By Ameet Pinto
Nowadays we are accustomed to live life in the fast lane. Any yet, we find enough time to ponder on what would happen in case we ceased to be here. Life Insurance has become a very important financial tool to make sure that we do not leave our dependents in financial difficulties in case of pre mature death.
One needs to purchase life insurance to ensure stability and see that there is no drop in the standard of living of the family left behind. Life insurance is a misunderstood concept in India. Life insurance policies have been sold as investment products. Let us understand how life insurance works and they types of insurance available.
How does Insurance work?
Insurance is nothing but sharing of risks by pooling of funds. People sharing similar risks come together and make contribution towards a pool and the money collected is used towards compensating for any losses suffered by members of the pool. The pool is managed by registered insurance companies.
Types of plans available
Term insurance is one of the simplest and most basic forms of insurance. In term insurance the risk is covered only during the selected term period. The sum assured is payable only on death of the policy holder and not end of the term. Term insurance policies are primarily designed to meet the needs of those people who are initially unable to pay the larger premium and still need insurance.
These are investment based insurance policies with dual benefit of life cover for a specific tenure and wealth creation. An endowment policy covers risk for a specific period, at the end of which the sum assured is paid back to the policy holder, along with the bonus accumulated during the term of the policy. Ideally this policy is suited by investors who would like to have a certain amount of capital at the end of a fixed term. For example parents who wish to provide for their child’s education or marriage. The premiums payable in endowment plans are much higher than term plans since your premiums are in the form of an investment in addition to the life cover.
Money back plans
In these plans, the policy holder benefit by not only getting life cover and wealth accumulation, but also get periodic sums of money at pre-specified time intervals during the term of the policy. They differ from endowment policy in the sense that in endowment policy survival benefits are payable only at the end of the endowment period. This is an insurance plan with emphasis on investments and periodic return. It is best suited for elderly people who wish to see regular cash inflows after retirement.
Whole life plans
A whole life plan runs as long as the policy holder is alive. A simple whole life policy requires the insurer to pay regular premiums throughout his life and the risk is covered for the entire life of the policyholder. This policy provides a benefit on the death of the policy holder whenever that might occur. Basically it provides long term financial protection to the dependents.
Unit Linked plan (ULIP)
Apart from the traditional plans there is one more plan called as unit linked plan. As compared to other traditional plans Unit liked plans function like a mutual fund. The insurance company indicates how your premium will be invested and what risk you will be taking. In these kind of plans your premium is invested in debt and equity instruments, in conformity with the investment policy. Insurance companies generally have different levels of risk. Aggressive i.e. more equity oriented investments, balanced i.e. an equal investment in debt and equity and conservative i.e. more debt oriented.
A pension plan is nothing but a retirement plan. Ideally younger people should invest in such plans so that they can get regular income after retirement. Pension plans generally do not offer life insurance cover. Some plans do offer term insurance cover at additional costs. Riders are some add on benefits available to policy holders in addition to the basic risk cover. Let us understand these riders and how they can be effectively used in a policy.
Accidental life benefit
Here over and above the sum assured the policy holder is paid an additional cover in the event of an accidental death.
All future premiums are waived in case of a permanent disability due to accident. The disability is generally defined in the policy contract.
In case of a critical illness such as cancer, heart attack etc. as defined in the policy contract the policy holder gets a lump sum payment. Financial needs of an individual are not static and keep changing over the years. Insurance cover needs to be built up over the years through the various products discussed above. Investors should keep in mind how much cover he needs to ensure the stability of his dependents it should be enough to sustain your family in the event of an untimely death. Investors should review his insurance needs and choose a plan accordingly. Investors should make sure they can handle the premium payments. There is this quote which says “Gamblers make bets they hope to win. There is one bet that everyone would love to lose – betting on life insurance. Life insurance policy is a bet, which a policy holder only wins by dying early.
(The writer is an investment consultant and proprietor of Pinto’s Way to Wealth, Margao)
Life insurance for personal stability
By Ameet Pinto