Life Insurance

What Type of Life Insurance is Right for You?

by SMCIB on Tuesday, 09 January 2024

What Type of Life Insurance is Right for You?

Investing in life insurance is one of the best financial decisions you can make to secure your and your family’s future. With a life insurance policy, you can ensure that your family will be taken care of - even in the most difficult of times. Besides this, it allows you to accumulate savings for important goals like your child's education and marriage, growing your wealth to buy an apartment, starting a business, creating a corpus for your retirement, and so on.

It can safely be surmised that life insurance provides you with an excellent financial foundation, allowing you to handle life's challenges with courage and confidence.

But, with so many life insurance policies available in the market, it may be difficult to determine which one matches your and your family's needs. In this article, we will explore various life insurance policies that are tailored to meet specific goals.

Let's dive right in!
 

First, What Is Life Insurance?
Life insurance is a contract between you and the insurance company wherein the insurer agrees to cover your financial risks in exchange for which you need to pay premiums.

The insurance company pays a sum of money to your family members in the event of your passing away. Besides providing financial protection, life insurance also helps you save for the future and accomplish financial goals such as retirement, a child's education, a wedding, etc.
 

What Type Of Life Insurance Is Right For You?
When choosing a life insurance plan, ask yourself one question: “What financial goals do I hope to accomplish with life insurance?”

Knowing your goals is the key to finding the right life insurance plan because it will help you determine the level of coverage and protection you and your family need.

1️⃣ If Your Goal Is To Protect Your Family’s Financial Future
Uncertainty is part of life. If you are the sole breadwinner of the family and you pass away, it can have a detrimental effect on your family. Your sudden demise can put your family in a financial bind. To protect your loved ones from potential financial hardship, it is important to plan for the unexpected.

That's where term insurance comes in. Term insurance policies are a great way to ensure that your family is taken care of should the worst happen, and that their financial security is not compromised. The plan will ensure that your dependents, who rely on you financially for their livelihood, can comfortably achieve their goals and take care of daily expenses without sacrificing their standard of living. Additionally, it helps pay off any outstanding debts, so your family will not be left with a repayment burden.

Example: Raghav, 35, purchases a term insurance policy to secure his family’s financial future. He opts for a sum assured of Rs. 50 Lakhs with a policy duration of 20 years and appoints his sister, Sara, as the nominee.

If Raghav passes away during the policy period, the insurer will pay a claim amount of Rs. 50 Lakhs to Sara (Raghav’s nominee). She can use the money to take care of the family’s needs.

 

2️⃣ If Your Goal Is To Enjoy Lifelong Coverage & Leave A Financial Legacy For Your Family
If you have financial dependents who may rely on you financially for a long period, perhaps for the rest of your life, it is important to create a financial plan to secure their future. You can consider investing in a whole life insurance plan. In essence, it covers you for the rest of your life - offering coverage up to the age of 99 or 100.

This plan is also a viable option if you want to leave a financial legacy for your family members after you pass away. Your family can earn around 4% tax-exempt interest each year on the amount they will receive if you pass away during the plan’s tenure. It is less likely that you'll survive such a long time, so a whole life plan is an excellent way to leave a parting gift for your family, to ensure they live a comfortable life - in your absence.

Example: Rakesh, 30, wants to leave behind a financial legacy for his family, so he decides to purchase a whole life insurance policy. He opts for a sum assured of Rs 70 Lakhs. The policy will cover him until the age of 99 years. He opts for a premium payment term of 15 years.

If Rakesh survives the policy term, he shall receive a cover amount of Rs 70 Lakhs. And, if he passes away during the policy period, his nominee will be paid the death benefit of Rs 70 lakhs.

 

3️⃣ If Your Goal Is To Build Wealth Through Low-Risk Instruments
Investing in the stock market can be a very effective way to grow your money. Today, there are many financial products linked to investments - some are high-risk, while others are low-risk. If you are looking for a low-risk product that can help you save systematically, consider an endowment plan - a combination of insurance and savings.

Investing in the endowment plan is a safe way to build wealth over time, as it allows you to preserve your money while still having the potential to generate returns. On the other hand, the insurance part helps you secure your family's financial future.

Example: Sarthak buys an endowment policy for 20 years with a sum assured of Rs. 25 lakhs so he can accumulate funds for buying a house. He chooses the premium payment term of 10 years. He nominates his spouse Divya as the nominee.

If Sarthak survives the policy term, he is entitled to receive a sum of Rs. 25 lakhs that can be used to buy a house. If he passes away in the middle of the policy term, Divya will receive the death benefit of Rs. 25 lakhs. Once the claim is settled, the policy will be terminated.

 

4️⃣ If Your Goal Is To Save Funds for Your Child’s Future
If you have or plan to have children, it is important to plan ahead and start accumulating funds for them. They may dream of studying abroad at a good university, enrolling in a prestigious sports academy, having a grand wedding, etc. If you want your children to have the best possible future and give them the opportunity to pursue their passions, it is crucial to establish a stable financial foundation while they are still young.

You can achieve this by investing in a child insurance plan. It combines insurance and investment to help you save efficiently and build wealth for your child's future. By investing in a child insurance plan you can be assured that your child's future is protected, as well as their dreams are realised - no matter what the future holds.

Example: Punit has a 5-year-old son, Shyam. He wishes to save up funds for his son's higher education. He chooses a child plan in 2022 with a sum assured of Rs 25 Lakhs and a policy term of 15 years.

  • If Punit outlives the policy term, he will receive Rs 25 lakhs. By that time, Shyam will be 20 years old and ready to pursue his PG degree. He can use the money to pay the fees for his PG programme.
  • If Punit passes away during the policy period, the insurer will waive the remaining premiums. Once the policy matures, Shyam will receive Rs 25 Lakhs.

 

5️⃣ If Your Goal Is To Create A Guaranteed Side Income To Cover Various Financial needs
There are certain expenses like house or car EMIs, rent, bills etc. that need to be paid regularly. If you are looking for an effective way to cover recurring expenses, a money-back plan can provide a great solution.

A money-back plan combines insurance and investment.

  • You not only get insurance coverage but also guaranteed returns (which can either be a fixed percentage of the sum assured or the annual premium paid periodically) called survival benefit - no matter how the market performs.
  • If you outlive the tenure of your policy, you’ll receive the maturity benefit which can either be -
    • Your policy sum assured
    • The survival benefit as periodic payouts.
    • Survival benefit payouts as a lump sum, in a single go.
  • If you pass away in the middle of the policy tenure, your nominee will receive the sum assured as the death benefit. This amount will be exclusive of the survival benefits you receive during the policy tenure.

Example: Mehak buys a money-back plan with a sum assured of Rs. 25 Lakhs in 2020. She opts for a policy duration of 20 years and a premium payment duration of 10 years. As per her policy T&Cs, she will be paid 10% of the sum assured as a survival benefit for five years once her premium payment period gets over. And the sum assured will be paid as maturity benefit if she survives the plan's tenure. If she doesn't, her nominee will receive the same as the death benefit.

So -

Survival Benefit

Survival Benefit = 10% of the Sum Assured

                            = 10% of 25,00,000

                             = Rs. 2.5 Lakhs

Mehak will receive this amount annually for 5 years once the premium payment term gets over. She can use this money to cover her rent and bills.

Maturity Benefit

If Mehak outlives the policy period of 20 years, she will receive  a maturity benefit of Rs. 25 Lakhs.

Death Benefit

If Mehak passes away during the policy period, her nominee will receive a death benefit of Rs 25 Lakhs.

 

 

6️⃣ If Your Goal Is To Build Wealth Through High-Risk investments
If you're interested in investing in market-linked instruments that can help you generate wealth in the long run, a Unit Linked Insurance Plan (ULIP) is a great option. They are a great way to leverage your money and reap the rewards of taking higher-risk investment decisions.

A part of your ULIP premium goes towards life insurance coverage, while the rest is invested in several stock market funds, such as equity funds, debt funds, and other securities - which have the potential to yield high returns. Furthermore, you have the flexibility to switch between funds depending on your risk appetite, making ULIPs a great investment choice.

 

David, a 30-year-old, bought a ULIP in November 2022, for a policy period of 20 years. He has to pay an annual premium of Rs 1,00,000. He also appoints his wife, Deepthi as the nominee.

Let's say the insurer deducted Rs. 7000 as charges. So, the amount invested per year is Rs. 93,000.

As per the policy,

Death benefit =  The higher of Sum Assured or Fund value on the day of death.

Maturity Benefit = Fund value on the date of policy maturity.

Let's assume that the Net Asset Value of the units was Rs. 600 on the date of policy purchase -

Total Units = (Amount Invested - Charges)/Net Asset Value

                    = 93,000/600

                    = 155

So let’s see how the benefits will be paid out -

If David passes away during the policy term,

The death benefit may be either the sum assured or the fund value, whichever is higher. Let’s assume the sum assured is 10 times the annual premium.

So, Sum Assured = 10 x Annual Premium

                               = 10 x 1,00,000

                               = Rs. 10,00,000

The fund value is calculated based on the NAV and the accumulated units.

Let’s assume that the NAV on the date of his passing away is Rs. 800, and he accumulates another 800 units till that date.

Total units accumulated = 800 + 155 = 955.

So Fund Value on the day of his death = NAV x Owned Units

                                                                    = 800 x 955

                                                                    = Rs. 7,64,000

Since the Sum Assured (Rs. 10,00,000) is higher than the Fund Value (Rs. 7,64,000), the insurer will provide a death benefit of Rs 10,00,000 to his wife, Deepthi.

If David survives the policy term

Let’s say he accumulates another 1200 units over the 20-year policy term.

So, the total units accumulated till 2041 = 155 + 1200 = 1355 units

Assuming that the NAV on the date of policy maturity is Rs 900.

Maturity Benefit = NAV x Owned Units

                          = 900 x 1355

                          = Rs. 12,19,500

So David will Rs. 12,19,500 as the maturity amount in 2041. Once the payout is made, the policy will terminate.

 

 

7️⃣ If Your Goal Is To Get Regular Income Post-Retirement
While your income stream may cease when you retire, your living expenses will not. To maintain your desired lifestyle even after retirement, it's important to have a steady source of income. Life insurance policies can also help you with that.

If you want to guarantee a comfortable retirement life, an annuity plan is a suitable option. In this plan, you will be required to make premium payment/s for a specific period, which will be accumulated into a fund. This will be converted into an annuity, i.e., a steady income stream based on the annuity rate determined by the insurance company. You can sit back and relax knowing that you have a stable income that will be paid to you periodically upon retirement.

Example: Rishi, 45, is a salaried employee and wants to retire at 60. He wants to invest in an annuity plan, and secure his retirement life.

Let’s assume that he decides to invest a premium of Rs 50,000 (excluding taxes) annually for the next 15 years and opts to get the payout immediately each year for a duration of 25 years. He will start getting the annuity payout a year after the premium payment term is over. Let’s also assume that the annuity rate is 5%.

So, the payable annuity  = Total Premiums Paid (minus taxes) x Annuity Rate

                                            = (50,000 X 15 years) x 5%

                                            = 7,50,000 X 5%

                                            = Rs. 37,500

Rishi will receive an annuity payout of Rs. 37,500 annually for 25 years.


8️⃣ If Your Goal Is To Build A Retirement Fund
You may have several retirement goals such as taking a world trip, pursuing your hobbies, setting up a business, buying a shiny new car, etc. and may wish to create a retirement fund for the same. A pension accumulation plan does just that.

A pension accumulation plan is an investment option specifically tailored for those who want to live their retired life to the fullest. It is an ideal way to ensure that you have the financial resources to fund your retirement wishes. Your savings are invested in market-linked instruments and accumulated systematically for retirement. Upon maturity, your policy offers a lump sum that you can use to fulfil your retirement goals.

Example: Namit, a 50-year-old man, decides that he wants to invest in a non-linked pension accumulation plan to build a retirement fund. He plans on retiring when he is 65 and so, chooses a policy term of 15 years. He pays a premium of Rs 1 Lakh on a yearly basis and has appointed his spouse as the nominee.

Maturity Benefit

Namit will either receive the total premiums or 108% of the total premiums - whichever is higher - as per his policy terms.

Total premiums paid

Annual premium = Rs 1 Lakh

No. of years = 15 years

Hence, total premiums paid = 15,00,000

Percentage of total premiums paid
Annual premium = Rs 1 Lakh

No. of years = 15 years

Hence, total premiums paid = 15,00,000

Accumulated fund = 108% of 15,00,000 = Rs 16,20,000

So, Namit will receive a maturity benefit of Rs 16.2 Lakhs if he survives till the end of 15 years.

Death Benefit

Let’s assume Namit passes away after 10 years. Namit’s nominee will receive the total paid premiums or 103% of the total premiums paid - whichever is higher as per his policy terms. 

Total premiums paid

Annual premium = Rs 1 Lakh

No. of years = 10 years

Total premiums paid = 10,00,000

Percentage of total premiums paid
Annual premium = Rs 1 Lakh

No. of years = 10 years

Total premiums paid = 10,00,000

Death benefit = 103% of 10,00,000 = Rs 10,30,000

Namit’s spouse will receive a death benefit of Rs 10.3 Lakhs.

 

 

Wrapping Up!
Life insurance is are available in a variety of forms. Each type of life insurance policy is designed to meet unique needs. It is important to thoroughly understand the policy before you invest in it so that you can ensure that it is the right choice for you and your family.

 

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