Life insurance is considered one of the most important financial planning instrument. Yet there are many questions and ignorance about life insurance.
As a young graduate, you are entering the workplace for the first time. Your income is much for your family. There are members of your family who are dependent on your income. There will be new members in your family who all will be dependent on your income.
As a responsible income earning member of the family, the first thing you need to know is about life insurance.
Here we have detailed the explanations about the life insurance you need to know.
What is Life Insurance?
Life insurance is a contract between the insured and the insurance company. Under the contract, the insurance company agrees to pay the insured lump-sum policy amount either on the death of the insured or on the expiry of the contract.
To get this benefit the insured pays the insurance company the premium amount.
The Insurance Company uses the premium to;
- Manage its administrative cost
- Invests to generate a return to be paid to the insured.
- Make some profit for future sustenance.
Life insurance companies sell future commitment and receive the advance premiums for that commitment to honour.
Why you need life insurance?
“I detest life-insurance agents: they always argue that I shall someday die, which is not so.” Stephen Butler Leacock
But why do you need to invest in life insurance? A valid question to ask.
Imagine the fate of the people dependent on your income if you die suddenly?
The following two realities of life make it important for anyone to invest in life insurance.
- Uncertainty of death
- People dependent on your income
You need to fulfill both the conditions.
When your death looks certain, no insurance company will accept your proposal. When you have no one dependent on your income, you may not need insurance as the insurance money is receivable after the death.
However, some of the policies designed by the insurance companies make it relevant even if you have no one dependent on your income. This we will see in the next para.
What are the types of life insurance policies?
To cater to the varying need of the people, insurance companies have designed various types of policies.
- Whole Life Plan
This plan is for your life till you die. On your death, the beneficiary gets the money.
- Term Plan
This is for a specified time as selected by you. Say 10, 20,30, or 40 years. The beneficiary gets the money only if you die within the term period. If you survive the term period, all premium paid is foregone. No one receives the money.
This is pure risk coverage plan. Since this plan does not payback after he term ends, this is relatively a cheaper plan.
- Endowment Plan
Unlike whole life plan, this plan is for a specific period say 10, 20, 30, or 40 years. Unlike term plan, this plan pays at the end of the tenure.
- Unit-linked Plan
This plan is risk coverage and investment plan. Money is invested to build wealth. At the end of the tenure, you get the fund value of your invested fund.
In case the insured dies during the plan tenure; the beneficiary gets the maturity proceeds.
- Retirement Plan
Under this plan, the money is invested to create a corpus. After specified years, you receive monthly income out of the corpus as your pension.
The monthly pension is another reason people invest in life insurance plans.
- Critical Illness Plan
This is a relatively new plan. Under this plan, lump sum amount is paid to the insured when the insured is diagnosed with a certain specified critical illness. The life cover continues and premium is waived. However, the plan differs company to company.
These are some of the basic plans. Every insurance company customises the plan to cater to more specific need of the investors. This customization is known as Rider.
Who should you insure?
Ideally, income earning people should have life insurance coverage. However, with the variety of policies catering to different needs, you need to evaluate your requirement.
- You may invest in a retirement plan for your parents.
- You may invest for critical care plan for both spouses.
- You may invest in child education in the name of children.
- You may invest wealth building ULIP in the name of your spouse
Health, wealth, pension, risk coverage, children education, all these are the purpose which drives life insurance investment decisions.
When to invest in Life Insurance?
Earlier the better.
- In the younger age, policy premium is lower. The premium is higher when you buy rupees one crore policy at the age of 40 than you buy at the age of 25. In the younger age the risk of death is lower, the insurance company gets more years to build your targeted corpus.
- When you invest early you get longer risk coverage. Dying young is a new phenomenon. It is always better to buy an insurance policy as soon as you start earning.
- When you start early, your wealth is built a manifold. (Impact of cumulative return)
It is advisable to start as soon as you can. If you don’t start early, sooner your tax advisor would advise you before your personal financial advisor.
Who should be the nominee of your life insurance policy?
The nominee should be the person whom you want the policy benefits to go. Know more about the nominee from our detailed post on Nomination by clicking the link below.
Tax implications of Life insurance?
Usually, the premium paid for the life insurance policies are tax-exempt up to a specific amount. In India, it is deductible from the income under section 80C.
Maturity proceeds are also tax-free in most cases. This way investment in life insurance is tax efficient also. This is the reason investment in life insurance is very popular.
However irrespective of the tax benefits, independently also life insurance is a utility and deserve adequate investment.
Periodic review of life insurance
As your income grows and your lifestyle changes for better you need to review your life insurance coverage.
The money your dependent needs and the money you need after the retirement increases. This requires more insurance coverage.
Life insurance investment once made is not the end of the story. Every few years as your income increase family expanded and inflation increase, you need to reassess your need. You need to increase your policy coverage keeping in mind the future needs.
Remember adequate coverage is necessary. Inadequate coverage though may help you but won’t serve the purpose.
What else you need to know?
Some more things.
- What if you fail to pay the premium?
If you fail to pay the premium within the grace period, the policy lapses. If any untoward incidence happens within the lapse period and the insured person dies, you lose all the benefits.
- How can you restart your policy?
You can restart the lapsed policy with 2 years by paying the entire overdue premium and some penalty.
- Can I surrender the policy before maturity?
Yes after the 3 years and in some cases like ULIP after 5 years you can surrender the life insurance policy.
You will be paid what is called surrender value of the policy. This is worked out on the basis of total premium paid and bonus accrued.
The bonus is annual addition declared by the insurance company to be payable over and above the policy amount.
The surrendered policy is a closed policy, however, a lapsed policy is semi-surrounded policy.
This means if you have paid the premium for 10 years on a 25 years term policy, your policy will remain in force upto the 40% value.
This is because you have paid the premium for 40% of the total tenure. For example, for rupees one crore policy, your lapsed policy after 10 years will become rupees 40 lakhs policy.
However read your policy document and understand the surrender value, policy lapse and policy restart conditions. Ask your agent.
A loan is available against the policy. So think of a loan rather than policy surrender. In the case of a loan, all your policy benefits continue. When you surrender the policy, all your policy benefits including the life cover ends.
“You don’t need to pray to God any more when there are storms in the sky, but you do have to be insured.” Bertolt Brecht
Want to know more? Write to us and we would be happy to answer your life insurance queries.