Life Insurance

Life insurance is one of the two broad categories of insurance. Before understanding the definition of life insurance, let's understand what problems do life insurance policies solve in your life.
There are different types of life insurance plans that are designed to cater different problems of life. Two of the most haunting problems of life are dying early and living too long. Different life insurance products protect against the ill-effects of either or both of these problems. The other equally fearsome problems in life can be either getting diagnosed of a critical disease or acquiring total or partial disability. These two problems can be addressed by attaching riders or add-ons offered by life insurance companies to regular life insurance policies.

Now, you would probably be wondering what riders are. Don't worry! That part would be discussed later on this page.

To sum up, these are the most awful situations life insurance plans are designed to deal with.

  1. Untimely death
  2. Living beyond income sources
  3. Contracting a critical disease
  4. Becoming disabled

Now let's talk about the definition of life insurance.

Life insurance is a contract between a life insurance company and the buyer of the life insurance policy. Under this contract, the company promises to pay either the policyholder or the nominee (as the case may be) a sum assured if the assured event or the maturity of the policy happens. In return, the policyholder pays the life insurance company a lump-sum or period payment called a premium.

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Important Terms and Language of Life Insurance

These are companies that are allowed to sell life insurance policies in India. Till August 2000, only LIC (Life Insurance Corporation of India) was the sole company responsible to sell life insurance in the country. Thereafter, the sector was opened to private players. As of present, there are 24 life insurance companies present in India.

This is the person whose life is being insured by the insurance company. If the assured dies within the currency of the policy period, the nominee mentioned in the policy gets a sum called death benefit from the life insurer.

The death benefit is the amount of money paid by the insurance company to the nominee upon the death of the policy assured. The death benefit is also called life cover or sum assured. As per the general rule of thumb, the sum assured should be 10-15 times of the annual income of the policyholder.

The monetary returns received by the policyholder from the insurance company at the time of maturity of the life insurance policy.

The premium is yet another very important insurance term. It is the amount that you pay to the insurance company to buy the life cover. This payment can either be a lump-sum or periodical. In case of periodic premium, the premium paying frequency can be flexible. Depending on the plan you are going for, you can get the option of annual, monthly, quarterly, or half-yearly paying options. However, the payments should be regularly made else the life insurance policy gets lapsed.

It is the bonus time you get after the due date to pay the premium and avoid the policy from getting lapsed. Generally, the grace period is of 30 days from the due date.

It is the date from which the risk cover starts.

There are certain risks or expenses that are not covered in your life insurance policy. Things that are not covered in your life insurance plan are called exclusions.

The policyholder gets 15 days from the date of receipt of the policy in which he/she can discontinue the policy after purchase for a full refund. This option helps you to come out of a plan you are not satisfied with.

The policyholder should have a financial interest in buying a life insurance policy. The death of the person on whose life you are taking a life insurance could cause a financial loss to you. For example, a woman taking a life insurance policy for her earning husband. An employer can take a life insurance policy for his key employee. You cannot take a life insurance for your neighbor as there is no insurance interest.

It is the annulment of the life insurance policy due to non-payment of premium.

It is the amount of money given to the policyholder if he/she wishes to terminate the policy before its maturity. It is calculated by subtracting the surrender changes from the fund value.

These charges are also called discontinuance charges. These charges are deducted from the cash value of the fund if the policyholder decides to terminate the life insurance policy.

This is the minimum time period till which the policyholder has to wait for surrendering the policy. If the policyholder terminates the policy before the surrender period then no surrender value is given by the insurance company. It is also called lock-in period.

These are additional benefits that you can attach to your insurance policy by paying some extra premium. Some common riders are as follows.

  • Accidental death rider: Under this rider, the insurance company pays up to 100 per cent more death benefit to the nominee if the death of the assured happens due to an accident.
  • Critical illness rider: The insurance company pays a lump-sum amount to the assured if he/she is diagnosed with a critical disease. A critical disease is a terrible illness that can claim the life of the patient if not cured in time. The treatment cost of such diseases is very high and the patient may lose on income due to poor health. The lump-sum received from the company can be used for treatment expenses as well as substitute the loss of income.
  • Disability rider: This rider helps the policyholder if he/she meets with an unfortunate event and becomes totally or partially disabled because of that. The insurance company then pays a regular income or a lump-sum to the assured. This money can be used to compensate for the loss of money due to such disability.
  • Waiver of premium rider: With waiver of premium, if the assured is diagnosed with a critical disease or becomes disabled and because of such situations is unable to pay the premiums then the insurance company waives-off the future premiums and keeps the policy continued.
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Types of life insurance

  • Term insurance

    Term insurance is often regarded as the purest form of life insurance as it is a pure risk cover policy and does not have any component of saving. Being the cheapest life insurance policy with great benefits, term insurance is also the most sought-after life insurance plan. You get only the death benefit in a term insurance plan. There is maturity benefit that you get in a term insurance plan.

  • Term insurance with return of premium

    The biggest flaw people find in a regular term insurance plan is that they lose all the premium paid over the years if they survive the policy term. TROP or term insurance with return of premium solves this grievance of the customer and returns all the premiums paid at the end of the term. And therefore, these plans are expensive than a regular term insurance plan.

  • Whole life insurance

    Unlike term insurance plans that cover you for a specific number of years, the whole life insurance plans provide coverage for your whole life. These plans cover you till the age of 100 years and pay you a maturity benefit if you survive 100 years of age. Some of these policies require you to pay the premium for 10-15 years and the policy benefits cover you for your whole life.

  • Moneyback policy

    Most life insurance policies that pay you a maturity benefit at the end of the policy term. However, moneyback policies pay you a regular payout, which is a percentage of the sum assured, during the policy tenure.

  • Unit linked insurance plans

    These plans are part insurance and part investment. A portion of the premium that you pay for these plans is invested in unit-linked market schemes. These plans have an inherent risk but they also pay higher returns. These plans have a lock-in period of 5 years. Such a long investment period helps you build a substantial amount of corpus.

  • Endowment plans

    These life insurance policies have benefits of a life cover as well as lucrative saving opportunities. These policies fulfill your long-term saving goals. These policies provide a death benefit to your nominee in case you meet an untimely demise during the period of the policy. And if you survive the policy term you get the maturity benefit.

  • Group life insurance

    Much like group health insurance policies the group life insurance policies are provided to you by your employer. In such policies a large number of people are assured under a single master policy. You are covered under such a policy till you work with that organization. The cover finishes once you leave the company.

  • Child insurance

    A child insurance policy is designed to protect the future of a child. It provides a death benefit to the child if he/she loses a parent. In such an event, the insurance company pays the future premiums on behalf of the deceased parent and keeps the policy continued. A portion of the premiums is accumulated in a fund that grows over a period of time to build a corpus. This fund can be traditional as well as unit linked.

  • Pension/Retirement Plans

    These plans counter the ill-effects of living too long beyond your working age. The premiums paid are accumulated in a fund. This fund grows over time. From this fund you are paid pensions which can keep you afloat when you are not making any active income.

The main benefits of life insurance policies

A Perfect Tool For Financial security

As per finance experts, you should take a life cover of at least 10 times of your annual income. Ideally, it should be 20 times of the annual income. This amount is considered to be decent enough for your family to maintain the same living standards that they are used to while you are alive and earning. With a good life insurance cover, your children can continue their studies, your pending debts can be paid-off without burdening your family, and every other expense can be managed comfortably as before.

Facilitates Long-term savings

Most people are not disciplined enough to save money or build a solid corpus by habit. However, by investing in life insurance plans that offer maturity benefits they can save systematically due to lock-in feature of these plans. Many of these plans have a lock-in period of 5 years before which you cannot withdraw any money. In this way, you are able to save and build a substantial amount of corpus.

Solve the ill-effects of dying early

Plans like term insurance prove to be angels for surviving family members in cases where the life assured meets untimely death. Losing the bread winner of the family is like cutting the roots of a tree. The grieving family not only deals with the immense emotional loss but also the financial hazards that await them. The proceeds that come from the life insurance plan bring the much needed respite.

Make living too long a happy affair

You might live over 30 years post your retirement. That is a lot of time to live without an income. Also, in the advanced age you are faced with increasing medical expenses. If you don't have any source of regular income in that age then life becomes a burden and you live with fear and dependency on others. Plans such as pension plans arrange for a regular income for you once you stop working. Therefore, it is better for you to plan timely to avoid problems in the future.

Arranges funds to deal with critical diseases and disabilities

Life insurance plans become even more useful when you equip them with certain riders that are discussed above. Being diagnosed with a critical disease can be nothing short of a haunting experience. It becomes even scarier if you do not have the funds to take the required treatment. A critical illness rider not only provides the lump-sum funds needed for treatment but also to make up for the loss of income due to such a dreadful disease. Similarly, a disability not only brings in emotional frustration and physical difficulty but jeopardizes your earning capacity also. A disability rider provides a lump-sum to make up for the loss of income and waives-off your future insurance premiums as well.

Investment options

Some life insurance plans are unit-linked and have potential for giving higher returns. The unit-linked insurance plans invest your premiums in three types of funds i.e. Equity Funds, Debt Funds, and Hybrid Funds. A thing to note is that you are given an option to switch between these funds anytime as per your liking. According to your risk appetite and ambition you can choose whether to by unit-linked insurance plans or traditional saving plans.

Different plans for different needs

The several types of life insurance plans and the attachable riders fulfill different needs of a human life. The different financial risks of life are identified by insurers and an insurance plan is curated to solve that problem. Hence, for the various risks your life is exposed to you can count on life insurance plans for help.

Provide you peace of mind

The most valuable thing in this world is peace of mind. Your mind can be at peace when you know that you have cover for most of the problems that can arise in your life. Thus, by being adequately life insured you can sleep calmly.

Life Insurance Comes With Lucrative Tax benefits

The payout that you or your nominee gets from the life insurance company is fully exempt from income tax under section 10(10D). And the premiums that you pay for life insurance plans are deductible from your taxable income up to a certain limit. This limit varies from plan to plan. However, the most common deduction for these plans is up to INR 1,50,000 under section 80C of the Income Tax Act 1961.

Wrapping it up!

Life insurance plans are designed to make your life hassle-free and ease the tension. By paying affordable premiums, you not only save a lot of tax but forge a financial shield around you and your loved ones. The best part is that now you don't have to book appointments with life insurance agents and deal with scores of their follow-up calls. You can yourself research and compare various plans on the internet and buy life insurance online comfortably from anywhere and anytime.

So if you are thinking of buying life insurance, do it now. Life is uncertain and problems come without a warrant. You certainly wouldn't want these problems to approach you off-guard!

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