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What You Should Know About Life Insurance

  • Highlights

  • View life insurance as a risk management scheme

  • There are 4 major players in any policy

  • There are various kinds of policies in India

  • The best way to ensure timely premium payment is by selecting ECS

You may think of having a life insurance policy as a tax deduction tool. The question of whether or not to have such a policy arises only at the time of filing tax returns and, in most cases, you may take a policy only to mitigate the impact of taxes on your net worth. But this is not the right way of looking at life insurance. Here’s why life insurance is important and what you should know about this essential policy.

1. Consider insurance as essential to ease financial burdens

If you believe that life insurance is not a necessity, think again. For instance, say you are the sole breadwinner of the family and your wife and children are dependent on your income to meet their daily needs. These needs include everything from shelter to education. If something had to happen to you resulting in your untimely death, how would your spouse and children fend for themselves? Keeping this in mind, it is essential for you and your spouse to have a life insurance to secure the future of your dependants. Though you may also be tempted to consider life insurance only in terms of an investment, think of it instead as an investment in the financial security of your family, especially in cases where they do not have access to alternative sources of money should a disaster or tragedy strike. The thumb rule here to follow is if even one person is financially dependent on you, then having a life insurance policy is a must. The main principle behind life insurance is that it helps your family cope with any financial stresses arising out of sudden loss of life.

2. Understand the role of primary players in your life insurance policy

Life insurance is a contract between the insurer and the insured, where the former has an interest in the life and livelihood of the latter. It does this by making use of the premiums made to give your dependants, such as your spouse, a death benefit, which is basically monetary compensation that can be relied upon. Basically, there are four key players in all life insurance policies. These are the insurer or the insurance company which settles the claims, the owner or the policyholder who is also responsible for settling the claims, the insured or the one on whose life the policy is based, and lastly the beneficiary or the one who receives the claim or the death benefit. Sometimes the owner and the insured can be the same person, but it does not always have to be the case.

3. Know the broad varieties of life insurance and how they work

Broadly speaking, in India, there are five different types of life insurance policies. These are

  • a) Term life insurance
  • b) Whole life policy
  • c) Endowment plans
  • d) Unit Linked Insurance Plans (ULIPS)
  • e) Money-back policy

In term life insurance, the insurance offers financial protection to the policyholder for a limited time period or term. In whole life, the subscriber pays the premiums until the whole and appreciated corpus is paid out to the family. Endowment plans are those that pay out the sum insured both in cases of death as well as survival. Unit Linked Insurance Plans are those which provide a risk cover to the policyholder by investing in certain instruments like units of a mutual fund. The mutual fund units can either belong to a debt fund or an equity one depending on the policyholder’s preferences. In a money-back life insurance policy, which also doubles up as investment instrument, life cover is provided on the death of the policyholder along with periodic returns as a percentage of the sum assured. Knowing these differences, you can choose the right insurance policy for yourself.

4. Use online tools to find the optimal life insurance policy

The workings of life insurance can be quite complex. There are such elements as age, mortality rate, consumer price indexes and other elements to consider. Fear not. Today there are a wide variety of online tools that can help you decide which is the optimal life insurance policy you should go for, whether for you individually or for your family or even as a combination. Many online sites give you a fairly accurate idea of how much you need to pay by way of premiums and for how long. The calculators also help you extrapolate how much of a corpus your family would need to survive 5 or 10 years from now in case you die an untimely death. Such online calculators are therefore invaluable risk management tools.

5. Learn how cancellations and premium payment lapses can affect your policy

If you are unable to pay your life insurance premiums on time, you need not worry. You can pay the premium due within the grace period allotted to you, provided you make it a point to make the payment on time. Should you fail to pay the premium within the stipulated grace period, which is usually 15 or 30 days, your policy automatically lapses. You then have to go through the whole process of reviving it within three years. In some cases you can revive it within five years. This means you have the extra task of paying any balance premiums and associated costs such as late or delayed fees. A lapsed policy therefore becomes ineffective and neither are you able to enjoy survival benefits nor is your family entitled to any death benefit. The best way to ensure that this does not happen is to opt for the ECS (electronic clearance service) facility where your premiums are automatically deducted from your bank account either monthly or annually.

Given these important considerations, think smartly about life insurance and create a plan to protect your loved ones.

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