Most of us have an umbrella at home. We use an umbrella only for a few weeks in a year, yet we keep it.
All of us have different plans for future. But then life is full of uncertainties. One may not be there tomorrow and plans may remain as plans. But, financial goals as parent, as wife/husband, or as son/ daughter will not go away. Even after a tragic event, our responsibilities do not change.
Life insurance is a financial cover for protection from risks linked with human life. Events like death, disability, accident, etc. can cause financial harm. We are after all humans. Our lives are subject to risks of death and disability. Cause can be anything, but the outcome of such risks is always negative.
When a human life is lost or a person is disabled, there is a big loss not just physically but also financially. There is loss of income to the household. Though no human life can be valued, the loss of household income can be compensated in a little way. This has to be done by giving a monetary sum, either in lump sum or installments.
This sum could be determined based on the loss of income in future years. This is how in life insurance the concept of sum assured has emerged. Life insurance products provide a finite amount of money in case the life insured dies during the policy term, or becomes disabled due to an accident.
Life Insurance is needed:
1. To ensure that your immediate family has some form of financial support in the event of your death.
2. To finance your children’s education and other needs.
3. To ensure that your loss of income due to serious illness or accident is compensated.
WHAT ARE THE TYPES OF LIFE INSURANCE?
There are some basic types of life insurance policies. Each policy type has the core function of providing a life cover. Let us have a quick look.
Term insurance – Term plans are the most basic type of life insurance sold. They provide life insurance cover with no savings or profits component. They are the most affordable form of life insurance. The premium you pay is the cheapest. A fixed sum of money, called the sum assured is paid to the beneficiaries of the policy if the policyholder expires during the policy term. This is called the death benefit. If the policyholder survives, there is no pay out to the beneficiaries.
Endowment plan – Endowment plans contain life insurance, but they also have a maturity benefit. Unlike term plans which pay out the sum assured only in case of death of the policyholder, an endowment plan pays out the sum assured under both scenarios i.e. death and survival. The premium charged is more expensive than term plans.
This too is a combination of insurance and saving. A certain amount is kept for life cover. The rest is invested by the life insurance company. In an endowment plan, the benefit is either in the form of death benefit when the policyholder dies, or maturity benefit when the policyholder outlives the policy term. To attract customers, endowment plans may offer bonuses periodically. Endowment plans are commonly referred to traditional life insurance. They carry lower risk than ULIPs, but offer lower returns too. Do remember endowment products can save tax on investment and their corpus is also tax-free.
Unit linked insurance plans (ULIP) – T his is a combination of insurance and investment. The premium paid towards ULIP is partly used as a risk cover (insurance). Increasingly, a large portion of the ULIP premium is being invested in funds for investment. One can invest in different funds offered by the ULIP offering insurance company depending on their risk appetite. ULIP funds can be compared to mutual funds. However, costs associated with ULIP structure make this investment cum insurance product competitive only if you hold it for the long-term. Do remember ULIPs can save tax on investment and their corpus is tax-free. There are many similarities between ULIPs and mutual funds, but ULIPs also contain insurance advantage. ULIPs are a combination product of investment and insurance. Mutual funds are a pure investment avenue, with no insurance benefits.
Money back policy – A money back policy is a variant of the endowment plan. In this policy, you can get periodic payments over the policy term. Portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured. In case of death over the policy term, the beneficiary gets the full sum assured. Money back plans are also eligible to receive the bonuses declared by the company. Like other insurance products, money back plans save tax on investment while their returns are tax-free for the policyholder/ heir / nominee.
