Many Facets of Life InsuranceInsurance covers risk, life insurance covers the risk to life. Life insurance has become animportant tool of providing security to the family in case of premature death of the earningmember. It has come a long way from being a simple life insurance; from a protection to familyagainst the earning member’s death to investment and wealth generation. Know your purposeof buying life insurance. It could be: Lifetime income for dependents Children’s education fund Get added income along with insurance Provide for the retirement yearsLife insurance still remains risk cover first. It insures life. Other benefits are added to supportand cater various situations that one may face in life. It is as important to understand that inmost cases, insurance is a long term contract and the terms cannot be changed in between.Each life insurance type has a specific purpose and we need to understand that and comparewith our needs before finalizing anything.Let us study the insurance options available:Term InsuranceTerm insurance is a pure risk cover plan taken for a fixed duration to cover a specific risk. Youpay a specific premium for a specific sum assured for a given period. The policy ceases as soonas the payment term is over. It is the cheapest life insurance one can get; maximum cover forminimum possible premium. The reason for this is that there are no returns if the insured personoutlives the insurance term. The policy simply stops. Though there are options like term planwith return of premium option the premium rises.It is ideal for those who are sole earning members, have dependents and who want to cover thedependents in case something happens to them. In case one has liabilities like home loans etc.and also has dependents, term insurance becomes even more relevant.Child PlansChild plans make sure that the child’s financial requirements are met with effectively at theircrucial life stages. They work more like investment plans where you pay a specific premiumover a given period of time and get back a substantial corpus when the child reaches a certainage. The duration of the policy depends on the child’s age.Child plans usually come with payer benefit or waiver of premium attached. So, if casesomething happens to the parent or the payer of the policy, it still remains in force and the childgets the maturity amount as planned.It is ideal for people with young children who wish to plan for their children’s higher educationand training needs. It can be planned as a means to be prepared for extra expenditures forprofessional training. One can choose between a pure endowment child plan and child plan thatensures periodic payments.Investment plans
Investment plans combine the benefits of investment and wealth generation along with thesecurity of insurance. They can further be classified into Traditional plans like endowment andmoney back plans or unit linked insurance plans commonly called ULIPS. Endowment plansEndowment plans are investment linked insurance plans. They have a fixed maturity date for afixed sum assured. The premium is calculated on the basis of maturity amount and duration ofthe policy. Every parameter is specified in an endowment plan. Some plans have the option ofbonus payments. This depends upon the performance of the insurance company, calculated onthe sum assured. The amount is added to the maturity amount.It is good option for those who anticipate major expenditure at a particular time. The insuredgets a lump sum amount on the maturity date that may become a good financial support. Money Back PlansMoney back plan is also traditional investment linked insurance plan. It gives periodic paymentsof fixed percentage of the sum assured to the insured person during the policy term. If the policyholder survives the policy term he gets the maturity amount. If he/she dies during the term of thepolicy, the nominees get total sum assured irrespective of the previous payments. Some moneyback plans may also have the bonus option. The bonus is added to the final payment of thematurity amount or the sum assured as the case maybe.It is preferred by those doing life stage planning who may require financial assistance at regularintervals over a period of time. The added advantage of getting full sum assured in case of aneventuality without deducting any previous payments makes it even more attractive whenplanning. ULIPSUnit linked insurance plans or ULIPs are market linked insurance plans. Here the investment orthe wealth generation part is linked to the market. While in the traditional plans the risk if any isborne by the insurance company, in a ULIP the market linked risk is borne by the insured. If themarket is doing well, the policy may do much better than any traditional plan. If the market isdown, the returns may be lower.It is a better option for those who can afford to take the market linked risks. Here the insuredhave the option to choose the type of funds they wish to invest in based on their risk profiles.These ULIPs are more flexible and transparent.Pension PlansPension plans also called retirement plans or annuities are somewhat contrary to insurance yetincluded in insurance plans. They do not cover the life of the insured in case of untimely deathbut ensure income if one outlives the earning age. The annuity can be immediate or deferreddepending upon the stage at which the plan is taken. In a deferred annuity plan, a fixedpremium is to be paid to the insurance company during the decided accumulation phase. Onvesting up to a 1/3rd of the accumulated amount can be withdrawn and the rest (or even wholeof the amount) is used to purchase annuity. Immediate annuity allows purchasing immediateannuities with a lump sum amount that can start paying regular pension immediately.One must keep in mind the purpose of buying a plan. Make sure that you use the free lookperiod to read through the policy document and see if it fulfills your purpose of buying aparticular plan.