Life insurance is a form of financial protection against the risk of death. It is the best way to protect your family from financial risks and can be used as a source of income in case of death.
Life assurance and protection policies are designed and sold by insurance companies to provide individuals with some financial protection in case certain events occur. Although policy details may vary from company to company, their main features should be similar.
What is a Life Cover?
A life policy is an insurance where the event insured is a death. An insurance policy requires the payment of premiums in exchange for life cover – a lump sum payable upon death.
Instead of paying a fixed sum on death, investment-based policies may provide a lumpsum amount and some additional amount termed a bonus. The amount paid out will depend on the guaranteed insurance sum and the fund’s investment performance.
Before looking at the types of policies available, it is essential to understand some key terms.
| Proposer | The person who proposes to enter into a contract of insurance with a life insurance company to insure himself or another person on whose life he has an insurable interest life life |
| Life Assured | The person on whose life the contract depends is called the ‘life assured.’ Although the person who owns the policy and the life assured is frequently the same, this is not necessarily the case. A policy on one person’s life but affected and owned by someone else is called a ‘life of another policy. A policy caused by the life assured is called an ‘Own Life Policy.’ |
| Single Life | A single-life policy pays out on one individual’s death. |
| Joint Life | When the cover is required for two people, this can typically be arranged in one of two ways: through a joint life policy or two single life policies. |
| A joint life policy can be arranged so that the benefits would be paid out following the death of either the first or, if required for a specific reason, the second life assured. For example, most policies are arranged to protect financial dependents, with the sum assured or benefits paid on the first death. | |
| With two separate single-life policies, each person is covered separately. If both lives assured were to die at the same time, as the result of a car accident, for example, the full benefits would be payable on each of the policies. If one of the lives assured died, benefits would be paid for that policy, with the surviving partner having a continuing cover on their life. | |
| Insurable interest to | To buy a life insurance policy on someone else’s life, the proposer must be interested in that person remaining alive and expect financial loss from that person’s death. This is called an ‘insurable interest.’ |
We need to consider two types of life cover: whole-of-life assurance and term assurance. A whole-of-life policy provides permanent cover, meaning that the sum assured will be paid whenever death occurs, as opposed to if death occurs within the term of a term assurance policy.
Term Life Insurance
The simplest form of life insurance is a term policy. A term policy provides coverage for a specific period. Life insurance terms can be 5, 10, 15, or 30-plus years. Upon receipt of your premiums, i.e., the payments to keep the policy active, and after the agreed-upon term ends, coverage ends. Let’s use the home loan example again. You have taken a home loan of Rs 50 Lakhs and agree to pay it off in 10 years. You should take a 10-year life insurance policy, providing coverage if you died before the loan was paid off.
In addition to providing coverage for a specific period, a term policy is also the least expensive of the life insurance policies. However, the most significant disadvantage is that coverage ends at the end of the term.
Whole Life Insurance
Whole life insurance is considered permanent since it provides coverage until death. Like term insurance, whole life insurance provides financial protection and the ability to elect your beneficiaries. However, the main advantage of whole life is that it can build cash value.
When you make monthly premiums, the life insurance company invests those premiums. If they make money from the investment, it shows on your policy as cash value. The more premium payments you make over time, and the more successful your company’s assets, the more your policy’s cash value builds. The cash value in the policy can be withdrawn, borrowed against, or paid out as a death proceed.
For example, let’s say you take out a policy for Rs 10 Lakhs and make ten years of premium payments. Based on how the premium payments are invested in the market, the policy builds a cash value of Rs 5 Lakhs. You can withdraw the Rs 5 Lakhs, take out a loan from the accumulated cash value, or leave the cash value on the policy. If you leave the cash value intact, your beneficiaries will receive the total insurance amount, i.e., Rs 10 Lakhs, in the event of your death.
It’s important to note that whole-life policies are more expensive than term policies. Also, there are many types of whole life insurance.
Applying for Life Insurance
Life insurance coverage is a legally binding agreement between the insured and the insurance company. As long as the insured provides factual information on the application and makes the agreed-upon premiums, the insurance company will pay out the proceeds upon death. You must provide accurate information about your age, health, and occupation, as it determines your insurability and insurance premium.
A young, healthy person’s premium will be much cheaper than an older person with numerous health problems, but an older person in excellent health may pay a smaller premium than a child with some disease. Some insurance companies may require a medical examination to assess the applicant’s health Risk is also a factor in considering premiums. For example, a teacher’s monthly premium will be less expensive than an airline pilot’s due to the nature and risk of a pilot’s job.
Benefits of Life Insurance
Many think life insurance is only for middle-aged people. But this isn’t true. It is a good idea to talk to a licensed life insurance agent when you turn 18 or start earning to determine if you need a policy. For example, if you’re earning and have taken a home loan and your family is dependent on you, then in case you were to die before paying off the loan, then the loan-providing company will recover the loan by selling the home. It would put your family members in a difficult situation. Life insurance proceeds could be used to pay off the loan.
In this example, you would be considered the insured or the person being covered, and your parents would be the beneficiaries. A beneficiary is a person who is designated to receive life insurance proceeds. It’s important to note a beneficiary does not need to be a family member. Life insurance can also be used to pay o a mortgage or other expenses, provide for a college education, or allow the beneficiary or beneficiaries to live comfortably.
Nominating a Beneficiary in Life Insurance Policy
As you protect your family from financial loss caused by the death of a loved one, you also ensure that the name of the beneficiary of the policy is present on the list of beneficiaries to be distributed upon the insured person’s death.
Conclusion: Purchase a Life Insurance Policy to Get Rid of Your Financial Worries!
The best way to eliminate your financial worries is by purchasing a life insurance policy today. Many people don’t know that life insurance is an investment product also. You can use it to cover your family’s retirement needs and emergencies.
All it takes is a little knowledge and understanding of how life insurance works, and you can be well set to take control of your financial future.
