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What is Life Insurance Policy? What does it Mean?
Life insurance policy is a contract between an individual and an insurance provider, in which the insurance company gives financial protection to the policyholder in exchange for monthly fees (known as premiums).
Based on the arrangement, in the event of the death of the policyholder or, if the policy matures, the insurance provider shall pay the person or his family a lump sum amount, after a certain amount of time. There are different types of life insurance policies to suit the individual needs and requirements of the policy buyers.
Which Financial Goals Can You Secure with Life Insurance?
Life Insurance plans help complete numerous financial objectives of an individual and his family. Some goals of an individual that a life insurance policy helps fulfil:
- Financial protection against loss of life
- Education for Children
- Child's Marriage
- Owning/Buying a House
- Post Retirement Pension or regular income
These are only a handful of financial goals that you can achieve with the help of life insurance plans. Life insurance plans are pretty versatile. You can plan for your stated life goals and align your insurance to help you achieve those, e.g., you can utilise the corpus created out of an endowment plans (traditional or market-linked) to say, pay for a house at a future date.
What the Different Types of Life Insurance?
Now that you are aware of what is life insurance, you should check the main types of life insurance plans:
- Term Life Insurance Plans – Pure risk covers
- Unit linked insurance plan (ULIP) – Insurance as well as Investment opportunities
- Endowment Plan – Insurance and Savings
- Money-Back – Periodic returns alongside insurance cover
- Whole Life Insurance – Whole life coverage to the life assured
- Child's Plan – For achieving your child's life goals like education and marriage
- Retirement Plan – Post-retirement income
Let's learn further and understand the specifics of each life insurance plan.
1. Term Life Insurance Plans
Term life insurance plans are the purest form of life insurance. They offer life cover with no savings or profit elements. Term life insurance plans are the most affordable type of life insurance as premiums are relatively cheaper in comparison to other life insurance plans. They are also the purest form of life insurance.
2. Unit linked insurance plan (ULIP)
A unit-linked insurance plan is a thorough mixture of investment and insurance. The premium paid for ULIP plan is partially used as a risk (insurance) cover, and partially invested in different funds.
Depending on the policyholder's risk tolerance, they can invest in different funds offered by the insurance provider. Then the insurance provider invests the collected amount into different money-market instruments such as shares and equities.
3. Endowment Plan
The endowment plan is a traditional life insurance policy that is a blend of insurance and savings.
In an endowment plan, if the life assured live longer than the policy period, the insurance company provides maturity benefit to the policyholder. Additionally, some endowment plans may offer periodic bonuses that are either paid on maturity or to the beneficiary in case of the policyholder's untimely death.
3. Endowment Plan
The endowment plan is a traditional life insurance policy that is a blend of insurance and savings.
In an endowment plan, if the life assured live longer than the policy period, the insurance company provides maturity benefit to the policyholder. Additionally, some endowment plans may offer periodic bonuses that are either paid on maturity or to the beneficiary in case of the policyholder's untimely death.
4. Money-Back
Money-back life insurance plans are a unique form of life insurance policy, in which a portion of the sum assured is paid back directly to the insured at regular intervals as a survival benefit. This way, the policyholder can achieve short-term financial objectives.
5. Whole Life Insurance
Whole life insurance plans cover the life assured for a lifetime, or in a few cases, up to the age of 100 years.
At the time of purchasing a whole life insurance policy, the sum assured gets determined. During the purchase, a nominee is mentioned. In case of any unfortunate event, they get paid with the death claim and any bonuses, if applicable.
Nevertheless, if the life assured lives longer than 100 years, the insurance provider gives the life insured with a maturity benefit equal to the endowment corpus.
6. Child Plan
Child life insurance plans aim at building a corpus for the future development of a child. Typically, it helps in funding the education and marriage of a child.
Such plans provide instalments annually or in one lump sum pay-out, following the major milestones of a child’s life. In case the insured parent meets with an untimely death during the policy term – future premiums are waived off and the policy benefits continue without disruption.
7. Retirement Plan
Retirement life insurance plans support building a stable financial source for an individual's retirement years. It helps one become financially independent and allows them to live without any worry. Most retirement life insurance plans offer annual pay-out (by means of annuities) or a one-time lump sum pay-out (by means of commutation of the accumulated amount, up to the prescribed limits) on the completion of 60 years of age.
In case of an eventuality, within the policy term, the insurer pays the insurance benefit to your family.
What Are the Benefits of Life Insurance Plans?
Once you are aware of life insurance meaning and its types, there are 3 main advantages of getting a life insurance policy that you should know about. Following are the 3 primary benefits of life insurance policy:
1. Security
Life is unpredictable and can be full of uncertainties. It is difficult to reduce the possibility of an unfortunate event like death. In such a scenario, the family faces financial constraints arising from the lack of a steady income.
Investing in a life insurance policy early on in life acts as a safety blanket during such eventuality. The life insurance provider is obliged to pay the nominee or beneficiary the pre-defined sum assured. As a result, even in the policyholder's absence, his family stays protected.
2. Long-Term Savings
If one wants to make long-term investments, it's important to think about life insurance. Such insurance plans help you make systematic savings and create a corpus, which can be used for several reasons, such as building a new home, financing quality schooling for your child, and funding a child's marriage expenses.
What's more, some life insurance policies often offer monthly pay-outs in the form of annuities, which is an ideal way to aim at and achieve retirement goals.
3. Investment Options
Life insurance providers offer Unit-Linked Investment Plans (ULIPs), which are mainly investment instruments.
These market-linked life insurance products provide significant gains during maturity, therefore making them ULIPs a reliable investment tool.
How Much Life Insurance Do You Need?
Besides understanding life insurance meaning, you should also evaluate how much life insurance cover do you actually need. While it is impossible to put a definitive rupee value to human life, it is still necessary for you to measure how much you are worth? You can measure your human life value (HLV) by assuming what it would take for your family to be financially stable in your absence.
In life insurance jargon, Human Life Value or HLV is the sum assured and the monetary estimation of the policyholder's life worth.
The basic method of calculating the human life value includes two steps:
1. Add all expenses such as household expenses and everyday life expenses
2. Calculate future obligations (such as outstanding loans)
The addition of the figures mentioned above gives an estimation of human life value that in meaning is your life insurance policy's sum assured.
In life insurance jargon, Human Life Value or HLV is the sum assured and the monetary estimation of the policyholder's life worth.
The basic method of calculating the human life value includes two steps:
1. Add all expenses such as household expenses and everyday life expenses
2. Calculate future obligations (such as outstanding loans)
The addition of the figures mentioned above gives an estimation of human life value that in meaning is your life insurance policy's sum assured.
How to Pick the Right Life Insurance Policy?
When you understood what is life insurance and have recognized the need for life insurance, you should be aware of these simple steps to pick the best life insurance policy. Select the best available life insurance plans with these steps:
1. Get in Touch With An Insurance Consultant/ Provider
Although this may sound insignificant, at the initial level, it is essential to involve a credible and knowledgeable insurance advisor or provider when seeking life insurance. Many people are unlikely to decide on their own and need an insurance advisor's expertise.
Consumers of the insurance industry are more inclined towards digital media but still expect human interaction and recommendation [2] for such critical activities.
2. Evaluate The Life Insurance Cover
A life insurance provider can help you calculate the life cover amount (sum assured). They also evaluate your source of income, the number of dependents, any liabilities and your expenditure to arrive at a preferred life cover.
Life insurance providers also help you choose the best insurance from amongst the different types of life insurance plans that are available in the market. This makes sure that you receive an optimum life cover. Also, you can check your life insurance requirements with our online calculator.
3. Compare Life Insurance Plans
Many insurance providers in the market offer a range of life insurance policies. One needs to make sure that they carefully choose the most suitable life insurance available. You should compare life insurance plans to avail the best life insurance policy available as per financial needs
For the same, by comparing life insurance plans from different insurers considering all requirements and criteria, one can pick the most appropriate plan.
3. Compare Life Insurance Plans
Many insurance providers in the market offer a range of life insurance policies. One needs to make sure that they carefully choose the most suitable life insurance available. You should compare life insurance plans to avail the best life insurance policy available as per financial needs
For the same, by comparing life insurance plans from different insurers considering all requirements and criteria, one can pick the most appropriate plan.
Get Insured to Stay Secured
Purchasing a life insurance policy is a necessity in our times. While many buy in different types of life insurance plans, not all know about the many benefits it offers. In your absence, a life insurance policy supports your family in times of difficulty and gives them financial assistance.
Moreover, investing in a life insurance policy encourages a disciplined habit of savings. Thus it enables one to create a significant corpus.
Life insurance policies from Max Life Insurance help safeguard your financial future and lets you earn multiple other benefits. So, choose to buy life insurance policy now and stay secured!
Sources:
[1]https://www.irdai.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2
[2]https://www.pwc.in/assets/pdfs/consulting/financial-services/competing-in-a-new-age-of-insurance.pdf
Arn:- APR/Bg/02