be able to earn regular incomes in way of monthly pensions when you retire.
When you are planning your finances, insurance is one thing that you can not ignore. While you choose a life insurance plan for yourself, it is important for you to keep in mind your financial and family needs, risk appetite and the amount that you can set aside on monthly, quarterly, half-yearly and annual basis. It is important to go through every minute detail and fine prints and all the potential risks attached to it before you sign the purchased policy documents.
Do not end up getting over insured or staying under insured. There is no harm in consulting a financial advisor for the purpose. After all, it’s your hard earned money and you would not let it go waste especially when it is the matter of buying peace and security for your loved ones and yourself.
Contributed By: Megha Sharma
Megha Sharma works as a guest lecturer in Delhi. She holds an MBA & Doctorate from the UPTU. With extensive knowledge and experience in various financial products, she also works as a consultant in banking & finance domains wherein she offers advice to her clients in managing personal finance.