INSURANCE

LIFE INSURANCE

Life insurance is a tool for Risk-Management, where an insurance company promises to pay a specific sum of money to the insured person’s dependents on the event of his/her death.

What is Insurance Premium- It is the cost of buying insurance.  In other words, it is the amount you pay to the Insurance company against which it provides you insurance. It varies according to the age, income, weight, health, life style etc.

Payment mode: It can be monthly, quarterly, half-yearly, annually or single premium.

Insurance companies also provide some additional benefits attached to the basic term-insurance, called RIDERS. Some of them are:-

CRITICAL ILLNESS RIDER- it is an additional cover to the life insurance policy and paid in the event of diagnosis of any Critical Illness like cancer, kidney or renal failure etc.

ACCIDENTAL DEATH BENEFITS- it is again added to the life insurance policy and paid in the event if the death of the insured person is due to accident during the policy term.

DISABILITY OR DISMEMBERMENT BENEFIT Rider- on the event of the disability due to accident the inured person is paid life cover and additional cover.

Cost of buying these riders : There are many such riders which insured person can take as per their requirements by paying some extra premium.

TENURE

Any person above the age of 18 years can buy insurance. it is generally provided till the age of 70-80 years depending upon the policy type.

HOW MUCH INSURANCE DO YOU NEED

Generally, advisable insurance is the 10-15 times of the income of the insured person.

NOMINATION

Nominee is the person who is paid the insurance amount in the event to the death of the insured person.

TAX BENEFITS

The premium paid is exempted from TAX under SECTION 80C up to a limit of RS.1,50,000/- in a financial year.

ENDOWMENT PLAN– The insurance company promises to pay the insured person a specific amount (per month/quarter/year) after a particular age. A pure endowment plan doesn’t cover risk of death.

Now they don’t provide PURE ENDOWMENT PLANS any longer.

Endowment plan is sold along with Life insurance policies in various forms. Some of the schemes that offer both insurance cover and endowment plans are:-

ULIP(UNIT LINKED INSURANCE PLAN)

Reason for which people invest in ULIP is that it provides returns with insurance. The insurance it provides is not as good as the term insurance but it still attracts the investors.

In ULIP the returns are not guaranteed. Also the returns are very poor because of the additional charges attached to the schemes like administrative charges, mortality charges etc. These additional charges bring down your returns.

They are also less liquid because of the 5 years lock-in period. They allow you to exit with some penalties but you will never have the full principle amount to withdraw.

ENDOWMENT PLAN AND OTHER TRADITIONAL INSURANCE PLANS-

Endowment plans are the combination of Insurance and Savings. The investor is paid when the policy matures or if the policy holder dies within the term period. They cost more than the term insurance as the premiums are high and also the returns are lower because they usually invest in risk-free avenues.

MONEY-BACK POLICIES-

Money back policies are the combination of insurance and redemption of money on regular intervals.    It provides regular payouts but the return it provides is less than any other market-linked plan.

Endowment plans, money-back policies and other traditional insurance plans have strict surrender policies. If the investor wants to surrender the policy, he would have to pay very high charges. Looking at these high charges/penalties people drop the idea of surrendering the policy and stay invested (which precisely is the purpose of insurance companies).

COMPARISON OF VARIOUS INSURANCE PRODUCTS

ELIGIBILITY ULIP ENDOWMENT POLICY MONEY BACK POLICY TERM INSURANCE
INSURANCE COVER YES YES YES YES
SUFFICIENT INSURANCE COVER NO NO NO YES
COST OF INSURANCE HIGH HIGH HIGH LOW
ADVANTAGE MARKET-LINKED REGULAR SAVINGS REGULAR PAYOUTS LIFE COVER
RETURNS NOT GUARANTEED GUARANTEED LESS THAN MARKET-LINKED PLANS NO
ADDITIONAL CHARGES HIGH MEDIUM MEDIUM NO
SURRENDER CHARGES NOMINAL HIGH HIGH NO *

* IN TERM PLAN THERE ARE NO CHARGES CALLED SURRENDER CHARGES BUT IF YOU DO NOT WANT TO CONTINUE YOU CAN SIMPLY STOP PAYING THE PREMIUM. PLEASE NOTE THAT THE POLICY WILL LAPSE EVEN IF ONE PREMIUM IS NOT PAID ON TIME

In the process of Financial Planning a Certified Financial Planner like me would not recommend ULIP, Endowment Plan, Money-Back policies. Typically the sum assured that you get is not sufficient for your family to survive after the death of the insured. For this reason I recommend TERM INSURANCE as you get plenty of insurance cover at very low premiums.

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