Life insurance is an essential component of your financial planning, especially if you wish to secure the financial future of your loved ones in your absence. Also, the earlier you start, the better it is for you, in terms of the premiums that you have to shell out and the goals that you wish to achieve. Here, we talk about what is life insurance and how does it work.
What is Life Insurance?
Life insurance is a contract that you enter into with an insurance company. This contract mandates you to pay premiums regularly, whether quarterly or half-yearly or annually, to the insurance company, who in turn will pay a lump sum amount on maturity of the contract or as a death benefit to the nominee of the policy after your demise. The death benefit can be used by the nominee for any purpose- funding day-to-day expenses, repaying debt, or investing. And if you outlive the policy term, you get the maturity value and can use it for any purpose.
Types of Life Insurance
The different types of life insurance policies available in India are:
Term Insurance- One of the cheapest options in life insurance, term insurance plans are of fixed duration and involve the payment of a death benefit upon the passing away of the policyholder. No amount is paid if the policyholder outlives the policy term.
Term Insurance with Return Premium– These policies involve repayment of the premiums on the maturity of the policy if the policyholder outlives the policy term.
ULIPs– Unit Linked Insurance Plans offer life insurance coverage plus investment opportunities. In these policies, a portion of the premium paid is used for investment in different instruments like debt, equity, or a combination of the two.
Endowment-These policies offer the combined benefit of life insurance and savings. It is a good option for people looking to save regularly to get a lump sum at maturity and fulfill their long-term goals.
Money-Back Policies-These policies give the policyholders a certain proportion of funds at regular intervals.
Whole Life Insurance– These policies provide insurance coverage for the whole life of the policyholder. The death benefit is payable to the nominee upon the passing away of the policyholder, but the maturity benefit is available only if the policyholder crosses 100 years of age.
Along with the above types, life insurance companies in India offer special insurance plans for retirement planning and children. You should select an insurance policy according to your requirements and suitability. Also, remember to read the terms and conditions of a policy carefully.
Working of a Life Insurance Policy
For taking a life insurance policy, you need to assess the financial requirements of your family, including any liabilities that they may have to repay. And in case you are taking the policy to fulfill your long-term goals, you need to quantify them too.
Policy Amount– You will have to finalize the amount for which you wish to take the policy and the period after which you will need the money. Experts recommend finalizing a policy amount that is 10-12 times your current annual income to take care of the inflation and increase in fund requirements.
Policy Premium-Clarity about the policy value will help in knowing the premium that you will have to pay. You can use a life insurance premium calculator to know the premium payments for different maturity amounts and policy durations. The premium amount will also depend on the type of policy you select, your age, and your health condition. The younger you are, the lower is the premium amount. Applicants above a specific age have to undergo a medical examination or provide details about their health. Applicants having a higher risk of developing chronic ailments or working in high-risk industries may have to pay a higher premium.
Insurance Claims-In case of a mishap leading to the policyholder passing away, the nominee is entitled to get the entire coverage amount by submitting the requisite documents, including the original policy. The insurance company verifies the claim and other documents submitted by the nominee and then pays the death benefit amount.
However, if the policyholder outlives the policy term, no amount is paid by the insurance company in case of a term insurance plan. Some policies with the return of premium option are available and promise to pay the survivor a certain payment on the expiry of the policy. In the case of other life insurance policies, the policyholder gets the maturity amount on submission of the original policy. Some insurance policies have the option of paying the death benefits in regular monthly installments instead of a lumpsum amount.
To conclude, a life insurance policy is a must for securing your family’s future in your absence or for fulfilling your long-term goals. You can buy a life insurance policy online or through an agent of the life insurance company. But do not forget to read the terms and conditions carefully before finalizing the policy amount, duration, and the premium amount and frequency.