Life Insurance
What is Life Insurance?
Life insurance is a combination of two terms "LIFE" and "INSURANCE" which implies in case of "loss of life" of the person who is insured, a monetary compensation (which is pre-decided) will be payable to the family members by the insurance company which help them to lead an independent financial life.
On the other hand, if the earning member of the family does not die an untimely death, the money received from a life insurance policy could also help to attain various financial goals. Life insurance is thus a legal contract between the insurance company and the person who is taking insurance. Person who is insured pays a consideration as premium to get this life cover from the insurance company.
Life Insurance Plans
We have often heard the common saying that "Life is unpredictable" which implies that anything could happen in our life be it a "fortunate" or an "unfortunate" event. If its fortunate, life becomes even more happier and keeps going but the u-turn comes when it is an unfortunate event.
Dreadful events or we may call the 3 D events such as
- ☂ Death
- ☂ Disease
- ☂ Disability
could prove fatal and takes little time to turn the happy living upside down. Life could be devastated for our own self and/or for the people around us specially our family. The aftermaths of any unfortunate event could be more dreadful if the victim is partly or solely the financial contributor to the family.
Life Insurance covers the risk of:
“Dying too early” - leaving a dependent family to fend for itself.
“Living too long” till old age - without visible means of support.
It is important to have an understanding about the basic terminology used in Life Insurance domain to understand it better.
Important Life Insurance Terminology
Insured
Insured is a person whose “Loss of life” is being covered by the insurance company and on whose death the insurance company provides a financial amount to the family members.
Sum Assured/ Life Cover
The financial amount which an insurance company pays to the family in case of insured events which are covered under a life insurance contract.
Premium Payment Term
It is the duration or tenure till when the policyholder has to pay the premium for the insurance policy. The premium payment term could be equal to the policy term (contract term) or it could be less than that as well in some cases.
Claim
It is an insured event on whose occurrence, the life insurance company pays the policy money.
Death
When the life insured under a life insurance contract dies during the policy term, the nominee is handed over the policy money.
Insurer
Insurer is another name for an insurance company. Insurance company is the business entity which is a registered organization to do the insurance business.
Policy Term
Policy term is the duration or specified number of years for which the insurance company covers the risk and the insurance contract is active.
Insured Events
The happenings or events which are covered under the insurance policy like death, maturity and in some policies, it could be disease and/or disability as well under some policies.
Maturity
When the policy term is completed, and the life insurance contract comes to an end.
Nominee
An individual (usually a family member) who is entitled to receive the financial compensation out of the insurance policy in the event of death of the insured person.
Premium
It is the cost of getting a life cover from the insurance company which is paid by the policyholder to the insurance company.
Policyholder
The individual who pays the premium for the insurance policy and who enters into a life insurance contract with the insurance company is policyholder. There could be 2 scenarios:
1. If a policyholder has taken a life insurance policy on his own life and pays the premium, under this scenario, the policyholder and life insured are same.
2. If a father has taken a life insurance policy on the life of his son, under this scenario, the father is termed as policyholder who pays the premium and the son is termed as Life insured whose life is being insured.
How many types of Life Insurance Plans are there?
There are 3 broad types of Life Insurance Plans which are based on framework and the benefits offered therein.
Term Plans - Term Insurance plan is a pure protection insurance plan where the insurance company covers you with a sum assured against your premature or untimely death within the contract period. The benefits out of a term insurance plan are handed over to your nominees. There is no element of investment or saving in a pure term plan that’s why there are no maturity benefits if you survive the policy term.
Endowment Plans - Endowment plans are protection cum saving plans (also known as traditional plans) which help you to save regularly in the form of a premium for creation of a corpus. Such plans help you to achieve your mid-term and long-term financial goals along with protecting you against any unfortunate events like death. Endowment plans offer life cover in case the person insured dies during the policy term. But if the person insured lives throughout the policy term, then on maturity the policyholder gets a guaranteed sum. Endowment plans could be participatory (where policyholder gets their share of bonus during the policy term) or non-participatory (where bonus is not allocated) plans.
Unit Linked Investment Plans (ULIPs) - Unit linked Insurance plans are protection cum market linked investment plans. Such plans are taken for wealth creation as the policyholder gets the opportunity to reap market linked benefits. Units are allotted to the policyholders and one can choose to invest in the funds investing in govt. securities, debts or equities as per the risk bearing capacity. The money invested grows and allow the policyholder to enhance his invested amount due to market linked returns in the form of a fund value payable at maturity.
Life insurance plans are often goal driven, based on various LIFE GOALS and SPECIAL FEATURES inherited in it, following are the types of Life insurance plans:
Child Plans - Child plans are designed with a sole purpose to provide continuous financial back up to the child in case something unfortunate happens to the parent. The child plan helps to save and secure the dreams and aspirations of the child by offering a robust sum to take care of different milestones in a child’s life. The main feature of a child plan is the “inbuilt waiver of premium” benefit which ensures that the policy continues in case the parent paying the premium dies during the policy term. Child plans comes as traditional endowment plans and unit linked insurance plans (ULIP) too based on the risk appetite of the policyholder.
Money Back Plans - Money back plans as the name suggests is a traditional life insurance plan which helps the policyholder to get periodic payments as “money backs” i.e some portion or percentage of the sum assured is returned to the policyholder during the policy term instead the entire sum assured being given at maturity. It helps the policyholder to get some money out of his/her insurance policy to meet various financial needs.
There could be 3-4 money backs in the policy depending upon the policy terms and conditions. If before starting the money backs, the life insured dies, the entire sum assured is given to the nominee and the policy ends. If the life insured dies after getting money backs, the money back amount is not deducted from the death sum assured and the entire sum assured is payable to the nominee.
Pension Plans - Pension plans help the person to accumulate funds for the retirement. One has to pay premium during his or her earning phase of life to the insurance company. Insurance company offers the person an enhancement of his/her money so that once the person retires, he or she could start getting pension amount as per his chosen option.
The policyholder could decide for how many years he/she has to pay the premium amount and from which age he/she wants to have the pension started. Death is also covered during the policy term and the death cover will be given to the nominee. Once the insured starts receiving pension, in case of his/her death the nominee could continue to receive the pension as per policy conditions.
Pension plans comes as traditional endowment plans as well as unit linked insurance plans (ULIP) too based on the risk appetite of the policyholder.
