Life Insurance: An Agreement That Goes Beyond Just Putting Pen to Paper
As we delve into the various explanations and attributes about life insurance, let us first understand what it is. A life insurance is essentially a contract drawn up between the person holding an insurance policy and the insurer/assurer.
Then deal between these involves the former paying a monthly or annual premium that the insurer has to pay back to the designated beneficiary upon the death of the person who is insured. This contract can also involve clauses where the sum of money, also known as a benefit, can be paid to the beneficiary in case of terminal or critical illness to the insured person. Certain other expenses (like funeral expenses) can also be included as part of the benefits.
A life insurance basically works as a safety net, a kind of financial security for your family in case of loss of life, which forms the basis of this service. The three basic components of this service are:
- Premium: A certain, pre-planned amount paid by the insured person in order for his/her family to be accorded cover. As mentioned earlier, it can be paid on a regular, fixed basis (in most cases monthly) or as one lump sum. It can be considered as a kind of starting investment which brings returns later.
- Sum assured/death benefit: The amount that is promised to the beneficiary/nominee (voted by the policyholder) by the insurer after the death of the holder of the policy. This sum of money can vary depending on a lot of factors.
- Term: There is a certain period of time that an insurance policy provides cover for, which is called as a term. This can again vary depending on the choice of the policy type.
Types of Policies
In India, the sale and procurement of insurance policies is regulated by the Insurance Regulatory and Development Authority of India (IRDAI). And the work of this body is not easy at all, for the country has more than 50 insurance providers, which includes more than two dozen that provide life insurance. Let us look at the various kinds of insurance policies available in the Indian market:
1. Unit Linked Insurance Policies (ULIPs)
The first thing to remember about these services is that they carry a certain risk, the consequence of which falls on the shoulders of the policyholder. This is because these policies have an association with market offerings like bonds, stocks, and mutual funds.Unit linked insurance plans are good for those who are looking for both returns and protection. It involves insurers putting in a certain part of their premium into these market products while keeping the remaining amount as part of the base sum. Since these are risky options, investment companies have their own fund managers whose dedicated work is to oversee performances of these investments.
2. Pension Plans
These are related to when a person retires, for it is never easy to lead a stable lifestyle post retirement due to unsteady income. Anyone planning his/her retirement (or annuity, pension) plan can opt for pension plans, which involve payment of one lump sum to the insurer, in most cases. In turn, the insured can choose the frequency of when and how they are paid, with these payments lasting their lifetime, thus providing financial security. Many pension plans are also unit linked, which means policyholders can get market-based returns.
3. Term Insurance Plans
These are plans that provide coverage for life over a fixed time period, be it short-term or long-term. Term insurance plans ranges from 5 years minimum to 60 years maximum. Protection is provided in the form of the insurer paying the nominee the assured sum on death of the policyholder, but only if the death occurs within the policy term. However, if the policyholder dies after the term, then no protection is provided.
4. Endowment Policies
An endowment policy has a dual role, that of offering life cover and also a means to save money. This occurs because, under this plan, the insured is paid an amount even on policy maturation. However, due to the dual role, most insurers charge a higher premium as compared to normal plans. It is also possible to have unit linked endowment plans, but most insurers in India offer just regular endowment plans.
5. Money Back Plans
An extension of endowment plans, it provides survival benefits to the policyholder, but after taking into consideration several contingencies. A death benefit is assured to the nominee on death of the insured, but apart from that, there is also a survival benefit offered if the policyholder lasts the duration of the policy term or a certain amount of time.
6. Whole Life Policies
As the name suggests, a whole life insurance policy offers protection for the entire lifetime of an individual, with many an insurer having an upper age limit for policy maturation. Apart from the regular amount paid to the nominee on the demise of the insured, a maturity amount may also be paid if the policyholder reaches the upper age limit if the policy has a maturity benefit associated with it.