Life Insurance: Are you covered?
I’m sure you have thought about this question multiple times, but did you ever act on it? All of us are aware about the importance of having life and health insurance but not many have taken the necessary steps to invest time and efforts to buy one for themselves and their families. Do you know that there are different types of Life Insurance Products available in the market today and they come with different benefits and values? But before that lets understand if you need a life insurance or not.
Do you need a life Insurance?
Ideally not everyone needs a life insurance, but almost all needs one! Why do I say so? If you have no dependants, don’t have any liabilities/debts, have your own house/property, have a regular source of income (probably for your life time) to cover your day-to-day and incidental expenses; probably you may not need a life insurance. If you don’t fall into the above category, then you must consider having a life as well as health insurance.
“Insurance” operates on the principle of taking exposure by collecting money frequently over a period, from a large group of people to be able to pay for a few who may need a larger sum of money to cover from a risk.
Its possible that you can protect yourself from unforeseen future risk by investing or saving money and not buying any type of insurance. But the invested/accumulated corpus may not be enough to cover you from the risk and manage your day-to-day expensed post the event. And hence comes the importance of having a life insurance.
What type of life insurance you should buy?
- Term Life Insurance
- Whole Life Insurance
- Endowment Life Insurance
- Unit Linked Insurance Plans
- Annuities/Pension/Retirement Plans
Term Life Insurance
Term Life Insurance is a type of insurance that provides you with higher coverage or sum assured for a specified term of years at a much lower premium compared to any other type of insurance products. Usually the term insurance policies are available for a period of 10, 20 or 30 years. There are no benefits or payments made if the insured person outlives the term for which the insurance policy is taken.
Its important to note that in a Term Life Insurance product, the insured person needs to pay a much lower premium for the “Term” (period) and the benefits are paid only in the event of death of the insured provided the insurance policy is in-force.
Whole Life Insurance
Whole Life Insurance provides life insurance for the entire life of insured person. Sometimes these types of insurance are also called as traditional life insurance products/policies. This being a major difference between a term insurance and whole life insurance, makes the whole life insurance products more expensive than the term life insurance products. Most of the whole lift insurance products mature when the insured person turns 100 years of age. On maturity if the insured person is alive, he/she receives tax free returns towards sum assured plus the accrued bonuses.
Whole Life Insurance comes with cash benefits such as survival benefits, yearly bonus, life cover benefits. In the event of the insured person’s death, the cash benefits are passed on to the dependents.
Endowment Life Insurance
Endowment plan is a type of traditional life insurance policy that combines both term life insurance and savings. Endowment plans can also be considered as an investment plan that helps you save regularly for a longer period to generate a relatively larger sum to meet an objective. The insured person receives the sum assured plus the accrued bonuses on maturity. Some insurance products do offer continued life coverage even after the maturity. Endowment plans can be surrendered after paying the premium for a certain period. But in some cases, the returns can be even lower than total premium paid and hence its not recommended to surrender endowment plans earlier.
Its important to note that endowment plans are expensive compared to the term life and whole life plans as they generate relatively higher returns compared to both products. As a rule of thumb, you may compare the returns of an endowment plan with the bank fixed deposits, without compounded interest but with tax exempted returns.
Unit Linked Insurance Plans (ULIPs)
ULIPs are type of insurance plans that combines the benefits of both insurance and stock markets like mutual funds and bonds at the same time. ULIPs are market linked plans and offer a choice of funds to the insured person/investor based on the age, risk appetite, investment horizon, specific needs etc. The funds are generally categorized into various categories like Bond Funds, Debt Funds, Balanced Funds, Equity Funds. Based on the choice/mix of funds selected and the premium paid (minus the costs), investor gets equivalent number of units allocated. But its also important to consider the costs/factors associated with ULIPs such as Fund Management Charges, Allocation Charges, Admin Charges, Market Risk, Insurance cover and Lock-in period.
ULIPs offers the best returns when compared to all other insurance products we have seen so far.Returns of ULIPs are usually higher when the units are held for a period of at-least 10 years or more.