As the name suggests Life Insurance is basically a way to protect your family by substituting your income generating ability, in case of your death. All the financial planning would be a waste if you are not around to execute the plan. Insurance steps in to address any such eventuality.
In our country people normally buy life insurance products as a tax saver, an investment and a life cover. Though a good insurance product meets all the three benefits but the order of purpose of buying insurance is wrong. Ideally the sequence of buying insurance should be Life cover first, Investment second and lastly tax benefits. Let me narrate a small story to illustrate most of the people’s approach towards insurance. You all must have heard the golden goose and egg story. If you have to choose between the goose and the golden egg, you will probably choose to insure the egg first and the hen later. In your day to day life, you insure your car, home, air travel etc but do not worry about insuring our own life. Is the value of the car more than your life? God knows why but we continue to behave in this fashion. Insure the egg but neglect the goose which gives that egg. What will happen when the goose is not there to deliver the golden egg?
Why Life Insurance?
Most of us continue to believe that we are going to live forever; we are too young to die etc. Life Insurance is a very sentimental subject in our family. When I started to understand the concept of Insurance, I asked my dad, if he is insured and both my mom and dad reacted very negatively on my question and they felt that I have hurt their feelings. Nobody is saying that buying insurance means you are going to die tomorrow but god forbidden if it happens then what? In today’s modern world Insurance provides a variety of options to choose from that it has also become a very good retirement tool. So if nothing happens to you that is great news as the insurance will give you lump sum money which will come very handy to meet your financial needs at various stages of life. We all carry an umbrella during rainy or hot summer season. You do not open the umbrella if it is not raining or if sun is not scorching down your head. We open it only when we really need it. Similarly, buying insurance is about meeting your needs in case of any eventuality or enjoy the fruits even if the eventuality has not taken place. So it is a win-win situation for both you and your family.
What are three most important words in Life Insurance?
1. Sum assured: The amount you have insured you life for.
2. Term: The term for which you are insured and will pay the premium.
3. Premium: The amount you will be paying to insurance company for insuring your life.
The premium is allocated to broadly three parts i.e. Mortality of life cover charges, Investment and Administrative charges. Higher the age, higher the costs of life cover. Similarly higher the investment portion, lower the life cover.
What are the various types of policies and what purpose they meet of the insured?
1. Term Policy: Term policies are life insurance policies which only covers risk of loss of life. They are without any investment component in them. If you survive the policy term, you do not get any thing but if you die during the term of policy, your nominee will get the sum assured. The entire premium paid in this type of policy goes towards life cover charges and no part of the premium is invested on your behalf. The key features of such policy are:
a.Only covers risk of loss of life.
b.Zero component of investments.
c.Zero payback if you survive the term.
d.Due to non investment component, premium payable are significantly lower.
e.Suitable for people who want larger cover for smaller premium.
f.It is good to cover risk of the loan that you have borrowed.
2. Endowment Policy: Endowment policies are investment based insurance policies and they provide a combination of both life cover as well as wealth creation. A part of the premium goes towards life cover and a part is invested depending on the investment objective. In case you survive the policy, you will get the entire accrued proceeds from your policy whereas in case of your death, you nominee will get the sum assured along with the accumulated bonus. The key features of such policy are:
a.A combination of life cover as well as investments.
b.Sum assured along with accumulated bonus is paid to nominee in case of death or accumulated proceeds if the insured survives the term.
c.Choice of investment plans to choose.
d.Switches between the investment plans are allowed.
e.Loan is available against the policy.
f.Good for those who want to accumulate wealth for future financial goals.
3. Money Back Policy: Money Back Policy is an endowment policy but with a feature to receive a part of the Sum Assured at regular intervals. These policies provide you two benefits- life cover for a specific period along with wealth accumulation and the option to receive this wealth back at regular intervals. If case you die during the policy period, the entire Sum Assured is paid to your nominee immediately along with the accrued bonus without deducting the periodic payments. The Key features of such policy are:
a.A combination of life cover as well as investments.
b.Periodic cash flows to meet goals.
c.Good for those who want to accumulate wealth and also want to meet financial goals at various stages of life.
4. Whole Life Policy: Under this policy, the insurance covers the policy holder’s risk of death as long as he or she lives. In case you die, the policy benefits are being paid to the nominee. Often age of 100 is fixed as the outer limit for these policies and on reaching age of 100 or on death, whichever is earlier, the benefits are being paid. The key features of such policy are:
a.The life is insured till you are alive.
b.Premiums are high as every policy will eventually have a claim.
c.Loans are available against these policies.
In today’s liberalized world, a lot of products offer various choices in terms of the investment objective. You can choose from various plans available depending on your risk appetite and return objective. Such market linked investment options are popularly knows as Unit Linked Insurance plan or ULIP. These products basically work on the concept of the risk and reward of the investment performance of the plan is yours”. Unlike traditional plans, where you only get a portion of the gains on the investment made, in ULIP the entire gains post administrative or fund management charges are yours. Insurance being a long term product, chances of one loosing capital or not making enough returns are very remote. Hence ULIP makes a great investment sense as you own the returns made by the insurance scheme and the plan you chose to take.
Additional attachments or RIDERS:
Riders are basically additional features, which can be added to you insurance policy to give you additional benefits beyond the risk cover. By adding riders you basically enhance the quality of the life cover. It is like extra toppings on a Pizza or extra butter on a chapatti. The riders can be taken at the time of taking the policy or at any point of time when you think you need the extra feature. The key benefits of the riders are given below:
a.Riders enhance the value of the cover at a small extra cost.
b.Riders cover Critical illness, Accident and disability, Waiver of premium, major surgical assistance, extra term cover are some of the popular choices.
How to ascertain the amount of insurance one needs and which plan one should go for in our next series on Life Insurance.
What is a Pension Plan? How is it different from the pension one gets from his employer?
A pension plan is an insurance cum saving plan that allows an individual to accumulate wealth in the pre-retirement period, which at a later stage can be converted into annuity (to generate a fixed post-retirement income). Since pension plans can help generate a retirement corpus its something that must be evaluated positively by anyone planning for his retirement. Pension plans are different from the pension one gets from his employer as it involves only your own contribution & provides greater flexibility in choosing the amount of monthly contribution & the period for which you are willing to pay a fixed sum.
