Life insurance a need of today…..!!! Do you agree with the statement…..??? Yes it is not only the need of today but also for tomorrow to support your family in your absence. What are the important factors to be considered while choosing an insurance policy? It is sum-assured and premium. Sum assured should be opted according to the need and lifestyle of a person. For a given sum assured different companies charge varied premium. You might be thinking what determines the premium of an insurance policy. The premium rate for a life insurance policy is based on three underlying concepts: Mortality Interest and expense. Expense is the amount which company adds to the cost of the policy to cover operating costs of selling insurance, investing the premiums, and paying claims.
The concept of Life insurance is based on sharing the risk of death by a large group of people. The amount at risk must be known to predict the cost to each member of the group. Mortality table is a tool which helps to determine the average life expectancy for each age group. Insurance companies use mortality tables to create a basic estimate of how much money it will need to pay for death claims each year.
Interest earning is the second important factor used in calculating premium. Normally companies invest your premiums in bonds, stocks, mortgages, real estate, etc., and assume they will earn a certain rate of interest on the investments.
Operating expenses of the company is the third consideration. Salaries, agents’ compensation, rent, legal fees, postage, etc. are comes under such expenses. The amount charged to cover each policy’s share of expenses of operation is called the expense loading. This cost can vary from company to company based on its operations and efficiency.
Life Insurance Cost in India:
Life Insurance and Need Analysis
Life insurance serves the following needs
- Financial Security
- Helps to Avail Tax Exemptions
- To Save/Invest
- Helps To Diverts States Resources for Other Purpose
- Facilitates Economic Movements
Life Insurance provides financial security for a human. When the breadwinner of a family dies the life insurance policy comes into picture to help the family. It helps the dependence of the insured person to meet their Individual and family’s needs. Therefore they will naturally be forced to give sufficient funds for this purpose. This practice encourages thrift and also helps people to plan for some productive schemes.
Helps to Avail Tax Exemptions
Insurance policy holders are allowed to claim income tax exemptions for the payment of premiums. The amount and the level to which they are allowed depends on different factors like the persons income, investment, etc. This provision is the most tempting point which makes people to invest in insurance and attain a mutual benefit of tax exemption. Since universal life insurance is a long term investment it is not advised to borrow money either by loans or through surrender values as they reduce your policy amount.
This is the third important reason to buy insurance. Generally savings is the amount remaining with a person after he/she meets all their basic expenses and other cash needs. If one has to build wealth, savings need to be channelized into an investment with precise time horizon and goal. But purchasing an insurance policy is neither savings nor investment; it is simply an effort going waste.
Life insurance is the only investment option that offers specific products tailor-made for different life stages. It thus ensures that the benefits offered to the customer reflect the needs of the customer at that particular life stage, and hence guarantees that the financial goals of that life stage are met.
Helps To Diverts States Resources for Other Purpose
One significant duty of the governments in any country is to take care of the old and dependent population. The state also assigns funds for this purpose. With the increasing awareness of insurance the government can be assured of spending less for the old. As a result they can concentrate on strong issues and problems in the society.
Facilitates Economic Movements
Life insurance companies collect premiums from a range of investors. They are thus able to collect large funds. This money is used to finance trade and development activities. Finally production of goods and services will increase and the economy of the nation will be developed.