Monday, 4 August 2014

Life Insurance - Complete Guide

What is Life Insurance policy?

Life Insurance policy is a contract between an individual and insurance company where in the insurance company agrees to pay to the policy holder a decided amount in case of unfortunate death of the policy holder. In return, the policy holder agrees to pay an annual payment called premium to the insurance company.


Why do I need it?

Life is very unpredictable. You would never want your loved ones and your dependents to suffer helplessly in case of your unfortunate death. The resulting financial insecurity can lead to a lot of privations and hardships for your family. No one wants that to happen to one's family.

How can you completely eliminate this risk?
A small premium paid every year is more than enough to completely secure the future of those you can’t bear to see in a helpless situation. Typical premiums for a term policy of `1 crore can be in the range of `10000-15000 per year.
This nominal amount contributed annually will not make a major difference to your present budget and will not at affect your finances. But the insured amount will make all the difference in the world to the family if it faces your unfortunate death.


How much insurance do I need?

The Insurance amount needed depends on the time period for which insurance is provided & the expenses of the family which need to be met through the amount. It also depends on the inflation rate in the country, the long term interest rates, etc. The insurance premium to be paid depends on the age of the individual, the health of the individual, the insured amount, the type of policy, the income level of individual and such other things.
Our tool helps you calculate the optimum level of insurance required by you.
The insurance amount is decided such that the family will be able to use the money to take care of all its necessities for a pre-decided period. It is of financial prudence to insure yourself for the optimum amount. Being over-insured leads to wastage of financial resources through unnecessary premiums. Being underinsured leads to inadequate protection for the family.


Types of Plans & their comparison?

There are various insurance products available in the market. Some of the prominent ones are:
Term Insurance: It is the most basic form of Insurance. The period for which the policy holds true is limited and is normally limited to maximum of 30 years. The sum assured will be given only if the policyholder dies during the given period. If the policy holder stays alive at the end of the insured period, the policy lapses and the policyholder gets no money from the company.
Endowment Policy: These policies cover the risk to an individual for a specific period of time like term insurance. But these plans also pay back sum assured and promised bonuses at the time of maturity. In case the policy holder dies before maturity, the nominees get the assured amount plus the bonus which has been accumulated till date.
Money Back Policy: These plans pay the entire sum assured at the time of the death of the policy holder; if he dies in the insurance period. Apart from that these plans also pay some portion of the sum assured after every few years if the policy holder survives. The death coverage is provided without deducting the money back.
Unit Linked Insurance Plans (ULIPs): Unit linked insurance plans are a hybrid of insurance and investment plans. A part of ULIP premium is used to provide Insurance cover and other part is invested in capital markets to provide good returns.


Table of comparison of various types of Insurance policies
ProductsAdvantagesDisadvantagesTypical annual premiumsExpected return on investments
Term Insurance1. Cheapest product
2. Very simple product and very easy to understand
1. No payment is made if policyholder survives till maturity
2. Provides protection for only a limited period
`7k to 15k for insurance amount of `1 crore0
Endowment Policy1. Provides life cover like term insurance but at maturity if policyholder survives, he is still paid the assured amount plus accrued bonuses1. More expensive than Term Insurance
2. Provides lower returns than plain investment products
`50k to 100k premium for investments & insurance cover of `10-20 lakhs4-8%
Money Back Policy1. Provides life cover like term insurance and policyholder gets portion of assured amount plus bonuses at various stages of his/her life if alive1. More expensive than Term Insurance
2. Provides lower returns than plain investment products
`50k to 100k premium for investments & insurance cover of `10-20 lakhs4-8%
Unit Linked Insurance Plan (ULIP)1. Some portion of premium provides term insurance and the rest is invested in capital markets to provide financial growth to policyholder1. Most expensive of all products
2. Investing separately in Mutual Fund companies may be better as mutual funds have better understanding of capital markets
`50k to 100k premium for investments & insurance cover of `10-20 lakhsMarket Linked


What are the Tax saving implications?

One of the many advantages of buying life insurance policies in India is that it helps one save taxes. The premium paid towards specific life insurance policies can be claimed as deduction under 80C which has a maximum limit of `1 Lakh.
There are certain conditions which need to be fulfilled for the premium to be eligible for deductions. The conditions are as follows:
  • Applicable only for life insurance of self, spouse and any child in case of individual, and any member in case of HUF
  • The premium should not be more than 10% of sum assured.


Which plan will suit me better?

There is no general answer to this question. The type of policy most suitable for an individual depends on his age, his risk profile and his financial planning requirements.
Term Insurance: It serves best for a person who only wants to mitigate his risk arising from his death for only a limited period of say 30 years, and does not want to invest his savings through insurance companies. For very large covers (more than `50 Lakhs), it is advisable to take a term insurance policy. The premium paid for term insurance is extremely low. The savings can also be invested in products like mutual funds, PPF, FD, etc. rather than through an insurance company. This method has higher probability of generating high returns
Endowment Policy: It serves best for a person who wants to club his insurance policy and savings. The person gets life cover as well as he saves for the possibility that he will survive the insurance period and will need funds at that time. The rate of return is around 6%-8% but the returns are assured; appropriate for a person with low risk appetite.
Money Back Policy: It serves best for a person with liquidity requirements at different times in life. The person gets life cover as well as he saves for various future expenses in coming years. The rate of return is around 6%-8% but the returns are assured; appropriate for a person with low risk appetite.
Unit Linked Plans: : It serves best for a person who does not want to invest in multiple products for insurance and investments, and wants a single product to act as both. Different plans invest in equity and debt in various proportions. A life cover of value higher than `50 Lakhs will need premiums far higher than term insurance.


Comparison of Term Insurance Plans

Please click on the link below to see a comparison of various term insurance plans.


Where can I buy life insurance?

Our team has a knowledge of the various financial products available in the market. Our experts can handpick the optimum product fulfilling all your requirements and also help you in all the later processes.
If you want free consulting or want to buy an insurance policy, click here to fill a form & we will call you.
Don’t worry, we will not share your contact details with any Insurance company or other telecallers.

No comments:

Post a Comment