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  • Key Thing You Need to Know About Life Insurance

    Life Insurance, as the name suggests, is a form of insurance available for individuals which provides financial cover for a family, in case the policyholder meets an untimely demise. The concept of life insurance has been operational for nearly 4 centuries now, since its first introduction in the United States during the 1760s. Currently, life insurance is a well-known financial instrument around the world which safeguards the livelihoods of millions of households every year. In this article, we will touch upon some of the key things you may need to know about life insurance.

    What are they? Jump right in to find out.

    • There are four important players in every life insurance policy:

      Every life insurance policy works much the same way and has at least four players associated with it. They are:

      • Insurance company: Also known as the insurer, this party is offers the policy and is responsible to pay out in case their liability is triggered.
      • Owner: An owner, with regards to a life insurance policy, is the person that owns a particular policy. For example, if a father buys a life insurance policy in his son’s name, the father becomes the owner of the policy.
      • Insured: An insured is basically a person against whom a policy has been taken. In the above mentioned father-son example, the son is referred to as the insured. Also, owner and person insured can sometimes be the same depending on who buys the policy.
      • Beneficiary: A beneficiary, also called a nominee, is basically an individual or individuals, who will receive a payout in case the insured comes to pass. According to terms and conditions of a life insurance policy, listing out beneficiary/beneficiaries is mandatory when buying a policy.
    • An applicant needs to be between 18 and 65 years of age

      To get a life insurance policy against their name, an applicant’s age needs to be between 18 years and 65 years of age. Insurance companies follow this rule because if an individual is aged more than 65, their risk of having to payout increases. Also, some of the insurers tend to ask for a full medical before they offer a policy to a prospective customer.

    • A life insurance policy doesn’t put a monetary value on an individual:

      People with lesser exposure to death or major injuries may often think that a life insurance policy puts a monetary value on an individual’s life by way of sum assured. That is, however, not true. The payout or benefit offered by the insurance company completely depends on the life insurance and premium plan chosen by a policy buyer. When buying a policy, individuals usually calculate their needs and requirements to decide on the exact amount they’d want as a payout.

    • There are two different types of life insurance policies:

      Yes, there are primarily two main types of life insurance policies available in the market. They are:

    • Term Insurance: A term insurance policy is basically a policy that is operational only for a certain period of time. For instance, if Mr.A buys a term insurance for 30 years, his beneficiaries will get a payout in case he dies within this 30-year period. Here, Mr.A will need to keep paying his premiums every year for the entire duration of his chosen policy term. If Mr.A is hale and hearty after the 30-year term, the insurance policy voids out and he’d be paid any survival or maturity benefit as specified in his policy document.
    • Permanent Life Insurance: A permanent life insurance policy, on the other hand, is a form of policy that pays the agreed death benefit or accidental benefit, in case an the person insured comes to pass. Let’s take Mr.A as an example here too. Mr.A buys a permanent life insurance and after paying the premiums for quite a few years, he succumbs to an untimely death. In this case, the beneficiaries named by Mr.A will receive a payment from the insurance policy which will be in line with the total amount insured.
    • Cost of a life insurance policy depends on a number of factors:

      Life insurance business is such that the same insurance policy could come at a different cost for a variety of individuals. This is primarily because price of a life insurance depends on a number of factors. They are as follows:

      • Age and nature of work: Age of an applicant has an impact on the premium. This is because an old applicant is likely to die sooner when compared to a young one. Kind of work an individual does can also has a bearing on the premium amount.
      • Type of policy selected: There are several types of policies like child plans, savings plans, retirement plans, among others. Premium amount can vary depending on the plan chosen.
      • Sum assured: This is the prime determinant of premiums quoted by an insurance company. Sum assured is the total amount a company agrees to pay the beneficiaries of a policyholder.
      • Policy term: How long a term an individual chooses can also affect the premium offered.
      • Riders: Riders are add-on products that can be included into a policy. It increases the coverage of a policy.
    • Life insurance can also be an investment instrument:
    • With the introduction of Unit Linked Insurance Plans (ULIPs), life insurance policies have crossed over from being just a risk-management instrument to an investment plan. A ULIP offers all the necessary life cover for an individual while also offering them a chance to invest in mutual funds, bonds, or stocks. However, the policyholder will not have a say in where the money is invested as it is carried out by fund managers appointed by ULIP providers.

    • Life insurance comes with tax benefits:

      Investing in a life insurance policy can also offer an individual with plenty of tax benefits under the Income Tax Act of 1961. Benefits are available based on Sections 80C, 80CCC, and 80D of the Income Tax Act and provides exemptions on premiums paid to the tune of Rs.1,50,000.

    • Life insurance offers plenty of add-on covers to choose from:

      An advantage to owning a life insurance policy these days is that it offers plenty of add-on covers, also known as riders, to add to your existing policy. For instance, HDFC Life, one of the leading insurance providers in India, offers two different riders called the Life Income Benefit on Accidental Disability rider and Accidental Cover rider. The first one basically pays a policyholder and his/her family for any apparent lack of income as a direct result of a disability due to an accident. The second rider offers a lump sum payment to the policyholder’s family if they die due to an accident.

    • Life insurance tax deduction laws have changed:

      As Direct Tax Code (DTC) has been introduced, eligibility for tax deduction based on life insurance premiums has also changed. Under the new reform, an individual needs to have a life cover that is more than 10 times the annual premium. For example, if a person pays a premium of Rs.15,000 every year, the minimum cover they need to have is Rs.1,50,000. Any lower coverage and tax deductions on premiums cease to exist.

    • Some insurance providers return premiums when a policy term ends:

      As mentioned earlier, term insurance offers life coverage only for a certain period agreed upon between the policyholder and the insurance company. While a majority of term insurance providers tend to not return the premiums at the end of a terms, there are some who return all the premiums paid by deducting any applicable charge and taxes.

    • Life insurance is a must if an individual has dependents:

      Although buying life insurance seems counter productive for people living alone, same isn’t the case with people with dependents. This is because these dependents usually could be spouse, children, or parents, who are relying on the policyholder for their livelihood. To reduce to risk of leaving the family stranded financially, such individuals need to have a policy against their name.

    All in all, life insurance is one of the best financial tool which helps safeguard the finances and futures of an entire family and only requires you to pay a small premium each year. In case, you don’t already have a life insurance policy, make sure to get one right away to live a relatively stress-free life.

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