Life insurance is an agreement between an individual and an insurance provider. The insurer pays a monthly premium, and in return, the policyholder receives financial protection.
In the event of the policyholder's death or the policy's maturity, the insurer will provide a lump-sum payment to the policyholder or their family. The market offers various types of life insurance policies to meet the specific needs and preferences of the policy purchaser.
What Financial Goals can you secure with Life Insurance?
Life insurance policies assist individuals and their families in achieving various financial objectives. These policies aid in the fulfillment of the following goals:
- Financial protection in case of death.
- Education for Children.
- Marriage of children.
- Buying/owning a House.
- Pension or regular income after retirement (income).
Life insurance plans are a versatile tool to achieve specific financial goals. By aligning your insurance plan with your life objectives, you can use it to plan for and attain these goals. For instance, setting up an endowment plan, whether traditional or market-linked, can help you accumulate a corpus that you can use to fund your future home purchase.
What are the different types of Life Insurance?
Now that you understand what life insurance is, it's essential to be aware of the main types of life insurance plans:
- Term Life Insurance Plan – Pure Risk Cover.
- Unit Linked Insurance Plan (ULIP/ULIP) – Investment Opportunity (Opportunities) along with Insurance.
- Endowment Plan – Insurance and Savings.
- Money Back – Periodic Returns with Insurance (Returns from time to time).
- Whole Life Insurance – Whole Life Coverage for Life Assured / Whole Life Coverage for Life Assured.
- Child plan – Life goals for children like education and marriage.
- Retirement Plan – Post Retirement Income (Income).
Let us know further and understand the nuances of each life insurance plan.
1. Term Life Insurance Plans
The term life insurance plan is the most straightforward form of life insurance, providing life coverage without any savings or profit component. It is also the most cost-effective type of life insurance, with lower premiums compared to other plans. This type of insurance plan solely focuses on providing life coverage.
2. Unit Linked Insurance Plan (ULIP/ULIP)
A unit-linked insurance plan (ULIP) is an ideal combination of investment and insurance. With a ULIP plan, a portion of the premium payment goes towards providing a risk cover, while the remaining portion is invested in different funds.
The policyholder's risk tolerance determines the investment choice in different funds provided by the insurance provider. The insurance provider then invests the accumulated amount in various money market instruments such as shares and equities.
3. Endowment Plan
An endowment plan is a conventional life insurance policy that merges insurance and savings components. Under this plan, if the life assured lives beyond the policy term, the insurance provider offers maturity benefits to the policyholder. Moreover, some endowment plans may provide a periodic bonus, paid either upon maturity or in the event of the policyholder's untimely death.
4. Money-Back
A money-back life insurance plan is a distinctive life insurance policy that offers a survival benefit to the insured in the form of periodic payments of a portion of the sum assured. This feature allows the policyholder to fulfill short-term financial objectives.
5. Whole Life Insurance
Whole life insurance plans provide life coverage to the insured for their entire lifetime, or in certain cases, until they reach 100 years of age.
When purchasing a whole life insurance plan, the sum assured is established, and a nominee is designated. In the event of the life assured's unfortunate passing, the nominee receives the death claims and applicable bonuses.
6. Child Plan
The objective of a child life insurance plan is to accumulate funds for a child's future development, typically to finance their education and marriage.
This plan offers annual installments or a lump sum amount at significant milestones of a child's life. In the event of the insured parent's passing during the policy term, all future premiums are waived off, and the policy benefits continue uninterrupted.
7. Retirement Plans
A retirement life insurance plan is designed to establish a stable financial source during an individual's retirement years. It promotes financial independence and allows them to live worry-free. Typically, these plans offer either an annual payout in the form of an annuity or a lump sum payout upon reaching 60 years of age, subject to a prescribed limit. Additionally, the accumulated amount can also be commuted or converted into a lump sum payout.
What are the importants of a life insurance plan?
Once you understand the definition and different types of life insurance, it's important to consider the three major benefits of having a life insurance policy. These benefits are as follows:
1. Security
Life can be unpredictable, and unforeseen events like death can cause financial distress to a family due to loss of income. Therefore, having a life insurance policy as a safety net from an early stage of life can be crucial. In the event of the policyholder's untimely demise, the life insurance provider is obligated to pay a predetermined sum assured to the nominee or beneficiary, providing financial security for the family. This makes investing in a life insurance policy an effective way to protect one's loved ones from potential financial instability.
2. Long-Term Savings
Long-term investments require careful consideration, and life insurance plans are an essential option to explore. These plans allow you to save systematically and create a corpus that can be utilized for various purposes, such as financing a new home, providing quality education for your children, or covering wedding expenses.
Moreover, certain life insurance policies provide monthly payouts in the form of annuity, which is an ideal way to achieve retirement goals and secure your financial future. By investing in life insurance, you can plan for both short-term and long-term goals and ensure a secure financial future for yourself and your loved ones.
3. Investment Options / Investment Options
Life insurance companies provide Unit Linked Insurance Plans (ULIPs) which combine insurance and investment. These investment products are linked to the market and offer substantial returns upon maturity, making ULIPs a dependable investment instrument.
How Much Life Insurance Do You Need?
In addition to comprehending the concept of life insurance, it's crucial to assess the appropriate coverage needed. Although determining the precise value of a person's life in currency may not be feasible, it's important to gauge their worth. This can be achieved by estimating the amount of money required for one's family to maintain financial stability in the event of their absence, known as the Human Life Value (HLV). In the realm of life insurance jargon, HLV refers to the sum assured and a monetary evaluation of the policyholder's life.
The fundamental approach to determining the human life value comprises of two steps:
- Tally up all expenses, including household and daily living expenses.
- Evaluate future liabilities and obligations, such as outstanding loans.
By summing up the above data, you can approximate the Human Life Value, which represents the Sum Assured of your life insurance policy.
How to choose the right life insurance policy?
After comprehending what life insurance entails and identifying your need for it, follow these simple steps to select the best life insurance policy:
Get in touch with an Insurance Consultant/Provider
Although it may not appear significant in the beginning, engaging a reliable and knowledgeable insurance advisor or provider is essential while purchasing life insurance. Many people require the expertise of an insurance advisor and are unable to make decisions on their own.
Insurance customers nowadays lean more towards digital media but still expect conversations and recommendations [2] for important activities like this.
Assess Life Insurance Cover
A life insurance provider can help you calculate the appropriate life cover amount (Sum Assured/Sum Insured). They assess your source of income, number of dependents, liabilities, and expenses to determine the preferred life cover.
Life insurance providers also assist in selecting the best insurance policy from the various types of life insurance plans available in the market. This ensures that you receive optimal life cover.
Compare Life Insurance Policies
Several insurance providers offer different types of life insurance policies. It is necessary to carefully choose the most suitable life insurance policy from the available options. You should compare various life insurance plans to acquire the best policy that caters to your financial requirements.
To accomplish this, consider all requirements and criteria (methodology) and compare the life insurance plans of different insurers to select the most suitable plan.
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