Life Insurance
Life insurance is a contract between you and a life insurance company. You agree to pay for the policy on a regular basis, and the insurer agrees to pay a sum of money in exchange for a premium after a set period or to your beneficiaries if you die.Life Insurance acts as financial protection for your family in case of your death or a payment made to you on surviving the policy term.
Types of Life Insurance
Whole life insurance is sometimes called permanent life insurance, and it encompasses several subcategories, including traditional whole life, universal life, variable life and variable universal life.
Universal life insurance is a type of cash value life insurance and blend between whole life and term.
Variable life insurance is a permanent life insurance policy with an investment component.
Features & Benefits of Life Insurance
- Life insurance provides an infusion of cash for dealing with the adverse financial consequences of the insured's death.
- Life insurance enjoys favorable tax treatment unlike any other financial instrument. Death benefits are generally income-tax-free to the beneficiary.
- High life cover at affordable premiums.
- Financial safety for family and loved ones.
- Some whole life policies can also earn annual dividends, a portion of the insurer’s financial surplus. You can take the dividends in cash, leave them on deposit to earn interest or use them to decrease your premium, repay policy loans or buy additional coverage. Dividends are not guaranteed.
Why you MUST buy Life Insurance
Life is beautiful, but also uncertain. Whatever you do, however smart and hard you work, and you are never sure what life has in store for you.A health emergency, an accident, or sudden death – these are some eventualities that you and your family must always be prepared for. That is where the importance of life insurance lies.
Why do i need Life Insurance
- Savings Growth - In your early years of working, some life insurance plans can be useful way to save and invest your money. Unit Linked Life Insurance Policies allow you to invest in equity and debt markets. Under current tax laws (which are subject to future amendment), you also get tax deductions for investment in life insurance policies and on the maturity amounts of such policies.
- Family Support - If you have a spouse and kids, the need to build a safety net for them becomes important. You would want to protect them from financial hardship in case of your untimely demise. You can also get good returns with life insurance by investing in some policies.
- Debt - We often take large loans in our working life, especially when it comes to buying a house. An untimely death while the loan is still due can have grave economic consequences for our families. In such a scenario, life insurance money can be used to pay off the loan. Policies taken under the Married Women’s Property Act, 1874* are also immune from attachment by creditors.
- Illness Protection - As you head towards retirement, life insurance policies which cover critical illnesses become important. Some life insurance policies offer you features that cover you from severe ailments like heart attacks and cancer. Buying these types of policies can protect you from some of the world’s most deadly diseases.
Tax Benefits of Life Insurance (Section 80C and Section 10D)
- If you buy life insurance, you qualify for a tax deduction up to ₹ 1.5 lakh annually under section 80C of the Income Tax Act, 1961. -The payout received at the time of maturity will be tax free subject to the conditions given in Section 10(10D) of the Income Tax Act, 1961. Tax laws are subject to amendment from time to time.
What Life Insurance plan should I buy ?
There is a life insurance plan for every possible financial goal. If you are looking for a simple cover to shield your loved ones against financial risks, choose a term plan. Whole life Insurance plan offers life insurance coverage to the life assured for the whole life. Those looking for a combination of insurance and investment opportunity. If you want insurance and comfort of savings, select an endowment plan. A child plan is best for fulfilling your child’s life goals like education, marriage, etc.
Should I buy Life Insurance ?
Life insurance is a great financial tool. From offering protection against financial risks, over the years life insurance has evolved to provide options for building wealth and generate tax-free maturity.
You should buy life insurance if you meet any of the following –
- Have financial dependents.
- Are beginning a family.
- Have a mortgage or other significant debt/loan.
- Are part of a non-child working couple family structure.
- Have children and have specific long-term financial goals.
Are you know about important life insurance terms before buying the policy ?
A policyholder is a person who owns the life insurance policy. Usually, they are the one insured under the policy. However, sometimes, the policyholder may be a relative of the insured, a corporation or a partnership. The policyholder has the right to exercise all privileges that are provided in the life insurance contract.
Sum assured is a predetermined fixed amount that policyholder’s family receives in case of policyholder’s death. It is basically the total sum policyholder is covered for. Sum assured is chosen by the policyholder and is always mentioned by the company in the policy details.
In life insurance policies, a nominee is a person who receives the sum assured and other benefits in case of an insured person’s death. The choice of nominee depends totally on the policyholder and the name is usually mentioned while buying the life insurance policy.
A policy term is the time period for which you are covered. A premium paying term is the duration for which you have to pay the premium of the policy.
This depends on individual circumstances. However, as a rule of the thumb, the life insurance cover should be at least 10 times annual income. Medical bills also increase with time and so a large amount is needed to cover future medical costs.
Your life insurance premium depends on several factors. The main factors contributing towards the calculation of life insurance premium include your age, the type of coverage you are opting for, the amount of coverage, and personal factors such as smoking status, occupational status, etc.
Term life insurance plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you or your spouse passes away.
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component. Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance.
Types of life insurance – " Traditional and Market linked "
There are several types of life insurance plans for specific needs –
- Traditional life insurance plans - One of the categories is “traditional life insurance plans” such as term insurance (pure protection), endowment and money back plans. Such plans offer multiple benefits in terms of life cover and returns, thus providing safety and security to the insured. These policies are considered risk-free. This is because they provide a fixed benefit in case of death of the insured person or at end of the term.
1. Term Insurance Policy –
This is the simplest type of life insurance policy. It pays your family a sum of money in case of your death, during the policy term. It does not pay anything if you survive the policy term. However the premiums on this type of policy tend to be low.
2. Endowment Policies –
Policies other than term life insurance are called endowment policies. These can in turn be divided into participating, non-participating and unit-linked.
- Participating (Non-Linked) Endowment Plan –This type of policy lets you ‘participate’ in the profits of the life insurance company and get a share of them. It pays your family a sum of money on your death but it also pays you an accumulated sum, if you survive the policy term. The survival payment or benefit is linked to the profits of the life insurance company.
- Non-Participating (Non-Linked) Endowment Plan – A non-participating policy defines exactly how much your family will get on your death and how much you will get on the maturity of the policy. There is no variable or investment linked component. You know before-hand exactly how much you will get, in each scenario.
- Market-linked plans – The “market-linked plans”, also known as ULIPs (unit linked insurance plans). These provide both protection and savings combined with flexibility to the covered person. As these products are linked to capital markets, they may have the potential to deliver better returns than traditional plans. However, with high returns there is a risk of low returns as well, which will depend on the market’s performance.
- Unit Linked Life Insurance Policy – This policy pays an amount on your death and a maturity amount if you survive the term. However unlike a traditional participating policy, the maturity amount is more dependent on your investment choices than the profits of the life insurance company. Your policy is invested in funds and divided into ‘units’ similar to the units of a mutual fund. You typically get a lot of freedom to choose the type of fund your money will be invested in.
How to choose the best life insurance plan?
There are several types of life insurance plans for specific needs –
- Buy suitable additional benefits, as per your requirement like an accident coverage and critical illness coverage.
- Choose a plan that provides regular income to your family after your death.
- Remember, low premiums do not mean the best policy. Look for other factors such as the claim settlement ratio of the insurer, the ease of buying the policy, etc.
What are the payout options available for Life Insurance Plans ?
A life insurance company provides the flexible payment options that cater to every type of policyholder. You can choose from 4 payout options –
- Lump-sum - The agreed life cover is paid as a fixed amount to the nominee in case of policyholder’s unfortunate death.
- Lump-sum plus income - The life cover gets paid in two parts as you mention during policy inception. You can choose to receive half of the amount in a lump sum manner and the rest as equal monthly installments.
- Income - This option provides claim payout in equal monthly installments so that family’s monthly financial needs are taken care.
- Income - This option provides claim payout in equal monthly installments so that family’s monthly financial needs are taken care.
Which is better term or whole life insurance?
Term Life Insurance Plans are much more affordable than whole life insurance. This is because the term life policy has no cash value until you or your spouse passes away.
Like all permanent life insurance policies, whole life provides lifelong coverage and includes an investment component. Although it’s more complicated than term life insurance, whole life is the most straightforward form of permanent life insurance.
