Life insurance is a product that protects from financial loss in the event of death and is an important consideration when you become an adult. There are two different types of life insurance: term and whole. Though a term policy is the least expensive, it only provides coverage for a specific period. On the other hand, whole life insurance offers a life-long range. Over time, it builds a cash value that can be paid out to the beneficiary or a person designated to receive life insurance proceeds upon the policyholder’s death. Many things affect the cost of a life insurance policy, including age, medical condition, and occupational risks.
Types of Life Insurance Plans
Endowment Plans
Endowment plans are policies wherein the policyholder pays a premium for the defined term, and benefits are payable either at the insured’s death or at the policy’s maturity. In most endowment plans, the minimum paying term equals policies. A bonus might be added to the base policy every year, depending upon the investment and mortality experience of the life insurance company.
The policy owner has no control over the investment decisions of the premiums. Generally, most investments are made in government securities and other debt products. This result in conservative returns from such investments.
Policyholder on survival receives sum assured with total bonus (dividend) declared under the policy during the term of the policy. On death, the nominees receive the sum assured along with an accumulated bonus up to the date of the claim.
Money Back Plans
Money back plans are policies wherein premiums are paid for a defined period. Policy benefits are twofold, i.e., in terms of periodic receipt in the form of survival benefit and finally on maturity. In the event of the insured’s death during the policy term, the sum assured and accrued bonuses are paid to the policy nominee.
Like endowment policies, the insurance company invests the premium fund in secured investments like government securities and other secured debt instruments.
Whole Life Plans
A whole life insurance policy remains in full force and effect for the insured’s life, with premium payments being made for the same period. Whole life insurance covers the life insured for his entire life, not just for a specific period such as term insurance. The death benefit and premium in most cases will remain the same. Whole life insurance also builds cash value. The guaranteed cash values can provide money later to help with temporary needs or emergencies.
The primary advantages of a Whole Life Insurance policy are: 1) Guaranteed death benefit, 2) Guaranteed cash values, 3) Fixed and known annual premiums, and 4) Access to cash values.
The primary disadvantages of a Whole Life Insurance policy are premium inflexibility, and the internal rate of return in the policy may not be competitive with other insurance products. Some Whole Life Insurance policies have limited premium payment options to cater to specific individuals’ needs. Such an option requires the life assured to pay for a shorter period such as 10-15 years or until age 65.
A Whole Life Insurance policy could be a good choice for long-term financial goals.
Unit Linked Insurance Plans
A Unit Linked Insurance plan may well be defined as a combination of life insurance and investment with several added features to control and manage the investment. An investment in ULIP is denoted as units and is represented by the value it has attained in the investment fund termed Net Asset Value (NAV). ULIPs provide solutions for insurance planning, financial needs, children’s future, and retirement planning.
Cost of ULIP: The upfront and recurring cost under most Unit linked insurance plans (ULIP) is relatively lower than traditional plans.
Flexibility: ULIPs allow the policy owner to control and manage insurance and investment needs. The policy owner may increase or decrease his life insurance cover with changes in life events. Allocation of premiums paid may be directed towards his choice of asset class, for example, equity, debt, or balanced funds.
Switches: The policy owner may switch the funds from equity to debt or vice versa according to the changing market conditions or risk appetite. This is a powerful feature of ULIP. Unlike stocks and mutual funds, any changes in asset allocation and switches do not cause any tax implication in a unit-linked insurance plan.
Limited Premium Payment Option: Most ULIPs offer limited premium payment options. The life cover continues until the policy has sufficient balance to cover the mortality cost.
Benefits of a Life Insurance Plan
Some of the unique features of an insurance plan are as follows: –
Protection
Savings through life insurance guarantee complete protection against the saver’s death risk. Also, in case of demise, life insurance assures payment of the entire amount along with the bonus wherever applicable, whereas, in other savings schemes, only the amount saved along with interest is payable.
Aid to Thrift
Life insurance encourages thrift’ It allows long-term savings since payments can be made effortlessly due to the accessible installment facility built into the scheme. For example, premium payment in an insurance policy could be monthly, quarterly, half-yearly, or yearly.
Liquidity
In the case of insurance, it is easy to acquire loans on the sole security of any policy that has reached loan value. Besides, a life insurance policy is generally accepted as security, even for a commercial loan.
Tax Relief
Life Insurance is the best way to enjoy income tax deductions. This is available for amounts paid by way of premium for life insurance subject to income tax rules. In addition, insurance proceeds on the maturity or payment at the insured’s death are also tax exempt.
Money in Need
A policy with a suitable insurance plan or a combination of different methods could be effectively used to meet specific monetary needs that may arise from time to time.
Children’s education, start-in-life or marriage provision, or even periodical needs for cash over time can be less stressful with the help of insurance policies. In addition, an insurance policy is an excellent financial tool to plan for retirement.
Conclusion: Life Insurance is Inevitable
Many think life insurance is only for middle-aged people. But this isn’t true. It is a good idea to think about life insurance when you turn 18 to determine if you need a policy. For example, if your parents are helping you through college by taking out a student loan in their name, you need life insurance. If any unforeseen event happens before the loan is paid off, your parents would still be responsible for loan payments. Life insurance proceeds could be used to pay o the loan.
Life insurance can also be used to pay o a mortgage or other expenses, provide for a college education, or allow the beneficiaries to live comfortably.
