• Life Insurance Guide

    Life Insurance
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    The thought of your child’s happy face or the thought of entering your home to be welcomed by your loved ones brings great joy and contentment to the heart. But the thought of what the same family members would go through due to your untimely demise can be terrifying. While an individual cannot be replaced, his/her income that once supported the family can be replaced. This is what makes life insurance an incredible financial product. It helps keep one’s family financially protected against the risk of an individual’s death. A life insurance policy will do what the individual who provides for his/her family would have done had he/she been around.

    Given the importance of a life insurance policy which keeps the family financially secure, it is essential to do some basic homework to ensure that we are aware of how life insurance policies work.

    What is a Life Insurance Policy?

    A life insurance policy is an agreement between the policyholder and the insurance company. The company promises to pay a certain amount of money as decided at the inception of the policy upon the death of the individual in exchange for payment of fixed amounts of money on a regular basis. The amount that the insurer promises to provide is known as the sum assured and the periodic amount provided to the insurer is called the premium.

    Life insurance policies can be bought both online and offline. Insurance agents will help access the best life insurance policies so that individuals can make the right decisions. Many insurers offer special online insurance products that can be bought through their official website with just a few clicks. Many third-party websites, too, offer life insurance policies online. It is important to shop around to find the insurer that offers the best suitable comprehensive plan at an affordable price.

    The amount provided on the death of the life assured, known as the death benefit, is provided to the nominee/beneficiary as chosen by the policyholder. The nominee is required to notify the insurer and file a claim in order to receive the benefit.

    When Should I buy a Life Insurance Policy?

    The ideal time to buy a life insurance policy is when a person with dependents starts working. The reasons being the risk of death that can cause financial loss to the dependents and the fact that life insurance is cheaper for younger individuals. Hence it is wise to buy a life insurance policy as early as possible.

    Apart from the age, the other factors that could impact the cost of life insurance are the health conditions, the lifestyle of the individual, and the medical history of the family. Also, those who are involved in dangerous professions or hobbies like if one is a pilot or frequently goes for mountain climbing, may have to pay a higher price for a life insurance policy.

    When one buys an insurance policy, he can decide whether to avail coverage for a short period of time or coverage for a lifetime. This again is directed by the purpose of the policy and the cost too.

    How much life insurance coverage do I need?

    Deciding exactly how much life cover to choose can be a daunting task. One can prepare a list of requirements based on priority to ascertain where the lump-sum payout might be required. It is important to understand one’s assets and liabilities to estimate how much the death benefit should be. The family’s lifestyle expenses, future expenses, and the amount of inheritance the family will receive are a few points to bear in mind. Many insurers’ websites and third-party websites offer online calculators that help come to an approximate number to be chosen as the sum assured.

    While buying at least one life insurance policy is a necessity, a few individuals buy multiple life insurance policies to cater to different needs like funding the child’s education or saving for the post-retirement period. The sum assured for each of the plans can be decided based on the purpose and requirement.

    When you have decided to buy life insurance, you must address the concern of how much insurance is adequate for you. If the coverage is inadequate, your family might face financial turmoil in the future if something happens to you. If the coverage is way too much, you might end up spending a lot of money on coverage you do not need. The key thing here is that you must find the right balance. Let’s consider the following scenario:

    Keshav is a 34-year old software engineer employed with a private company. His take home yearly salary is around Rs.6.5 lakh per year. He has two kids aged 3 and 5, and his wife is employed in a private company. The total living expenses of his family comes around to Rs.5 lakh per year. He has an outstanding home loan for Rs.45 lakh. In this case, the term insurance required to secure his family’s future can be calculated as follows:

    Corpus for living expenses (20 years): Rs.1.00 crore

    Outstanding loan amount: Rs.45 lakh

    Expenses for kids’ higher education and marriage: Rs.30 lakh

    Additional contingency expenses: Rs.25 lakh

    Based on the information available here, the total requirement for Keshav is around Rs.2 crore. If he is taking insurance at the moment, his minimum corpus must at least be Rs.2 crore. For this cover, he may have to spend nearly Rs.15,000 to Rs.20,000 per year in premium.

    This is just one example of how life insurance requirement can be calculated. This is subject to change based on various factors such as annual income, age, outstanding loan amount, number of kids, health condition, inflation, residential location, etc. Rather than choosing the sum assured amount in an arbitrary manner, you need to calculate the requirement based on the above-mentioned scenario. Once you have calculated the exact requirement, it is better to allocate a little extra just for emergency purposes.

    Term insurance plan: Maximum benefits at minimum cost. Here's why?

    Life is unpredictable and thus it becomes extremely important to have insurance. You can never be sure about when you may get diagnosed with a serious health condition or you may become disable or lose your life in an accident. Thus, it becomes important to have an insurance policy so that even if anything happens to you, your loved ones do not have to face any financial problems.

    There are various types of life insurance policies that you can purchase for yourself, but term insurance is one of the best product that you can avail for yourself. A term insurance policy is the purest form of insurance that you can come across as it provides maximum benefits at minimum cost. The part of the reason why term insurance is cheap as compared to other products such as an endowment policy is that it only provides the nominee with a lump-sum amount called the death benefit in case of your death and does not provide any other benefits such as maturity benefits whatsoever. Hence, a term insurance plan is extremely cheap and affordable in nature.

    A term insurance plan is the cheapest and the most affordable product that you can avail for yourself. For example, if you are a 30-years old non-smoker and you purchase a term insurance plan with a cover amount of Rs.1 crore for a period of 30 years, then the premium that you may pay on a monthly basis will be between Rs.650 to Rs.950 depending on the benefits and riders that you may have availed for yourself. Thus, it only makes sense to purchase a product like a term insurance plan which provides such a huge cover at such affordable premium rates.

    There are various types of term insurance plans that you can purchase for yourself such as increasing cover plan, joint life term plan, life stage event insurance plan, the return of premium (TROP), etc. On purchasing a term insurance policy, you also have the option of purchasing riders or add-on plans such as critical illness cover, accidental death cover, permanent and total physical disability cover, waiver of premiums, etc. On purchasing a term insurance plan, you can also avail a tax deduction of up to Rs.1.5 lakh on your premiums under Section 80C of the Income Tax Act, 1961. The death benefit which your nominee will receive in case of your sudden demise is also exempted from being taxed under Section 10(10D) of the Income Tax Act, 1961.

    What is the right age to buy term insurance?

    Term insurance is primarily used to protect your family’s future financial requirements in case of your unexpected demise during the policy term. It is something you must take based on your family’s living expenses and liabilities. As you age, your liabilities and your family’s dependency on you are likely to reduce. Hence, the requirement for term insurance may diminish as you age. This is why term insurance is best when taken at a young age. Through this way, you can protect your family from various financial hassles.

    Consider this scenario, for instance. Rajan bought a term insurance cover for Rs.1 crore (policy term 30 years) when he was just 25 years old. Currently, he is 35 years of age. He is married and has two kids. The yearly living expenses of his family comes around to Rs.4 lakh. He also has to save money for his kids’ higher education and marriage. He has no other liabilities. In this case, based on his requirement, a corpus of Rs.1 crore is adequate for his needs. If something were to happen to him, his family can use the money to secure their financial future.

    Now, consider an alternate scenario. Madhan is 54 years of age. He has two children. He has total PPF investments worth Rs.55 lakh, mutual fund investments worth Rs.50 lakh, and two homes worth Rs.2 crore. Following his retirement, he might earn an employee provident fund of Rs.30 lakh. His son has already completed his post-graduation, and he has just started working in a private concern. His daughter is still in college.

    In this scenario, Madhan has taken care of most of his family’s responsibilities already. His assets are sufficient for his family’s future, and he has no major liabilities. If he wants to enter a term insurance cover for Rs.1 crore at this age, it might cost him more than Rs.50,000 per year. Considering the fact that his family’s dependence on his earnings is minimal at the moment, taking a term insurance plan at this age may not be such a good idea. He can invest the money in other maturity plans and earn a decent corpus following his retirement.

    Does Term Insurance Cover Death Due to Sickness?

    Term insurance covers all kinds of death except for certain types such as suicide (within the first 12 months), accidental death under the influence of alcohol, etc. Even if the policyholder dies due to a terminal disease within the policy term, the company will provide compensation to the nominee or legal heir. In case of both accidental deaths and sickness deaths, the nominee must file the claim to the company to receive the compensation amount. Unless there is any fraud, the company will settle the claim amount after verification.

    Consider this scenario for example. Mr. Gupta is a 55-year old man who has term insurance coverage till 60 years. He has coverage for Rs.2 crore. He is recently diagnosed with a terminal disease. The doctors have given him 6 months of life. He has a family with two kids. Following his death, his dependents can file a claim request to the company and get the full sum assured amount. In other words, even deaths due to sickness are also covered by term insurance plans.

    In case of the death of the policyholder, the company must be notified immediately. Also, the claim must be filed as soon as possible. It is better to keep the company in the loop regarding the claim process. The company’s customer care department can be contacted to clear any doubts in the claim settlement process.

    While life insurers provide coverage for sickness deaths, not all kinds of deaths are covered by them. If the death of the policyholder arises due to participation in any adventure sports or hazardous activities, there will not be any compensation to the insured. Similarly, any deaths arising out of participation in illegal activities are also not covered by life insurance. Apart from certain exclusions such as this, all other deaths are covered by life insurance policies.

    What are the best life insurance options available for NRIs?

    Most of the life insurance companies in India allow non-resident Indians (NRIs) to buy life insurance coverage in India. It is entirely up to you to choose life insurance either in India or in the country of your residence. If you have decided to buy it in India, you can contact the company through phone or email and proceed with the purchase. You may also get in touch with the company’s NRI center and enquire them about your options.

    Term plans are better options for NRIs compared to other savings plans. However, if your family is still in India, you may take any kind of plan depending upon their requirements. When it comes to payment of premiums, you may choose to pay the money either in Indian currency or in foreign currency. If you have NRE or NRO accounts, you may pay the premium amount on your own through online transactions. You may also choose to pay the premium through your family members living in India.

    Consider this scenario for example. Mrithula is an NRI living in London for the last four years. She already had a term plan with LIC while staying in India. Now, she is planning to get an endowment policy to save money for her future. She has no plans of relinquishing her Indian citizenship in the future since her entire family is in India. Once her employment is over, she plans to return to India in a few years.

    In this scenario, any term or endowment plan will be suitable for Mrithula since she has no intention of relinquishing her Indian citizenship. If someone is planning to move to another country, it is always better to choose the insurance plans offered in the country of residence.

    Life insurance provides global coverage for policyholders. In other words, life insurance provides compensation even if the policyholder dies in another country. This applies to both term plans as well as other maturity plans. If the family members are living abroad, they can repatriate the compensation amount to the extent paid in foreign currency. Considering all these factors, NRIs still have a lot of options for life insurance coverage in India.

    What are some of the major myths about life insurance?

    There are plenty of common myths floating around about life insurance among the general public. This is one of the reasons why India has one of the lowest life insurance penetration in the world. Some of the common myths are listed as follows:

    • Life insurance is expensive.

    This is one of the most common misconceptions about life insurance policies. The cost of life insurance depends upon the type of policy chosen. If you choose a term insurance policy, it can be extremely cheap compared to other plans. Also, the cost to benefit ratio in term plans is extremely high. By shelling out a small annual premium, you can get high-value coverage for your life. For instance, a 30-year old non-smoker male earning Rs.5 lakh per year can get for Rs.1 crore coverage for 25 years by selling out as little as Rs.7,500 per year. This comes around to a monthly spending of just Rs.630.

    • Life insurance is not required if you are single.

    While the main purpose of life insurance is to provide financial security to your dependents, it can also serve other purposes. For instance, an individual has outstanding home loan of Rs.30 lakh and personal loan of Rs.5 lakh. He also has aged parents who are dependent on his income. In this scenario, a term cover of Rs.75 lakh can protect him against all the liabilities mentioned here. Also, he can leave the remaining coverage amount to his parents.

    • Employer-provided life insurance is sufficient for me.

    Employer-provided life insurance has many limitations in terms of flexibility and coverage. The sum assured amount is usually very limited, and it may not be sufficient to sustain the financial stability of a family for life. For a person earning around Rs.6.5 lakh, the life cover will be around Rs.10 lakh. This is nowhere sufficient to take care of a family throughout life.

    • Stay-at-home parents do not need life insurance.

    In a family, primary earners are the ones who mostly buy life insurance coverage. This does not mean that stay-at-home parents do not need any life insurance coverage. Stay-at-home parents are also vital part of a family. Losing them will cause a major impact on the proper functioning of a family. Hence, it is better to take coverage for stay-at-home parents also. You may also consider opting for joint life insurance which provides coverage for a married couple as a whole.

    Listed above are some of the myths commonly associated with life insurance policies. It is worth noting that life insurance is a must for everyone irrespective of their profession or income. If you have dependents to care for, you must ensure that their future is secured with the help of life insurance.

    What is a term insurance plan?

    A term insurance plan is a contract in which the insurance company provides coverage to the insured for a specific period of time. The insured in return has to pay premiums in order to keep the policy active. In case of the death of the insured, the insurer pays the nominee a lump-sum amount called the death benefit.

    What are the riders in term insurance?

    A rider is an attachment or an additional plan that you can purchase along with your existing insurance policy. A rider provides an extra layer of protection by offering additional benefits. For example, you can purchase a Critical Illness rider which covers you and helps you take care of your medical expenses in case you are diagnosed with a serious health condition.

    How does a term insurance policy work?

    A term insurance plan can typically provide you with coverage for up to 30 years. You have to pay premiums in order to keep the policy in force. In case of your unfortunate death, the nominee appointed by you receives a lump-sum amount called the death benefit and the policy terminates thereafter.

    What is the benefit of term plan? Does term insurance covers natural death?

    A term insurance policy offers death benefit. In case of your death, the nominee appointed by you receives the death benefit which is nothing but a lump-sum amount. The death benefit helps your loved ones take care of their day-to-day needs even if you are not around. Term insurance covers natural death.

    What is the best term life insurance?

    The best term insurance plan for you will depend on factors such as your age, annual income, financial liabilities that you have to take care of, future requirements, financial capabilities, etc. You have to be extremely clear about your future needs based on which you can choose a term insurance policy which is the most suitable for you. Some of the term insurance plans that you can avail for yourself are Aegon Religare iTerm Plan, Bharti AXA e-Protect Plan, HDFC Life Click2Protect Plus, ICICI Prudential iProtect Option Plan, etc.

    How much should I pay for term life insurance?

    The premium you will pay for a term life insurance will depend on factors such as the tenure for which you have subscribed the policy, age, annual income, sum assured chosen by you, lifestyle habits, etc. These are some of the factors which will determine the total premium you will pay for your term life insurance.

    Can you cash in on a term life insurance policy?

    No, you cannot cash in on a term life insurance policy. A term insurance policy is a type of product which only provides you with a protective cover. In case of your unfortunate death, the beneficiary receives a lump-sum amount called the death benefit and the policy terminates. However, if you survive the policy term, you do not receive any benefits whatsoever. You can avail the Return of Premiums (TROP) rider where all the premiums are paid by you is refunded back to you in case you survive the policy term.

    How long does it take for the life insurance company have to settle your claim?

    An insurance company can take up to 30 days in order to settle a claim. However, the maximum number of days an insurance company may take in order to settle a claim is 60 days.

    Do you get life insurance if your spouse commits suicide?

    You won’t be eligible to receive the death benefit or the claim amount if your husband commits suicide within two years of purchasing or reviving the insurance policy. However, a suicide clause initiated in a policy can differ from insurer to insurer.

    Can I get life insurance at the age of 70 years?

    An insurance company may not be willing to provide you with life insurance coverage since at the age of 70 years you are more at risk to die because of which the insurance company would have to pay the claim amount. Insurance is a business and the longer a policyholder lives and pays the premiums, the better it is for their business. One of the reasons why it makes no sense to purchase life insurance at the age of 70 years is because you tend to have fulfilled all your financial dreams and have nobody who is dependent on you. A life insurance policy is generally purchased so that your financial liabilities can be taken care of in case something happens to you. If you don’t have any financial liabilities to take care of, it makes no sense to purchase an insurance policy. However, there are some insurance companies in India which may offer insurance to people up to the age of 85 years.

    Which is the largest life insurance company?

    There are various insurance companies in India which have made their name over a period of time. Life Insurance Corporation (LIC) of India is the oldest insurance company in India and has the largest customer base in India. Similarly, there are various insurance companies such as ICICI Prudential, HDFC Life, Bajaj Allianz, PNB Metlife, Exide Life, Max Life, etc., which are some of the largest insurance companies in India.

    What are the different types of life insurance policies?

    There are various types of life insurance policies that you can avail for yourself. They are:

    Term insurance

    Whole life insurance

    Unit Linked Insurance Plans

    Endowment Plans

    Money Back Plans

    What is a long-term care insurance rider? What is the family income term rider?

    Long-term care insurance rider is a type of rider or add-on plan which you can avail in order to pay for your long-term expenses. For example, a long-term care insurance rider can take care of your medical expenses such as nursing expenses. This type of rider can be triggered if you are diagnosed with any form of chronic illness. Such riders are slightly expensive in nature and also harder to qualify for. A family income term rider is another type of rider where the nominee receives an amount of money equivalent to your monthly income until the total claim amount is exhausted.

    Is term life insurance a permanent policy?

    A term life insurance policy is not permanent in nature and provides you coverage only for a specific period of time. Generally, you can avail a term insurance plan which provides coverage for up to 30 years.

    How much is life insurance for a 40-year old man?

    The premium that a 40-year old man will pay will depend on his annual income, the cover amount chosen by him, financial liabilities he has to take care of, lifestyle habits etc. A 40-year old man should purchase a life insurance policy which provides him coverage for 20-25 years considering that the maximum age till which he will continue to work is 65 years.

    Can you get money back from a term life insurance policy?

    No, you cannot receive any money back from a term life insurance policy. A term insurance policy provides only coverage and pays a lump-sum amount called the death benefit to your beneficiary in case of your death before the end of the policy term. In case you survive the term you cannot receive any benefit whatsoever. However, on availing the Return of Premium (TROP) rider, you get a refund of all the premiums paid by you in case you survive the policy term.

    Which life insurance policy should I buy?

    Though the primary purpose of a life insurance policy is to offer protection, all insurers, today, offer a variety of life insurance products with many different features and benefits. Life insurance products can be divided into 4 broad categories:

    Term Plan

    Individuals looking for an affordable plan that offers pure risk cover and no element of savings or investment can go for a term insurance plan. It is a plan that requires the policyholder to pay premiums up to the end of the policy term. In case the life assured expires during the policy term, the death benefit is provided to the nominee of the policy. If, however, the life assured survives the complete policy term, no maturity benefit is payable.

    Though traditional term plans work as mentioned above, many insurers in the recent past have started to offer the ‘Return of Premium’ rider. A rider is an add-on to the base life insurance plan that provides added benefits under certain conditions. The rider, in this case, promises to return all the premiums paid if the life assured survives the policy term.

    Whole Life Plan

    A whole life plan, unlike a term plan, offers life cover throughout the life of the individual. The family members or the chosen nominee of the policy will be provided with the death benefit regardless of when the death occurs. A whole life plan, given the period of life cover, costs slightly more than a term plan. A whole life insurance plan has no savings or investment feature either.

    Endowment Plan

    An endowment plan is more expensive than term or whole life plans because they offer savings in the form of bonuses or profits. The sum assured of the policy is provided to the nominee if the life assured passes away during the policy term. If not, the sum assured is provided to the policyholder as the maturity benefit. Bonuses and loyalty additions are paid along with the benefits.

    Unit Linked Insurance Plan (ULIP)

    A ULIP is a combination of life insurance and mutual fund. This is the most expensive plan type of the lot since it partly offers protection and partly invests in funds. The returns that the individual may receive depend on the performance of the individual’s funds. Upon the demise of the life assured, the fund value or the sum assured, whichever is higher, is paid as the death benefit. This plan type is suitable for those who have a high risk appetite who wish to purchase a financial product that helps create wealth along with providing life cover.

    The final word

    While purchasing a life insurance policy, it is a good idea to find out a few suitable life insurance policies and compare each of the policies to narrow down on the best. Ideally, one should run a check on the insurance company in terms of the options available, claim settlement ratio, grievances solved ratio, etc. It is imperative to read the policy document carefully at the time of purchase and review them from time to time to ensure that it is suitable for the current requirements.

    Life insurance policyholders qualify for tax benefits too. The premiums paid towards the policy are eligible for deduction under section 80C of the Income Tax Act, 1961 and the benefits received qualify for deduction under section 10 (10D) of the Income Tax Act, 1961.

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