The need for Life Insurance
Why do we need Life Insurance? Consider this. Under any circumstances, the loss of a loved one is a traumatic experience. But, if your family is also left without sufficient money to meet basic living needs or prepare for future goals, they will have to cope with a financial crisis at the same time. If faced with an economic crunch, your family might have to move to a less desirable home, cut back on the quality of life, your children might have to abandon higher studies plans. Your family might even be forced to go into debt to pay the expenses, like medical bills, that result from your death. I hope that by now, you realise that the lack of sufficient life insurance coverage when a loved one dies can have devastating consequences for a family, results that can last for years. Hope now you get why we need life insurance.
What is Life Insurance?
You read about why we need life insurance. Now you must be wondering what life insurance is, after all? Life Insurance is a way of transferring the risk attached to your life to the insurer. In other words, life insurance is a policy bought from a life insurance company, which provides financial stability to a family after a member’s death, usually the breadwinner of the family. Its function is to help beneficiaries financially after the owner of the policy dies.
If the policy owner dies while the contract is in force, the insurance company pays a specified sum of money free of income tax to the person or persons you name as beneficiaries. The cash benefit helps provide for your family’s future needs as well, including college education for your children and part or all of your spouse’s retirement needs.
Life Insurance can also be a form of savings in the long run if one purchases a plan, which offers the option of contributing regularly. Additionally, a little known function of life insurance is that it can be tied in with a person’s pension plan. A person can make contributions to a pension that is funded by a life insurance company.
Types of Life Insurance?
You read about why need life insurance and what is life insurance. Now, let’s discuss the various types of life insurance available in the market:
The cheapest Life Insurance – Term Insurance
Term life insurance also called pure insurance, is the most straightforward type of life insurance and the easiest to understand. It protects for a specific term period – ranging from 1 year to 25 years or more. If the policy owner dies during this period, then the insurance company pays cash benefits (as decided upon policy subscription) to the nominees of the policy owner. However, once the term is over, coverage ceases.
The policy has no financial investment value. If you are looking for the maximum amount of coverage at minimum cost, term life insurance will give you the most “bang for your buck”.
Life Insurance with Returns Endowment Assurance
An endowment life assurance policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. An endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy. The premium on endowment life insurance policies is payable for the full term of the endowment policy unless the insurer dies earlier. When compared to pure life policies, the premium rates for endowment life insurance policies are higher. But one of the significant attractions of endowment policies is that they provide a return on premium payments when the plan comes to an end.
Money-Back Life Insurance
Money-Back Life Insurance offers the critical benefit of cash lump sums at periodic intervals of five years, ensuring that you can meet any of your financial obligations. Such a plan not only provide life cover but also entitle you to a guaranteed addition and bonus on maturity. Money-back Life Insurance plans like these not only let you enjoy regular cash flows during the policy term; they also get you a life cover.
ULIPs are a category of insurance cum investment solutions that combine the safety of insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion is invested in a fund which in turn invests in stocks or bonds. The value of investments alters with the performance of the underlying fund opted by you.