- A life insurance policy ensures financial protection to the dependents of policy holder
- Life insurance should cover all the financial liabilities, else there is a risk of being under insured
- Besides the life insurance cover, certain life insurance policies also provide money back and investment returns
In its simplest and most basic form, life insurance is a shield against risk of unfortunate demise. Technically, it is a legal contract between you and an insurer, under which you pay an amount or a periodic payment called premium, in return for insurance cover (protection) for the risk your life faces. The life insurance cover extends for a pre-specified term, at the end of which the contract ceases to exist.
Broadly, the premium you pay hinges on factors such as the type of plan (term or endowment), the cover amount you’re buying, the tenure, your health condition and your age. It’s important to get a fix on precisely how much cover you need — not just because it will determine how much premium you will pay but because if you’re inadequately insured, the very purpose of your buying insurance will be defeated.
The rationale that governs the purchase of insurance policies is this: in the event of demise, your dependents can be monetarily compensated to the extent of the cover you have taken. There are, of course, several other factors that determine precisely how much insurance cover you can take. You should use the Human Life Value Calculator to find out the minimum amount you must get insured for.
“ Life is full of uncertainties. Use life insurance as a financial hedge to overcome this insecurity”
Life Insurance, thus, is a risk management tool, but prudent risk management also requires you to prioritize your risks and take only such cover as is necessary at any point, and to review your insurance needs from time to time. For instance, a life cover of 15 lakhs taken when you were single may not be adequate if you are now married with kids.
Life insurance forms the cornerstone of financial planning. Yet, look around and you will find most people — irrespective of age — are under-insured. An inadequate awareness of one’s insurance needs is principally to blame for this. Most people, consequently, buy life insurance policies for tax-saving or investment purposes, which should not be the only reason to buy life insurance.
Policy types
There are, broadly, four types of life insurance policies- Term, Endowment, ULIP and Whole Life Plans.
Term plans are the cheapest, purest form of insurance, which cover the risk of unfortunate demise for a specified period. Generally term plans do not offer anything in return on completion of policy terms, however there are certain term insurance plans like Exide Life Insurance Smart Term Plan which offers life cover for the chosen term and also returns the premium on completion of policy term.
Endowment plans are insurance-cum savings vehicles: they offer life insurance cover for the policy tenure and, additionally, offer a return on investment. Money Back plans are a type of endowment plans in which you receive policy benefits in the form of regular pay outs even as you continue paying premiums.
ULIP is a life insurance policy which provides a combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs.
Whole-life plans are policies that, as the name suggests, cover you for your whole life, not just for a fixed tenure.
Some types of insurance plans also serve as retirement planning vehicles. For instance, an annuity is a contract between you and an insurer, which allows you to receive a pension in your post-retirement years. A deferred annuity is a long-term retirement planning vehicle in which the accumulations in your earning years will enable you to form a corpus which will be used to buy an annuity plan to receive pension in your golden years.
Evolving over a span of time, the life insurance plans today are not just confined to provide pure protection, but additionally serve your savings and investment needs as well. Insure wisely, insure properly is the mantra you should stick to in life.
