Life Insurance is a contract between the insurer and the insured, that in exchange for regular premium payments by the insured, the insurer will provide a lump sum amount (known as Death Benefit) to nominees of the insured, upon his/her death, within the term of the plan. Premium paid depends on sum assured.
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Purchasing a life insurance policy is necessary, especially if you have a spouse, children and dependent parents. Even if a person is single and without dependents, it is wise to take life insurance to cover for costs like funeral and burial expenses.
In case the primary earner in the family passes away, it affects the family drastically and completely derails the lives of everyone in the family. To avoid putting them through additional financial burden, life insurance ensures that the quality of life is maintained.
Life Insurance is crucial for a business person to protect the business from losses, liability and instability. Nominating a business partner or a key person allows them to keep the business operations running.
Anyone who is a parent or is planning to become a parent, must have life insurance cover to ensure that children’s education isn’t affected by his/her absence. Children can continue their education without disruption, while under the supervision of a single parent or legal guardian.
A person may have availed loans or other debts during his lifetime. In case these loans are outstanding at the time of his demise, the burden of repaying these loans will fall on his heirs or spouse. Life Insurance will decrease this burden by paying off the debts in part or in full.
Whether a person has a family or is single, at the very least, life insurance will help in paying off funeral and burial expenses, without putting additional financial burden on family and friends.
SEE ALSO: Unsecured Loan
Many people know about life insurance and its importance, but are unaware on different types of life insurance policies available, based on the preference and the riders that can be added-on to the basic cover. Some of the life insurance policies are explained below.
1. Term Insurance (Term Plan)
Term Life Insurance as the name suggests, provides coverage for a specific period of time. It is the most basic form of life insurance which is easy to understand and very affordable. The beneficiaries receive the sum assured either as a lump sum or monthly payments or both. It is a pure risk plan that provides high coverage at low premium.
Money (death benefit) is given to nominees on death of the policyholder within tenure of the plan. If the insured survives the term of the plan, no pay-out will be provided. However, there are insurance companies that provide term insurance with return of premium if the insured survives the term period. These types of term insurance plans are more costly than regular policies and require higher premium payments.
Example: Mr A, aged 30, purchases a term insurance for 30 years with coverage of Rs 1 crore. He pays an annual premium of Rs 10,000.
In case of a regular term policy, if the insured passes away within 30 years, his beneficiaries will receive a sum of Rs 1 crore, and if he survives, no pay-out will be given.
If the policy is a term insurance with return of premium, the beneficiaries receive Rs 1 crore upon the demise of the insured within 30 years. If he survives, then the insurance company will pay Rs 3,00,000 (10,000 * 30) as return of premium.
2. Whole Life Insurance
Unlike term plans, Whole Life Policy provides coverage for the entire life of the insured, or in most cases up to the age of 100. The insured continuously pays regular premiums to the company for a fixed term and if he lives till maturity, he will receive the maturity benefit. If the person passes away before that, his beneficiaries are entitled to receive death benefit, which is the sum assured. Whole Life Insurance Policies generally have a higher premium than term insurance.
3. Endowment Plans
Endowment plans are a combination of Insurance and Savings. Part of the premium is kept for life cover (Insurance) and the rest is invested by the insurance company (Savings). They have a specified maturity, at which point, the sum assured and the bonus, in case of profits from the investments, is paid-out to the insured, provided he survives the term of the policy. In the event of his demise before maturity, his nominees will receive death benefit which is the sum assured + whatever bonus accrues till then. Endowment Policies provide an opportunity for individuals with low risk appetite to earn profits from investment.
If a person cannot pay premiums, it can be converted to a paid-up policy. In this case, the sum assured is limited to the paid up premiums and is calculated as a ratio of the number of premiums paid to total number of premiums payable, multiplied by the total sum assured. The recalculated sum assured (known as paid up value) is paid out as maturity value upon maturity or death of the policy holder.
Example: The sum assured is Rs 10,00,000 for an endowment policy of 20 years with annual premium of Rs 15,000. If the policy holder has paid premium for 6 years and then converts his policy to a paid-up policy, then the amount to be paid out at maturity will be: (10,00,000* 6⁄20) = Rs 3,00,000.
Surrender of plan means terminating the policy. At the time of surrender, an amount known as Surrender Value will be paid to the person, which depends on the number of years completed, bonus and the premium.
Surrender Value are of two types – Guaranteed Surrender Value and Special Surrender Value. A person is eligible to receive the guaranteed surrender value if he has paid premiums for at least 3 years. It is calculated as 30% of the basic premiums paid excluding additional riders, first year premium, and bonus.
Special Surrender Value is calculated by adding bonus to the paid-up value and multiplying the total with a multiplier called surrender value factor.
Special Surrender Value =[(Paid up value+Bonus) X Surrender value factor]
The surrender value factor is zero for the first 3 years of the policy and keeps increasing after 3 years. It is different for each insurance company and depends on various factors like policy type, policy years, premium paid, time to maturity and so on.
Money Back Policy is another type of Endowment policy wherein, a percentage of the sum assured is paid to the insured at regular time intervals. Upon maturity, if the insured survives the term, the balance of the sum assured is paid. However, death benefit covers the entire sum assured, even if a portion of the sum has already been paid.
4. Unit Linked Insurance Plan (ULIP)
ULIPs are a life insurance product that gives you Insurance and Investment in a single plan. Part of the premium is taken for the insurance cover while the remaining money is invested in equity or debt or a combination of both. In a ULIP, the holder has the option to choose where his funds will be invested and the flexibility to change the allocation of funds in different assets. In the endowment plan, however, the holder doesn’t have the option and flexibility to choose where his money is invested. They are invested only in fixed income instruments. ULIPs allow investors with varying risk appetites to choose asset classes as per their choice.
Life Insurance Policies also provide tax benefits to the insured. Under Section 80C of the Income Tax Act, the premium paid for insurance can be claimed as a deduction, up to Rs 1,50,000 a year. The sum assured and any bonus that you receive can also be claimed as exemption from taxable income under Section 10(10D). However, there are certain conditions to be met for claiming an exemption under this section.
If you fail to satisfy these conditions, the maturity benefit cannot be claimed as exemption under Section 10(10D). In that case, the maturity benefit pay-out is subject to 2% Tax Deducted at Source (TDS), if the Permanent Account Number (PAN) is submitted to the insurer, and 20% TDS if the PAN is not submitted.
Everybody wants higher coverage for lesser premiums. People spend a lot of time comparing various insurance companies and different policies to get the most out of their investments. However there are certain factors that every insurance provider considers before deciding on the premium to be paid. Some of these factors are given below:
Age – Age of a person is an obvious factor taken into consideration. Younger applicants will ideally pay premiums for a longer period of time and have lower chances of death. For this reason, the younger a person is at the time of application, lower is the premium payable.
Gender – Data shows, females live longer than males. So, the premium is lower for females, as they will continue to pay the premiums for a longer time than males and are more likely to survive the term of the plan.
Amount of Coverage – Unsurprisingly, higher coverage attracts higher premium payments.
Occupation – occupation of the person is an important factor in determining premium. High risk jobs like working in nuclear power plants, police officer, race car driver and so on attract higher premium.
Health – the current health/medical condition of the applicant is thoroughly checked and cross referenced against medical records. Persons suffering from any illness or disease must pay higher premium.
Smoking – this is one factor that is taken very seriously by the insurance companies. Smoking puts a person at risk of various diseases and illnesses. Smokers generally pay around 50% higher premium than non-smokers.
Family Medical History – insurance companies not only look at the applicant’s health but also the family’s health history. If your family has a history of diseases like diabetes, cancer, heart conditions and so on, you will have to pay a higher premium. Hereditary diseases will attract higher premiums as well.
Riders are add-on benefits that can be included in your base policy. Riders can be taken at an additional cost by paying a higher premium and allow the insured to customize the policy as per his needs.
Accidental Death and disability
The basic life insurance policy does cover death by accident, however, taking this rider directs the insurer to pay additional amounts apart from the sum assured to the nominee, in case of death or disability by an accident. In case of permanent disability due to an accident, some insurers pay the rider amount as a monthly benefit.
This rider covers critical illnesses like heart attack, cancer, paralysis and so on, which have been diagnosed after taking the policy. Any illness diagnosed before taking the policy will have to be disclosed while applying for the policy. The critical illness may or may not lead to death immediately, but the person might be disabled and unable to work anymore. The list of illnesses covered under this rider varies from insurer to insurer.
Waiver of Premium
In case the insured is rendered unable to work for any reason, he will not be able to pay premiums and the policy will be terminated. To avoid this, the waiver of premium allows for the policy to continue till maturity, even though the insured person is unable to pay the premiums.
Hospital Cash and Surgery Care
A fixed benefit is paid for every day of hospitalization when you avail the Hospital Cash rider. Surgery Care rider provides coverage for unavoidable surgery within India. The benefit differs with types of surgeries and major or minor surgeries.
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