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Life Insurance

Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to pay the designated beneficiary a sum of money upon the occurrence of the insured individual’s death or other event, such as terminal or critical illness. In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump sums.  

Types of Life Insurance-

1) Term Life Insurance- Under a Term Life contract, the insurance company pays a specific lump sum to the designated beneficiary in case of the death of the insured.    These policies are usually for 5, 10, 15, 20 or 30 years

Term life insurance are the most popular in advance countries but were not so popular in India.   However, after the entry of the private operators and aggressive marketing by few players this kind of policies are becoming popular.    The premium on such type of policies is comparatively quite low when compared with other types of life insurance policies, mainly due to the fact that these policies do not carry cash value.

Advantages and Disadvantages of Term Insurance-

  • The premium payable on these policies is low as they do not carry any cash value.
  • One can afford for quite high value insurance policies.
  • If one survives the period of the policy, he / she does not get any money at the end of the policy.
  • The premium on such policies keeps on increasing with age mainly because the risk of death of older people is more. Over the age of 60, these policies become difficult to afford.

 2- Permanent Life Contract -

 In a Permanent Life contract, a portion of the money paid as premiums is invested in a fund that earns interest on a tax-deferred basis.  Thus, over a period of time, this policy will accumulate certain "cash value" which you will be able to get back either during the period of the policy or at the end of the policy.   

Your need for life insurance can change over a lifetime. At any age, you should consider your individual circumstances and the standard of living you wish to maintain for your dependents. In most cases, you need life insurance only if someone depends on you for support. Your life insurance premium is based on the type of insurance you buy, the amount you buy and your chance of death while the policy is in effect.  This type of policy not only provides protection for your dependents by paying a death benefit to your designated beneficiary upon your death, but it also allows you to use some part of the money  while you are alive or at the end of the policy.   Some examples of such policies are :-  Whole Life, Universal Life and Variable-Universal Life.

Endowment Policies-

These policies provide for period payment of premiums and a lump sum amount either in the event of death of the insured or on the date of expiry of the policy, whichever occurs earlier.

Money Back Policies-

These policies provide for periodic payments of partial survival benefits during the term of the policy itself.  A unique feature associated with this type of policies is that in the event of death of the insured during the policy term, the designated beneficiary will get the full sum assured without deducting any of the survival benefit amounts, which have already been paid as money-back components.  Moreover, the bonus on such policies is also calculated on the full sum assured.

Annuity / Pension Policies / Funds-

This policies / funds require the insured to pay the premium as a single lump sum or through instalments paid over a certain number of years.   The insured in return will receive back a specific sum periodically from a specified date onwards (the returns can be monthly, half yearly or annually), either for life or for a fixed number of years. In case of the death of the insured, or after the fixed annuity period expires for annuity payments, the invested annuity fund is refunded, usually with some additional amounts as per the terms of the policy.

Annuities / Pension funds are different from all other forms of life insurance as an annuity policy / fund does not provide any life insurance cover but merely offers a guaranteed income either for life or a certain period.  Therefore, this type of insurance is taken so as to get income after the retirement.