Basics Of Life Insurance
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How the insurance premium is decided?
Life insurance plans are mainly bought for investments, tax benefits and the life cover
they offer. The primary purpose of life insurance is to secure the financial
future of the nominees in case of an eventuality to the insured. It does this by
paying a 'sum assured' to the nominees. The sum assured is decided at the time
the individual buys the insurance plan and the premium is paid accordingly. The
premium consists of three important elements which are
1. Mortality charges
Mortality charges are incurred by the insurance company to
cover the risk of an eventuality to the individual. The mortality expenses
differ depending on the age of the individual and the sum assured- they are
higher for a higher age and sum assured.
2. Sales and administration expenses
These expenses are incurred by the
insurance company for operational purposes and recovered from the premiums that
the individual pays towards his policy. Agent commissions, sales and marketing
expenses and the overhead costs incurred to run the insurance business on a
daily basis are examples of such expenses.
3. Savings component
This portion of the premium is invested by the life
insurance company in various investment avenues like government securities
(G-secs), bonds, money market instruments and equities in varying proportions.
The savings component is what helps generate the returns which insurance
companies pay to the policyholder by way of bonuses and the maturity amount. |
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Types of Life Insurance |
Taking out a life insurance policy covers the risk of dying early, by providing
for your family in the event of your death. It also manages the risk of
retirement � providing an income for you in non-earning years. Choosing the
right policy type with the coverage that is right for you therefore becomes
critical. There are a variety of policies available in the market, ranging from
Term Endowment and Whole Life Insurance, to Money Back Policies, ULIPs, and
Pension plans.
Let's see what each of these is about, so that you can consider the one that
best suits you.
Term Insurance
Term Insurance, as the name implies, is for a specific period, and has the
lowest possible premium among all insurance plans. You can select the length of
the term for which you would like coverage, up to 35 years. Payments are fixed
and do not increase during your term period. In case of an untimely death, your
dependents will receive the benefit amount specified in the term life insurance
agreement. You can customise Term life insurance with the addition of riders,
such as Child, Waiver of Premium, or Accidental Death.
Endowment Insurance
Endowment Insurance is ideal if you have a short career path, and hope to enjoy
the benefits of the plan (the original sum and the accumulated bonus) in your
life time. Endowment plans are especially useful when you retire; by buying an
annuity policy with the sum received, it generates a monthly pension for the
rest of your life.
Whole Life Insurance
Whole Life Policies have no fixed end date for the policy; only the death
benefit exists and is paid to the named beneficiary. The policy holder is not
entitled to any money during his or her own lifetime, i.e., there is no survival
benefit. This plan is ideal in the case of leaving behind an estate. Primary
advantages of Whole Life Insurance are guaranteed death benefits, guaranteed
cash values, and fixed and known annual premiums.
Money-Back Plan
In a Money-Back plan, you regularly receive a percentage of the sum assured
during the lifetime of the policy. Money-Back plans are ideal for those who are
looking for a product that provides both - insurance cover and savings. It
creates a long-term savings opportunity with a reasonable rate of return,
especially since the payout is considered exempt from tax except under specified
situations
ULIP
Unit-linked Insurance Plans (ULIPs), introduced by the private players, are
hugely popular, because they combine the benefits of life insurance policies
with mutual funds. A certain part of the premium is invested in listed
equities/debt funds/bonds, and the balance is used to provide for life insurance
and fund management expenses.
Pension Plan
Insurance companies offer two kinds of pension plans - endowment and unit
linked. Endowment plans invest in fixed income products, so the rates of return
are very low. Unit-linked plans are more flexible. You can stop contributing
after 10 years and the fund will keep compounding your corpus till the vesting
date. You can opt for higher exposure in the stock market for your plan if your
risk appetite allows it. Lower risk options like balanced funds are also
offered. |
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