Investment Shastra

Must know facts about Life Insurance

“I detest life-insurance agents; they always argue that I shall someday die, which is not so” – Stephen Leacock, Canadian Humorist

We all pray that what Leacock said comes true. But, the chances of that happening are, well, low. In fact, most of us worry what would happen to our near and dear ones if something were to happen to us. In case worst were to happen, your place can’t be taken by anyone emotionally or physically.

Insurance in its basic form is defined as “a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.” In simple terms, it is a contract between the person who buys Insurance and an Insurance company which sold the Insurance.

Insurance is basically a protection against a financial loss which can arise on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. By paying a very small sum of money a person can safeguard himself and his family financially from an unfortunate event. For Example if a person buys a Life Insurance Policy by paying a premium to the Insurance company, the family members of insured person receive a fixed compensation in case of any unfortunate event like death.

There are two types of Insurance cover that we think are essential for your well-being as well as that of your loved ones, just in case, something unfortunate happens to you. These are

  •  Life Plan
  •  Health/Medical plan

In this article let’s look at life insurance plans in some detail.

Life Insurance:

What will happen to my family if, god forbid, something happens to me?

Does this question keep bothering you? Then Life Insurance is the answer. It is the most important insurance plan for any person who has dependents to look after. In a typical life insurance policy, an Insurance company collects a small sum from you and in return promises to pay your family a predetermined sum in case of an unfortunate event.

Life Insurance is considered to be an important part of an individual’s investment portfolio, not necessarily to accumulate wealth, but to feel financially secure. Other than this when you opt for a life insurance policy you enjoy other benefits also, like tax-deduction options, and in some cases long term capital gains. What is important when you opt for a policy is the term and plan related to that particular policy. Always remember Life Insurance is primarily made keeping your family and those who are dependent on you in mind. There are various companies and agents asking you to opt for a policy which benefits them more than you! If you are an amateur investor and try to push things in a hurry, you might end up settling for a wrong deal.

When you decide to invest in Life Insurance, it is imperative that you understand your financial status, your future liabilities & commitments and then opt for a policy that would suit your needs in the longer run. Insurance is by and large regarded as one of the best savings cum investing scheme. Important factors that an individual needs to understand prior to opting for Life Insurance Policies are

  • Requirements, term (duration) and premium to be paid
  • Nature and benefits of the policy in the longer run &
  • Coverage of the policy

The need and income of an individual helps him decide the amount of Life Insurance Premium. The insured should also think about the benefits that he and / or his nominee will receive before deciding to go for a particular policy. Life insurance covers the risks of loss due to the death of the insurer. Hence it is advisable that before you purchase the policy; take a look at the plan of the policy in detail. Most of the Life Insurance Companies would provide you with a ULIP (Unit Link Insurance Plan). Consulting an expert or your friends, & other reliable sources like the internet, that would provide accurate data helps. Analyzing the different categories of insurance, conducting a proper market research, checking your financial constraints where you ensure that you pay your insurance premiums simultaneously is important.

Another important factor that needs attention during the framing of the policy is Life Insurance Quotes. Life Insurance quotes are the prices at which life insurance policies are proposed to be sold and vary from company to company or individual to individual, mainly depending on the term of the policy. Other important issues that address the quotes are age and income, the physical features and family details of the insurer. The time through which an insured pays the premium for the policy is called Life Insurance term.

On a general basis, there are no standard premiums as far as term insurance is concerned. A person can decide the amount to be paid on the basis of his requirements in terms of coverage and affordability in terms of finance. All in all getting an insurance done for yourself at the earliest, once you start earning is an excellent way to get your financial future secured.

Ideally all life insurance companies invest the insurance premium funds in the various types of projects meant for developments and attractive returns. This project varies from government funded bonds to private companies. As an investor and depending upon your risk tolerance you can divide your investment funds in various modes which are generally marketed under various names such as – Balance, Maximizer, and Minimizer. In a Balance fund, the fund manager will invest your fund equally in government and private sector bonds as well in equity markets. In Maximizer mode your complete fund is invested in equity market, which completely depends on market conditions. This fund at times may give you unexpected results and at times may even ruin your principal amount. In the last type of investments the fund is completely engaged in government bonds, wherein risk is almost nil with assured returns.

Buying a life insurance cover is quite a simple process. Yet there are some simple things you need to understand in order to get the best life insurance cover that meets all your requirements. Read on to make your buying of a life insurance a success.

  • Decide the amount you need to be covered for: This is the most important step in buying a life insurance cover. Find out what is the amount of cover right for you. If your cover is insufficient to meet your present liabilities, your dependents will have a hard time to make their ends meet in case of your death. If you take very high life cover, you will end up paying very high premiums which are a waste of money. So it is advisable to contact an independent life insurance broker who will help you choose the proper cover for you.
  • Find out the coverage included in your policy: Certain life insurance policies also provide cover for certain instances like disability or critical illness. So if you already have separate insurance policies to cover these instances, you can always exclude them as going for them will increase your premium amount. This can be unnecessary expense.
  • Decide on the type of insurance policy you want to go for: If you want the cheapest insurance policy without an element of investment, go for term plan. For insurance and investment for a definite period, choose between endowment, whole life and unit link insurance policies. Due to the absence of investment option, term policy is the cheapest and unit link policy is the costliest.
  • Decide how long you want the policy to cover you: Your premium will be decided by the term you want your policy should last. This is very important because as you grow older, your premiums will increase. So if you have decided to take a policy for 15 years, your premium will increase at the time of renewal, as you have grown older. If you want to avoid this situation, opt for a whole life policy so that you are covered till you die.
  • Get life insurance quotes: Getting life insurance quotes is very important as different insurers have different premiums for a specific amount insured for a certain period with certain exclusions for a certain age. If you choose to avail of the insurance riders than the life insurance quotes will increase and this increase will not be uniform amongst various insurers. Asking for life insurance quotes can save you a lot of money over the policy term.
  • Study various life insurance quotes: After getting various life insurance quotes, go through them minutely. Understand what every policy covers as well as its exclusions. Select few policies that fulfill your need.
  • Find out about the quality of customer service of the short listed insurance companies: Quality of the customer service provided by insurance companies will vary a lot. Just because an insurance company is well known, it does not mean its customer service is excellent. You can get an honest feedback about the service of the insurers on different consumer forums, as well as consumer review websites. Here you’ll get an honest appraisal about the customer service of the insurers from actual experiences. It is very important to observe how quickly the company settles the claims, how the company deals with you in case of loss of policy documents and the ultimate surrender value of the policy, in case you cannot keep on paying the premium.

Following the above points will give you a better base as far as understanding Life Insurance is concerned. This will further enable you to make an insurance policy that will cater to your needs in a complete manner.

Advantages & Disadvantages of Life Insurance:

Like other investment modules Life Insurance also has advantages and disadvantages. The prime advantage is financial security for obvious reasons. It helps facilitate economic movements. Life insurance companies collect premiums from multiple investors hence gathering large funds. This money is used to finance trade and other financial development activities. Last but not the least it helps in reduction of tax payments. Policy holders are entitled to claim income tax exemptions for paying the premiums. The amount and the extent to which they are allowed income tax exemptions depends on other factors like the personal income and the amount paid as premiums annually.

Drawbacks include incompetent facilities as all Life Insurance Companies are not able to provide the exact kind of life insurance policy as desired by consumers. Moreover the services of insurance agents could sometimes do more bad than good. Some of them try to convince their clients to invest more or to choose certain policies which are not beneficial to the clients. A person will find himself in trouble if he invests more than what is actually required. But as the number of advantages outnumbers the disadvantages, investing in Life Insurance is always considered to be a good move.

Life Insurance Planning:

So now you know the basic features of insurance and how you should go about the process of insuring yourself.

However few of you might still face a dilemma, given the different types of life insurance policies offered by so many different companies. This is exactly what we will be covering in our next article,  the ideal cover and the peace of mind that comes with knowing that your loved ones will be financially secure in case of any mishap with you.

So, see you again with our 2nd article on Life insurance policies. Till then Happy Investing!!

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Shaurya Priya - Team MoneyWorks4me