- Life insurance is the gross amount payable on the death of the insured or on completion of a term period.
- Term life insurance comes with a time period and whole life insurance is for the entire lifetime.
- Endowment plans have to pay the amount even if the insured person lives after the term.
- Life insurance helps in taking care of the expenses of loved ones after the death of the insured individual.
- It is not recommended if there are no dependents.
What is life insurance?
Even the thought of leaving behind your loved ones without any financial protection is very scary. However, no matter how scary it might sound to a common person, life insurance works as security for your family in case of your untimely death.
Life insurance is a contractual agreement that requires the policyholder to pay periodical premiums to the insurance company in exchange for a gross amount payable on the death of the insured or on completion of the insurance term.
Terms used in life insurance
A few key terms that are used in life insurance contracts:
Insurer: Supplier of life insurance policy
Insured/ Life assured: Individual whose life is covered under the policy
Policyholder: Purchaser of insurance policy
Beneficiary: Inheritor of insurance amount
Insurance cover: Amount payable by the insurance company on the death of insured
Premiums: Periodical payment received by the insurance company
Policy Term: Period for which policy is active
To learn more about the terms used in insurance contracts read on here.
Types of life insurance
Term Life Insurance Policy
The term insurance contract is for a stated term ( an amount of time). If the insured dies within this term then the insurance company has to pay the coverage amount to the beneficiary of the insured. Term life insurance policy is regarded as the best policy and it’s the least complicated policy. A notable feature of a term life insurance policy is that expiry of the term period results at an end of the insurance contract and the sum total is not granted to the policyholder or the beneficiary.
However, in case of the demise of the insured during the term, the beneficiary receives the death benefit on the condition that the premiums were paid periodically. The premium amount is the least for term life insurance policies.
- Level Term: Sum of death benefit is maintained during the term period.
- Decreasing Term: The sum of death benefits shrinks every year.
Whole Life Insurance Policy
Unlike term life policy, this insurance contract covers the whole lifespan of the insured person. A term period does not exist in a whole life insurance policy. The death benefit is handed to the beneficiary after the death of the insured. Another commonly used name for whole life insurance is a permanent life insurance policy. The whole life policy also consists of a cash savings component.
Under endowment plans, the insurance company is responsible to pay the cover amount, it doesn’t matter whether the insured individual dies within the term period or continues to live. Death of the insured results in payout to the beneficiary. Otherwise, the sum total is collected by the policyholder. Thus, endowment plans play the dual role of insurance as well as savings. Endowment plans are a disciplined and long-term mode of investment that deliver profitable returns in comparison to other plans. Because of this, the premium paid by the policyholder is high.
Unit-linked Insurance Plans
Similar to endowment plans, ULIP is an insurance plus investment instrument. The amount invested as premiums can be moved between debt and equity funds. Unit-linked plans offer the facility of withdrawing a part of the sum assured. ULIPs are fruitful for individuals looking for wealth capitalization and investment, all in one plan, for the long run. Minus the insurance factor, ULIPs are very much like mutual fund plans.
However, it is good to keep in mind that ULIP returns are not as good as mutual fund returns because of the extra charges, but they are a more hassle-free way of investing, as fund investment decisions are made by experts, and not by you. There are also tax benefits on the premiums you pay, as well as the returns (up to 1.5 lakhs).
Money Back Policy
Money-back policies are most suitable for individuals opting for the safety of insurance coverage with the perk of liquidity of funds. Money-back policies work just as endowment plans with the special function of offering a percentage of the sum assured at regular intervals to the insured. The beneficiary is given the entire amount of sum assured on the death of the insured. However, if the insured lives even after the term of the policy then the policyholder is entitled to a maturity benefit, which is calculated as the total of premiums paid plus a modest interest percentage.
A few factors to consider when purchasing a life insurance policy (whether it is a term or permanent) are – your age, your dependents, your professional status, your savings and your health conditions.
“In short, money-back policies are endowment plans with the perk of regular cash flow.”
Is Life Insurance worth it?
So, coming back to the question, is it worth it?
If the idea of retiring from life with the promise of leaving behind your loved ones with sufficient financial protection sounds reassuring to you then life insurance is one financial plan you must consider.
Also, if certain people are dependent on you financially- it is worth considering to give them a safety net in case something happens to you. It gives your family money when they need it the most.
Life insurance has tax-free benefits, you can consider that a perk.
Life insurance is a means to replace your salary after a particular term or after the death of the insured. For individuals with a lot of assets, investment in the shape of insurance is also a profitable option.
However, the decision of starting life insurance should be taken only after assessing your financial and family situation. Often, life insurance plans aren’t recommendable to individuals with no dependents. Life insurance also should be considered when you share a mortgage with someone. It helps to cover debt settlement, mortgage, funeral costs, child care, college tuition or even basic expenses of life.
When should you consider Life Insurance?
Any individual with dependents to look after should consider buying life insurance. It’s as simple as that.
If you have EMIs or loans that will be needed to be paid off, you should consider those figures when you are calculating how much life insurance coverage you should have. If you have children, you should also consider amounts for their survival and their college fees.
The best way to manage one’s finances is to separate insurance from investments, ie take a term life policy (that only provides a benefit if you pass away in the term) and manage investments separately. This is generally more efficient, but also requires more effort and continuous research on investment strategies. Plans like ULIPs, endowment plans etc are useful if you do not want the hassle of managing money actively.
A common misconception among most people is that a young and healthy person doesn’t require life insurance because they have a high chance of survival. The sooner you get into life insurance, the lesser the premium you have to pay.
However, a young person poses relatively less risk to the insurance company in terms of the probability of paying the death benefits. Therefore, insurance companies offer lower premiums to young individuals. On the contrary, an elderly person will be presented with higher premiums. Therefore, it is a good idea to get into one when you are young.
Before taking up a life insurance plan, make sure to completely understand all the available options offered by the insurance companies and whether they meet your requirements and financial status.