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Life Insurance

Life insurance is financial product that provides the policyholder financial protection in the event of an unfortunate death. Anyone who is working and has dependents like children, spouse, retired parents etc needs life insurance because an untimely death will deprive the family of income and cause financial distress. If you have debt e.g. home loan, car loan etc, then life insurance becomes an even more critical financial need.

How does life insurance plan work?

A life insurance policy will provide your dependents financial protection over a certain period of time (the policy term) in the event of an unfortunate death. The amount of financial protection is known as sum assured or cover; sum assured is the amount your dependents will get in the event of an unfortunate death during the policy term.

How much cover should you buy?

It depends on your income and the needs of your family. The income from your life insurance cover should be able to meet the needs of your dependents for a long period of time or at least till the time, when your dependents themselves become financially independent e.g. your children start working. Additionally, if you have debt e.g. personal loan, home loan etc your cover should be large enough to repay those loans in the event of an unfortunate death. A common rule of thumb is that your life insurance sum assured (cover) should be at least 10 to 12 times of your annual income.

What is the cost of a life insurance policy?

The cost of an insurance policy is known as premium. The insurance premium is payable annual (or other intervals like monthly, quarterly etc) throughout the policy term or a shorter period, as specified in the policy document. There are also single premium policies, where the entire premium is paid up front. Since the entire premium is up front (lump sum), the insurer will provide you a discount on the premium. The insurance premium will depend on a number of factors, the most important of which are the sum assured, your age, pre-existing medical conditions (e.g. diabetes, hypertension etc), lifestyle habits (e.g. smoking), additional riders e.g. accident, critical illness etc.

Different types of life insurance plans

There are broadly three types of life insurance plans:-

Term life insurance:

Term life insurance provides life cover to the policy holder over the policy term. Term plans are pure protection plans; there are no survival benefits in term plans. For example, if you bought an Rs 1 crore term plan for a policy term of 20 years, your dependents will get the sum assured i.e. Rs 1 crore in the event of an unfortunate death. However, you will not get any maturity benefits, if you survive the policy term. The premiums of term plans are much lower than premiums of other types of life insurance plans.

Traditional life insurance plans:

The main difference between traditional life insurance plan and term plan is survival benefits. In a traditional life insurance plan, you will get the sum assured if you survive the policy term. In addition to the sum assured purchased by you, you will also get guaranteed additions to the sum assured every year, after the completion of a specified number of policy years. You will also get reversionary bonuses at the discretion of the insurer. Traditional life insurance plans are insurance cum investment plans, where you get the life insurance cover in the event of an unfortunate death and also returns on your investment (premiums) at the end of the policy term, if you survive the policy term.

Unit Linked Insurance Plans:

Unit linked insurance plans (ULIPs) are insurance cum investment plans. The main difference between ULIPs and traditional life insurance plans is that ULIPs are market linked investments. In ULIPs a portion of your premium is used to provide you life insurance cover, while a portion of your premium is invested in market securities like stocks, bonds etc. You can think of ULIP as a combined Term Life Insurance Plan and Mutual Fund. Since ULIPs are subject to market risks, you can even make a loss in ULIP. However, ULIPs also have the potential of giving much higher returns than traditional life insurance plans. There are different types of ULIPs with different risk profiles. Your insurance advisors can help you select a plan according to your risk appetite.