life insurance basic overview

Life insurance a basic overview

Introduction

Life insurance is basically a contract between an insurer (insurance company) and a policy holder (the person whose life has been insured) in which the insurer guarantees payment of a death benefit to named beneficiaries or nominees upon the death of the insured. Let’s understand life insurance overview. The insurer promises a death benefit in consideration of the payment of premium by the insured.

The purpose of life insurance is to provide financial protection to surviving dependents after the death of an insured. It is essential for applicants to analyze their financial situation and determine the standard of living needed for their surviving dependents before purchasing a life insurance policy.

Life insurance agents or brokers are instrumental in assessing needs and establishing the type of life insurance most suitable to address those needs.

Types of life insurance

  1. Term insurance plan: it is the simplest and the most affordable form of insurance. It provides death risk cover for a specified period. In case the insured passes away during the term of the plan, death benefit is paid to the nominee by the insurance company.

    It is a pure risk cover plan that offers high coverage at low premiums. It is best known for high sum assured coverage at a low premium and its main benefit is that it helps the dependent members of the family to replace the loss of income caused to the death of the breadwinner.
  2. Unit Linked Plans (ULIPs): It is a comprehensive combination of insurance and investment. The premium paid is partly used as a risk cover (insurance) and is partly invested in funds. An individual can invest in different funds offered by the insurance company depending upon his risk appetite.

    The company then invests the accumulated amount in the capital market. It is best known for long term investment option with much more flexibility to invest and its main benefit is to invest money as per your risk appetite as you have an option to invest either in equity, debt or in hybrid funds through the life insurance company with complete transparency.
  3. Endowment Plan: It is another type of life insurance plan that is a combination of saving and insurance. A certain amount is kept for life cover- insurance, while the rest is invested by the life insurance company.

    If the life assured outlives the term of the policy, the insurance company offers him the maturity benefit. On death, the death benefit is payable to the nominee.

    It is best known for long term saving option for people with much lower risk appetite for investment and its main benefit is long term financial planning and an opportunity to earn returns on maturity.
  4. Money back policy: It is a unique type of life insurance wherein a certain percentage of the sum assured is paid back to the insured on periodic intervals as survival benefit.

    These plans are also eligible to receive the bonuses declared by the company from time to time which helps the policy holder to meet short term financial goals.

    It is best known for short term investment to meet short term financial goals and its main benefit is short term financial planning and an opportunity to earn returns on maturity.
  5. Whole life insurance: It covers the life assured for whole life, or in some cases, up to the age of 100 years. The sum assured is decided at the time when the policy is bought and is paid to the nominee at the tie of death of death claim of the life assured along with bonuses if any.

    In case the insured outlives the age of 100 years, the insurance company pays the matured endowment coverage to the life insured. The premiums are higher as compared to term plans.

    It is best known for life coverage for whole life and its main benefit is providing lifelong protection to the insured and to leave behind a legacy for heirs.
  6. Child Plan: Its main purpose is the child’s future growth. These plans help in building funds for education and marriage of the child. Most of these plans provide annual installments or one time payout after the child turns 18.

    In case of death of the insured parent during the term of the policy, immediate payment is payable by the insurer company. Some plans even waive off the future premiums on the death of the life insured and the policy continues till maturity.

    It is best known for building funds for your child’s future and its main benefit is that it helps in fulfilling your child’s dream.
  7. Retirement plan: Its main purpose is to help you be financially independent and live without worries after retirement. Most of these plans provide annual installments or one time payout after the age of 60.

    In case of the death of the policy holder during the term of the policy, immediate payment is made to the nominee by the insurance company. Death benefit is higher of coverage or fund value. Vesting benefit is paid if the insured survives the maturity age.

    It is best known for long term savings and retirement planning and its main benefit is that it helps in building corpus for retirement.
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7 types of life insurance plans

Benefits of life insurance

  1. Risk Coverage: Insurance acts as a monetary compensation for the insured family in lieu of premium paid.
  2. Different plans for different consumer needs: a variety of insurance policies allow you to choose a plan as per your need and capacity.
  3. Promotes savings and helps in wealth creation: insurance policies also come with a saving plan through which they invest money in profitable ventures.
  4. Guaranteed Income: Life insurance policies have a sum assured pay back amount that is payable on the happening of the event.
  5. Loan facility: the insurance companies provides an option on selected policies for the insured to borrow a certain sum of money.
  6. Tax benefits: Insurance premium is tax deductible in India under the Income Tax Act, 1961.

Things to keep in mind

  1. Research: in this world of competition, it is always advisable for the investors to do a good amount of research or consult the experts before buying a plan because there are a number of plans and brands to choose from and you will be able to derive maximum benefit only if you choose a plan that best caters your need.
  2. Read terms and conditions carefully: Make sure to read the details of the manual and contract signed by you or provided by the company as it is binding on both the parties at the time of maturity and it has the final word in case of dispute.
  3. Remember lock-in period: there are times when an individual purchases a policy without making an informed decision and later regrets it and is left with no option as his/her money is stuck for a particular time period. Some companies offer a lock-in time frame of a very short period (usually around 15 days) where the customer can cancel the policy and switch to some other plan or premium in case they are unsatisfied with the prior purchase.
  4. Consider premium payment options: almost all the companies provide for an option to choose premium payment options consisting of monthly, annually, semi-annually and quarterly so choose as per your convenience. It is advisable to opt for Electronic Check System (ECS) payment that will debit your bank account with the premium amount as per instructions.
  5. Don’t mask information: people usually tend to hide information at the time of filling of the application form which later leads to serious consequences when trying to make claims later on. You must present all personal credentials and medical history correctly to the insurer company for your own good.
6 benefits of life insurance

Competition in the market

  1. Life Insurance Corporation of India
  2. SBI Life Insurance
  3. ICICI Prudential Life Insurance
  4. HDFC Standard Life Insurance
  5. Bajaj Alliance Life Insurance
  6. Max Life Insurance
  7. Birla Sun Life Insurance
  8. Kotak Life Insurance

Now that you understand the basics of life insurance better, it is recommended that you meet our insurance advisor and plan your life cover, investment and security for your family.

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