Insurance in its simple meaning advocates that your life is insured from any unseen circumstances in life and your spouse will not be left alone in case of any mishap with your life. When we plan anything big in life we always think of backup but what about life itself to which we don’t give the necessary attention? To provide a solution, one sector came up with various services to consumers depending on the requirement and of course payments paid to the insurance Sector. So I will try to Discuss the Topic in detail so that we all must know how important it is for us to have Insurance.
Insurance is a plan which protects the family of the person from financial loss after the death of the consumer. The company guarantees payment of a pre-decided sum equal to the death benefit upon the death of the consumer to the nominee. The utility of life insurance is to give financial protection to surviving dependents/ family after the death of an insured. It is a must for the customer to analyze their financial situation and determine the standard of living needed for their surviving dependents before purchasing this type of insurance.
How Insurance works
Being Insured is a perfect step for attaining Personal Finance at first, followed by other options like Saving and Investments. Insurance is a tool by which one can protect himself and his family from any financial loss. Generally, the fees or premium that a consumer pays for a big insurance cover is much lesser as compared to the money paid back by the company to the consumer in the event of any loss.
Why premium of insurance remains less
Because very few people claim that amount and this is why you get large insurance coverage at a low price. But that does not mean that you should not purchase any insurance and I would insist that everybody should have it, because nobody knows about that unlucky day.
Insurance is an official and legal contract that you can say is a mutual agreement between the service provider (insurer) and the consumer (insured). The company compensates for the losses of the insured in various circumstances which are described as per the agreement prior to the loss happening to an individual. Loss may be of any type like the death of the policyholder, or damage or destruction of the property (movable/immovable). Insurance companies compensate these losses in lieu of Premiums paid by an individual which will be very minimal as compared to the amount of compensation.
The consumer and the company both get a legal contract for the insurance, which is called the insurance policy, which contains each detail. Under these conditions, the company will compensate for the losses to the individual or the nominee of the company an individual. The details of the nominee will also be mentioned in policy documents.
The point to note here is that whether you will get insurance or not, totally depends on the service provider and the same will be communicated to you once they checked the documents related to your application. Usually, companies did not provide Insurance to people involved in the high-risk zone. Insurance is generally categorized as Life Insurance and General Insurance and I will discuss only Life Insurance in this Blog.
Life Insurance Riders
Many companies offer policyholders the option to customize policies to their personal needs, and Riders are the most usable way a policyholder may update their plan. There are many riders available for a customer to choose from:
⇒The accidental death benefit rider provides additional life insurance coverage in the event the insured’s death is accidental.
⇒The waiver of the Premium ensures the waiving of premiums if the policyholder becomes disabled and unable to work.
⇒The disability income rider pays a monthly income in the event the policyholder becomes disabled.
⇒Upon diagnosis of terminal illness, the accelerated death benefit rider (ADB) allows the insured to collect a portion or all of the death benefit.
Types of Life Insurance
There are various types of plans available in the market which caters to your life insurance. All plans have some distinctive features and limitations which you must understand before purchasing them. Various types of life insurance are:
Term Insurance is the most basic type of insurance. In which consumers get insured for a specific period of years. If the person insured dies when the policy is active or in force, his/her family gets a lump-sum amount. That means term insurance has no cash value behind it and the family will get the amount on the death of the insured person. So If you survive the term, no money will be paid to you or your family. The term for insurance can be renewed, but the premium would be costlier for renewed policy in comparison to the original term policy. The premium for a policy bought at a young age will be less.
Various types of term policies are available in the market for 20 years, or 30 years which are called Level Term Insurance. The medical test will be conducted for the individual who is buying the term insurance as the premium for the policy is calculated by the company based on the Age, Health, and Life Expectancy of the consumer. Types of Term insurance available are Convertible Term, Increasing Term, Mortgage Term, or Decreasing Term. We will discuss Term Insurance which is one of the best insurance in a different blog in detail.
It is traditional life insurance which you get covers you for a lifetime. In addition, Your family receives a certain sum of money after your death, and you will also be entitled to a bonus that often accrues on such an amount. The policy includes a saving portion called cash value along with death benefits and on the saving part, interest may be accumulated. To build cash value, a policyholder can pay additional payments more than the scheduled premium. Additionally, dividends can be reinvested into the cash value and interest can be earned. To access cash reserve, you can Loan or can withdraw funds.
The value of the total premium paid tax-free can be withdrawn from the customer. In the case of a loan, interest is charged by the company, and on Loans that are unpaid, the loan will decrease the death benefits by an outstanding amount. But in case of withdrawal of funds, the cash value will be hampered but not death benefits.
The death benefit of a whole life insurance policy is a set amount of the policy agreement. Some policies are eligible for dividend payments. In this case, the policyholder may choose to have the dividends purchase additional death benefits, which will increase the death benefit at the time of death.
An endowment policy is a Term insurance policy that covers the life of the insured, in addition, it also helps the policyholder save regularly over a specific period of time so that he can get a lump sum amount on the policy maturity in case he survives the policy term. This amount can be used for retirement or for a child’s future. So this type of policy serves both purposes of Life insurance as well as savings. The longer the plan will give large overall benefits.
A life insurance option with the benefits of saving part in it as well as some amount of maturity after the policy gets terminated is known as Endowment Policy. People with regular income and need a corpus after some period can go for this policy. But the people more interested only in life cover should go for Term insurance and not for Endowment because Term plans are cheaper.
Money back policy is a type of Life insurance in which a certain percentage of the sum assured money or coverage will be paid to you periodically throughout the term as a benefit. And once the period of the term got over, you will get the balance amount as maturity. In case of your death, Your family gets the full sum assured regardless of the payments already made to you while you were surviving.
These are meant to build your retirement fund, and you can get a regular pension amount after retirement. In the case of your death, your family can claim the sum assured. There are many options available in the pension plans but you should go with the basic one. If you regularly invest with these types of plans, you can build a sizeable corpus in the long term which can be used for your post-retirement life.
Unit-linked Insurance Plans (ULIPs)
Unit Linked Insurance Plans also known as ULIP are a type of Insurance in which in addition to life cover, part of your money is invested in the market. Pension plans usually give very minimal returns at maturity when we compare the returns of these pension plans with the market returns. Hence, what we can do to overcome this issue is we can get increased post-retirement benefits by investing in ULIPs.
The investment option depends upon the company whether they are investing with Debt funds or going Investment in Equity funds. The lump-sum amount will be paid to your family in the event of your death. If you are planning to buy ULIP, then you must check the fees and other charges related to it like fund maintenance, etc.
These types of plans of Life Insurance are meant to secure your child’s financial future. In the event of your death, your child will get a lump-sum amount. The insurer pays a lump sum amount after your death to your children and later on keeps on paying a certain amount of money at specified intervals.
Tax Benefits of Insurances:
Securing your family with insurance will provide you backup so that you don’t have to worry in emergencies and at the same time it also saves your money by giving an exemption in Income Tax. The money you pay as the premium can be reduced from your total taxable income. However, this is subject to a maximum of Rs 1.5 Lac. That means a Life insurance premium of up to ₹1.5 lakh can be claimed as a tax-saving deduction under Section 80C. Tax regulations are subject to change and the amount claimed as tax-free can be varied, hence you must check the latest rules for tax exemption.
⇒The premium amount used for tax deduction should not exceed 10% of the sum assured.
⇒A medical insurance premium of up to ₹25,000 for yourself and your family and ₹25,000 for your parents can be claimed as a tax-saving deduction under Section 80D.
Terms associated with Insurance
There are many words you will come across while searching for insurance, which you should know before purchasing the insurance. These phrases explain the benefits and limitations of the policy you are going to purchase. There are many phrases to write down but we will discuss them in a different blog and here I am mentioning only one or two. Insurance policies are regulated by the government and you can check the details by visiting the official website of the controller which is IRDAI.
It is a term used for the total money which you as a customer are liable to get after maturity. company is bound to pay the consumer in case of any type of loss. Insurance is divided into various types depending on the type of cover provided by the company. Insurance coverage helps you and your family to recover financially from unseen events in life, like a car accident or the loss of life of the bread-earning member of the family.
Cash surrender value
It is the sum of money an insurance company pays to the policyholder or account owner upon the surrender of a policy. This value generally equals the total accumulation account minus surrender charges. Surrender charges gradually decline over the period of policy and hence as longer the policy you maintain more the money you will on surrendering the policy. It is advisable not to surrender the policy in the initial three years because in this case, the company will levy heavy surrender charges and you will get a minimal amount post-cancellation of the policy.