A life insurance policy is a contract between an individual (policyholder) and an insurance provider (insurer) where the insurance company provides financial protection (financial protection) to the policyholder in exchange for a premium. Based on this arrangement, in the event of the policyholder’s death or, if the policy matures (reaches maturity), the insurance provider (insurer) pays a lump sum amount to the individual or their family after a certain period. There are various types of life insurance policies available in the market to meet the personal needs and requirements of the policyholder.
What financial goals can you secure with Life Insurance?
Life insurance plans (life insurance schemes) assist an individual and their family in fulfilling various financial objectives. Some goals that a life insurance policy helps achieve include:
- Financial protection in the event of death (financial security)
- Education for children
- Marriage of children
- Buying a house/becoming a homeowner
- Retirement (post-retirement) pension or regular income
With the help of life insurance plans (life insurance schemes), you can achieve some financial goals. Life insurance plans are quite versatile, allowing you to plan for your defined life goals and include your insurance in them. For example, you can use a corpus (large sum) prepared from an endowment plan (traditional or market-linked) to make payments for a house in the future.
What are the different types of Life Insurance?
Now that you know what life insurance is, let’s understand the main types of life insurance plans:
- Term Life Insurance Plan – Pure risk cover
- Unit Linked Insurance Plan (ULIP) – Insurance with investment opportunities
- Endowment Plan – Insurance and savings
- Money Back – Periodic returns with insurance
- Whole Life Insurance – Whole life coverage for insured/complete life coverage for the individual
- Child Plan – Plan for children’s life goals such as education and marriage
- Retirement Plan – Post-retirement income
Let’s discuss the details of each life insurance plan.
1. Term Life Insurance Plan:
Term Life Insurance Plan is the purest form of life insurance, providing life coverage without any savings or profit elements. It is the most cost-effective type of life insurance because its premiums are quite affordable compared to other life insurance plans.
2. Unit Linked Insurance Plan (ULIP):
A Unit Linked Insurance Plan is a complete mix of investment and insurance. A portion of the premium paid for ULIP plans is used as a risk (insurance) cover in various market instruments such as shares and equities.
3. Endowment Plan:
An Endowment Plan is a traditional life insurance policy that combines insurance and savings. In an endowment plan, if the life assured (insured person) survives beyond the policy period, the insurance company provides a maturity benefit to the policyholder. Additionally, some endowment plans may offer periodic bonuses that are either paid on maturity or in the event of the policyholder’s untimely death.
4. Money-Back Plan:
A Money-Back Life Insurance Plan is a unique type of life insurance policy where a portion of the sum assured (insured amount) is paid to the policyholder at regular intervals as survival benefits. This way, the policyholder can achieve short-term financial objectives.
5. Whole Life Insurance:
Whole Life Insurance plans provide coverage for the entire life of the insured (insured person) or up to 100 years in some cases. When purchasing a Whole Life Insurance plan, a sum assured is determined for the policy term, and a nominee (named beneficiary) is mentioned during the purchase. In case of any unfortunate event of the life assured during the policy term, the insurance provider pays the death claim and any bonuses applicable, either on maturity or in the event of the policyholder’s untimely death.
6. Child Plan:
A Child Life Insurance Plan aims to build a corpus (fund) for the development of a child’s future. Typically, it assists in providing funds for a child’s education and marriage. This plan provides periodic premiums or a lump sum amount after significant milestones in a child’s life. In the unfortunate event of the life assured (insured) parent’s untimely death during the policy term, all future premiums are waived, and the policy benefits continue without any interruption.
7. Retirement Plans:
Retirement Life Insurance Plans help in creating a stable financial source for the years of a person’s retirement. It aids individuals in becoming financially independent and assists them in living without any worries. Most retirement life insurance plans offer an annual payout (as an annuity/pension) after the completion of 60 years or a one-time lump sum payout through a prescribed limit or conversion. In the event of any probable incident during the policy term, the insurer (insurance provider) pays the insurance benefit to the policyholder’s family.
What are the Benefits of a Life Insurance Plan?
After understanding the meaning of life insurance and its types, let’s explore the three main benefits of having a life insurance policy.
Life is unpredictable and filled with uncertainties. Facing the possibility of an unfortunate event like death can be challenging. In such situations, having an investment in a life insurance policy acts as a security shield. Life insurance providers are obligated to pay a predetermined sum assured (insured amount) to the nominee or beneficiary in the event of the policyholder’s demise. This ensures the financial well-being of the family even in the absence of the policyholder.
For those looking to make long-term investments, considering life insurance (life savings) is crucial. Such insurance plans assist in systematic savings and building a corpus (fund) that can be utilized for various purposes, such as buying a new home, providing quality education for children, or covering wedding expenses. Some life insurance policies also offer monthly payouts in the form of annuities, making them an ideal tool for achieving retirement goals.
Life insurance providers offer Unit Linked Insurance Plans (ULIPs), primarily serving as investment instruments. These plans provide significant benefits tied to market performance, making them a reliable investment tool. ULIPs offer essential advantages during maturity, making them an ideal choice for those looking to secure their financial future.
In summary, life insurance policies not only provide financial security but also serve as effective tools for long-term savings and investment.
How much Life Insurance do you need?
Beyond understanding the meaning of life insurance, it’s essential to assess how much life insurance coverage you actually need. While determining the exact value of a person’s life in monetary terms is impossible, it’s crucial to gauge how much financial stability your family would require in your absence. By estimating the amount needed for your family to be financially secure in your absence, you can measure your Human Life Value (HLV).
In the vocabulary of life insurance, Human Life Value or HLV is an estimation in monetary terms of the worth of the insured individual’s life for both the sum assured and the policyholder.
Calculating Human Life Value involves two basic steps:
- Combine all expenses, such as household and daily living costs.
- Calculate future obligations, like outstanding loans.
By summing up the above figures, an estimate of the Human Life Value is obtained. This value signifies the sum assured in your life insurance policy, providing financial protection for your family in case of unforeseen circumstances.
How to Choose the Right Life Insurance policy?
Once you’ve grasped what life insurance is and recognized the need for it, you should be aware of these simple steps to choose the best life insurance policy:
Contact an Insurance Consultant/Provider:
While it may not seem crucial at the initial stage, involving a trustworthy and knowledgeable insurance advisor or provider is essential when getting life insurance. Many people may find it challenging to make decisions on their own, and they require the expertise of an insurance advisor.
Evaluate the Value of Life Insurance Coverage:
A life insurance provider can assist you in calculating the life cover amount (sum assured) based on your income sources, the number of dependents, any liabilities or debts, and an assessment of your expenses. Life insurance providers also help in choosing the best insurance plan from the various types available in the market. This ensures that you obtain an optimal life cover.
Compare Life Insurance Plans:
Various insurance providers in the market offer different types of life insurance policies. It’s crucial to ensure that you carefully select the most suitable life insurance from the available options. To benefit from the best life insurance policy according to your financial needs, you should compare different life insurance plans.