Life Insurance is the safest and the most secure way to protect your family or dependents against financial contingencies that may arise post the unfortunate event of your untimely demise. Under a Life Insurance Contract in India, the insurer assures to pay a definite sum to the policyholder's family on his demise during the policy term.
Life Insurance policy is an agreement between an insurance company and a policyholder, under which the insurer guarantees to pay an assured some of the money to the nominated beneficiary in the unfortunate event of the policyholder's demise during the term of the life insurance plans. In exchange, the policyholder agrees to pay a predefined sum of money in form of premiums either on a regular basis or as a lump sum. If included in the contract, some other contingencies, such as the critical illness or the terminal illness can also trigger the payment of benefit. If mentioned in the contract, a policy may also cover some other costs like funeral expenses as a part of benefits.
Why it is Important to Buy Life Insurance Policy?
It acts as a financial net in case of eventuality linked with human life, such as retirement, disability, accident, death, etc. Life is unpredictable; one can never guess what happens next. In case of sudden demise of the primary breadwinner of a family, apart from the emotional trauma, his/her family is at the risk of a financial crunch. In case this person is the sole breadwinner of the family, his/her dependents face a loss of income. Though there is no premium calculator that can calculate the worth of a human life, what needs to be done must be done. To calculate the sum assured of a life insurance policy, the insurer takes your lifestyle and finances into consideration. This sum assured is provided to the insured's family after his/her demise in order to offer them a much-needed financial support. In order to make sure that one's family doesn't have to make any compromises due to financial crunches, one should buy a suitable life insurance plan.
• Unpredictability Life is unpredictable. One can't predict when his/her life will come to an end. If it were up to people, nobody would want to leave without ensuring the financial security of his/her family. Sadly, it's not up to them. The solution is, one must buy life insurance plan and be a step ahead so that the financial goals set for his/her family can be accomplished even when he/she isn't around.
Life Insurance is an arrangement between the Insurance company/Government which guarantees of compensation for loss of life in return for payment of a specified premium. In Life Insurance, the beneficiary whose name has been mentioned in the contract receives the specified sum, from the insurer in case of happening of the event i.e. Loss of Life
1. Benefits of Life Insurance
1. Risk Coverage: Insurance provides risk coverage to the insured family in form of monetary compensation in lieu of premium paid.
2. Difference plans for different uses: Insurance companies offer a different type of plan to the insured depending on his need for insurance. More benefits come with the more premium.
3. Cover for Health Expenses: These policies also cover hospitalization expenses and critical illness treatment.
4. Promotes Savings/ Helps in Wealth creation: Insurance policies also come with the saving plan i.e. they invest your money in profitable ventures.
5. Guaranteed Income: Insurance policies come with the guaranteed sum assured amount which is payable on happening of the event.
6. Loan Facility: Insurance companies provide the option to the insured that they can borrow a certain sum of amount. This option is available on selected policies only.
7. Tax Benefits: Insurance premium is tax deductible under section 80C of the income tax Act, 1961.
2. Types of Life Insurance Policies
1. Term insurance plan
As the name says Term insurance plan are those plan that is purchased for a fixed period of time, say 10, 20 or 30 years. As these policies don’t carry any cash value their policies do not carry any maturity benefits, hence their policies are cheaper as compared to other policies. This policy turns beneficial only on the occurrence of the event.
2. Endowment policy
The only difference between the term insurance plan and the endowment policy is that endowment policy comes with the extra benefit that the policyholder will receive a lump sum amount in case if he survives until the date of maturity. Rest details of term policy are same and also applicable to an endowment policy.
3. Unit Linked Insurance Plan
These plans offer policyholder to build wealth in addition to life security. Premium paid into this policy is bifurcated into two parts, one for the purpose of Life insurance and another for the purpose of building wealth. This plan offers to partially withdraw the amount.
4. Money Back Policy
This policy is similar to endowment policy, the only difference is that this policy provides many survival benefits which are allotted proportionately over the period of the policy term.
5. Whole Life Policy
Unlike other policies which expire at the end of a specified period of time, this policy extends up to the whole life of the insured. This policy also provides the survival benefit to the insured. In this type of policy, the policyholder has an option to partially withdraw the sum insured. Policyholder also has the option to borrow sum against the policy.
6. Annuity/ Pension Plan
Under this policy, the amount collected in the form of a premium is accumulated as assets and distributed to the policyholder in form of income by way of annuity or lump sum depending on the instruction of insured.
3. Claim Settlement Process
On the happening of the event, the beneficiary is required to send claim intimation form to the insurance company as soon as possible. Claim intimation should contain details such as Date, Place, and Cause of Death. On successful submission of claim intimation form, an insurance company can ask for additional information about
1. Certificate of Death
2. Copy of Insurance Policy
3. Legal Evidence of title in case insured has not appointed a beneficiary
4. Deeds of assignment
On successful submission of all the document, the insurance company shall verify the claim and settle the same.
4. Principles of Life Insurance?
Life insurance is based on a number of principles that are tailored to meet market conditions and ensure insurance companies make profits, while offering security policies to insured individuals.
There are broadly four major insurance principles applied in India, these being:
• Insurable Interest – This principle pertains to the level of interest an individual is expected to have in a particular policy. The interest could be a family bond, a personal relationship and so on. Based on the interest level, an insurance company can choose to accept or reject an application in order to protect the misuse of a policy.
• Law of large numbers – This is a theory that ensures long-term stability and minimises losses in the long run when experiments are done with large numbers.
• Good faith – Purchasing an insurance is entering into a contract between company and individual. This should be done in good faith by providing all relevant details with honesty. Covering any information from the insurance company may result in serious consequences for the individual in the future. This being said, the insurer must explain all aspects of a policy and ensure that there are no unexplained or hidden clauses and that the applicant is made aware of all terms and conditions.
• Risk & Minimal loss – Insurance is a risky and companies have to do business and make profits keeping in mind the risk factor. The principle of minimal risk states that the insured individual is expected to take necessary action to limit him/her self from any hazards. This includes following a healthy lifestyle, getting a regular health check-up and more.
5. Points to Consider for Life Insurance
• Research: As an applicant for life insurance, there are numerous policy options at your fingertips to choose from. It is essential that you do your research before making an informed decision on purchasing a life insurance policy, as it can help you save money and receive maximum benefits.
• Read terms and conditions: The terms and conditions of an insurance plan contain all relevant information regarding the particular policy. Make sure that you read the fine print in detail and completely understand it before purchasing an insurance policy of your choice.
• Remember lock-in period: There are instances when individuals purchase insurance policies without making an informed decision and later realise that they are unhappy with the insurance policy. In such scenarios, some insurance companies offer a lock-in time frame, which is a short time usually 15 days where a policyholder can return the policy to the insurer and purchase another in case they were unsatisfied with the initial purchase.
• Consider premium payment options: Almost all insurance providers offer premium payment options consisting of annual, semi-annual, quarterly or on monthly basis. It is essential that you opt for Electronic Check System (ECS) payment that will periodically debit your bank account with the required insurance amount. Also, you can choose from a schedule that will allow you to make a premium payment with the convenience of interval payments.
• Don’t Mask Information: There are times where individuals try to hide information when filling out the insurance application form. All personal credentials and medical history must be accurately presented to the insurance company. Misinformation can cause serious issues when trying to make claims later on.