Brief definition of life insurance

Life insurance : As the word itself suggest, insuring our life against odds to keep our dependents financial safe is the purpose of any Life Insurance
Insurance in India is regulated by IRDA (Insurance Regulatory and Development Authority). Insurance is broadly classified into two types,

⦁ Life Insurance – Involves insuring life of a individual

⦁ General Insurance – Involves insuring value of materialistic things other than life of an individual. Further general insurance is classified into,
a) Heath Insurance b) Non Health Insurance

The above chart clearly shows how much scope lies for life insurance in India and Indians are either not insured or under insured risking their life and the life of the dependents.

Let’s throw some light on Life insurance and how it works

Life of a person is insured with a company who provide coverage to an individuals life in case of any death of the person through a contract called as a Life Insurance Policy. This policy contains the following important points in brief,

⦁ Proof of Age
⦁ Payment of Premium
⦁ Life Cover
⦁ Revival of Lapsed policy
⦁ Surrender details
⦁ Renewal
⦁ Claim

Apart from these, companies also give other details based on the policy.
Below are the two broadly categorized types of Life Insurance Policy

⦁ Term Policy – Wherein life of an individual is covered for a sum of amount called as a “Sum assured” and this amount is settled to the nominee/s of the policy only on demise of the policy holder and not in any other instance.

Eg., Mr A has taken a term policy for a period of 30 years at an Age of 25 and paying premium of Rs. 1 for a sum assured of Rs.50. In such case, Mr A has to pay the premium of Rs.1 for 25 years and the sum assured of Rs.50 will be settled to his nominees only in case of demise of Mr A within the policy period of 30 years.

If Mr A survives after age of 55.,ie after policy period of 30 years, no part of the premium paid will be returned to Mr A on survival. In other words, this policy is invoked only on demise of policy holder and not on survival.

⦁ Endowment Policy : In a country like India, where return on any sum of investment is seen as a major factor before investing, term policies which do not give any return on survival are not very popular.

Instead a new class called the Endowment policy is much popular. This class of policy, gives both the survival benefit on survival of the policy holder after the policy term and death benefit similar to term policy in case of demise of the policy holder in between the policy period.

Eg., Mr A has taken an endowment policy for a period of 20 years by paying a premium of Rs.1 for a period of say 10 years, he gets a life cover of Rs.10 ( 10 times the premium amount paid should be given a life cover/sum assured to get tax benefit on the premium paid).

Scenario 1 : In case of demise of Mr A during the 9th year of the policy, sum assured of Rs.10 along with bonus for payment of premium of 9 years is given to the nominees.

Scenario 2 : In case of survival of Mr A for the policy period of 20 years, the he received sum assured of Rs.10 along with the bonus for the premium he has paid for 10 years and waiting period of 10 years.

Hence endowment policy is preferred by people in India, although term policy only serves the purpose of Life cover fully. The sum assured in a term policy is always higher and calculated using some basic methods like Human Life Value method, Income Replacement Value, Expense Replacement method.

As a thumb rule, your sum assured must be minimum 10 times your annual income at any point of time. Higher the sum assured, safer your dependents are against any odds for the life insurer.

So, it’s always safe to have a Term Insurance policy as soon as you start earning or at least as soon as you have dependents on your income.

While there are various instruments that give much higher returns than a Endowment policy does, it depends on the individuals to opt for a Endowment policy or search for alternative investment.

Benefits of Life Insurance

Key benefits of life insurance are as follows

⦁ Financial Security – First and foremost benefit is to secure our family against any unforeseen circumstances and continue the lifestyle even after demise of the breadwinner of the family

⦁ Prevent Loan Burden – Helps prevent burden of loan on the family members/survivors incase of sudden demise of the person holding a loan

⦁ Child’s Future/Retirement Planning – To help secure our children future even in case of absence of the income generator or plan for a proper regular income option after retirement.

⦁ Tax Benefits – The premiums paid under life insurance policy help avail 80C benefits under income tax act. Recent changes have been made with regards to premium paid under ULIP policies.

Hence it’s always good to take a life insurance, please seek a proper advisor before you take your own life insurance, know the policy in detail before you opt for one and ensure you will be able to pay the premium on a regular basis to keep the policy live and fulfill the purpose for which it’s taken.