What is Life Insurance?
Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against.
The contract is valid for payment of the insured amount during :
By and large, life insurance is human civilisation’s partial solution to the problems caused by death.
Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:
1) That of dying prematurely leaving a dependent family to fend for it.
2) That of living till old age without visible means of support.
Why do I need Life Insurance?
Life is uncertain and it is not possible to predict exactly the different events that can occur. However, there is always a need to earn income to support yourself and your dependents in case of any eventuality. Life Insurance provides for financial security in the wake of such unfortunate events like death or on the inability to earn due to physical disabilities. Besides providing for financial security in the case of one’s untimely death, it can be used to accumulate a kitty for your old age, to systematically build assets, to fund your child’s education and also to save on taxes.
Who can buy a policy?
Any person who has attained majority and is eligible to enter into a valid contract can insure himself/herself and those in whom he/she has insurable interest.
Policies can also be taken, subject to certain conditions, on the life of one’s spouse or children. While underwriting proposals, certain factors such as the policyholder’s state of health, the proposer’s income and other relevant factors are considered by the insurance company.
Life insurance Vs Other savings options
A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.
At the time of taking a policy, the policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.
Protection:
Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.
Aid To Thrift:
Life insurance encourages ‘thrift’. It allows long-term savings since payments can be made effortlessly because of the ‘easy installment’ facility built into the scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly).
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.
Assesses can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.
Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.
Children’s education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one’s retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).
Why is it better to buy insurance at an early age?
There are many advantages of buying an insurance policy as early as possible. First, the consideration for an insurance policy or the premium is significantly lower at younger ages (the reason for that is as you grow older, the mortality risk is greater and hence insurance companies would charge a higher premium to cover that risk). By buying a policy at an early age, you would be able to protect your dependents against the unforeseen event like death at a much lower overall cost. Second, as you grow older, the chances that you would suffer from health problems are higher, and obtaining insurance could become difficult at that stage even if you want to. Third, if you are buying insurance with a view to create a large sum of money at a pre-determined age to meet certain planned expenses like your children’s education or for your post-retirement expenses, then saving early on in you life is highly beneficial. You will have to save much more or for longer durations to get the same amount of money if you start saving late in your life.
How much Life Insurance do I need?
The need for life insurance is based on various factors including your current lifestyle, expected outflows in future, your present age and your family size. The first step should be to estimate how much financial support your dependents would need in order to continue to enjoy the same lifestyle as they enjoy today in the event that you are not around to provide that support. In estimating this support, you should consider all regular monthly expenses including food, rentals, conveyance, school fees, medical expenses, any debts to be repaid, etc. and also estimated ones like for children’s education and marriage and your expected needs after retirement. Always provide for unforeseen contingencies that your dependents might need during the period of adjustment. Based on this analysis and the expected returns on the investments in future, you can work out a sum of money that would help your dependents achieve financial independence even if you are not around to support them.
While the situation of every individual would be different, and should be evaluated separately, one rule of thumb is to buy a cover for an amount equal to 6-10 times your annual income. Clearly, the need for insurance is not static and will change as your life-stage changes so you must re-work the requirement periodically and review the coverage available from time to time. It is advisable to speak to a trained financial consultant / insurance advisor to determine the extent of coverage that you require.
Are my existing policies enough for me?
(I already have life insurance policies, what should I do?)
Your need for protection is not fixed as life progresses, there are new developments that happen and these developments impact the extent to which you need protection. Hence the requirement for protection should be reviewed periodically and if there is a shortfall, it should be covered as soon as possible by buying additional insurance cover. For the purpose of illustration, some of the events in your life that are likely to have an impact on the levels of protection that you need are:
Life insurance products can be classified into two broad categories:
Pure protection plans or Term plans are those products that provide benefit only upon death of the life insured. These are the cheapest form of life insurance and are suitable, especially in younger ages when you are yet to build up your finances.
Protection cum Investment plans
These plans not only insure the individual to the risk associated with one’s life but also help in wealth creation. Portion of the premiums paid by insured go in for insuring life and the balance is invested on their behalf by the insurance company. The unit linked plans offer huge flexibility and complete control to insured on how these investments need to be managed. They also provided options to withdraw money from the policy incase of need or to invest over and above the premiums in case of extra cash flows.
Happy Reading.
With Regards,
YOURFINANCEUGURU.COM
Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against.
The contract is valid for payment of the insured amount during :
- The date of maturity or
- Specified dates at periodic intervals or
- Unfortunate death if it occurs earlier
By and large, life insurance is human civilisation’s partial solution to the problems caused by death.
Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:
1) That of dying prematurely leaving a dependent family to fend for it.
2) That of living till old age without visible means of support.
Why do I need Life Insurance?
Life is uncertain and it is not possible to predict exactly the different events that can occur. However, there is always a need to earn income to support yourself and your dependents in case of any eventuality. Life Insurance provides for financial security in the wake of such unfortunate events like death or on the inability to earn due to physical disabilities. Besides providing for financial security in the case of one’s untimely death, it can be used to accumulate a kitty for your old age, to systematically build assets, to fund your child’s education and also to save on taxes.
Who can buy a policy?
Any person who has attained majority and is eligible to enter into a valid contract can insure himself/herself and those in whom he/she has insurable interest.
Policies can also be taken, subject to certain conditions, on the life of one’s spouse or children. While underwriting proposals, certain factors such as the policyholder’s state of health, the proposer’s income and other relevant factors are considered by the insurance company.
Life insurance Vs Other savings options
A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.
At the time of taking a policy, the policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.
Protection:
Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.
Aid To Thrift:
Life insurance encourages ‘thrift’. It allows long-term savings since payments can be made effortlessly because of the ‘easy installment’ facility built into the scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly).
Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.
Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.
Assesses can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.
Money When You Need It:
A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.
Children’s education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one’s retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).
Why is it better to buy insurance at an early age?
There are many advantages of buying an insurance policy as early as possible. First, the consideration for an insurance policy or the premium is significantly lower at younger ages (the reason for that is as you grow older, the mortality risk is greater and hence insurance companies would charge a higher premium to cover that risk). By buying a policy at an early age, you would be able to protect your dependents against the unforeseen event like death at a much lower overall cost. Second, as you grow older, the chances that you would suffer from health problems are higher, and obtaining insurance could become difficult at that stage even if you want to. Third, if you are buying insurance with a view to create a large sum of money at a pre-determined age to meet certain planned expenses like your children’s education or for your post-retirement expenses, then saving early on in you life is highly beneficial. You will have to save much more or for longer durations to get the same amount of money if you start saving late in your life.
How much Life Insurance do I need?
The need for life insurance is based on various factors including your current lifestyle, expected outflows in future, your present age and your family size. The first step should be to estimate how much financial support your dependents would need in order to continue to enjoy the same lifestyle as they enjoy today in the event that you are not around to provide that support. In estimating this support, you should consider all regular monthly expenses including food, rentals, conveyance, school fees, medical expenses, any debts to be repaid, etc. and also estimated ones like for children’s education and marriage and your expected needs after retirement. Always provide for unforeseen contingencies that your dependents might need during the period of adjustment. Based on this analysis and the expected returns on the investments in future, you can work out a sum of money that would help your dependents achieve financial independence even if you are not around to support them.
While the situation of every individual would be different, and should be evaluated separately, one rule of thumb is to buy a cover for an amount equal to 6-10 times your annual income. Clearly, the need for insurance is not static and will change as your life-stage changes so you must re-work the requirement periodically and review the coverage available from time to time. It is advisable to speak to a trained financial consultant / insurance advisor to determine the extent of coverage that you require.
Are my existing policies enough for me?
(I already have life insurance policies, what should I do?)
Your need for protection is not fixed as life progresses, there are new developments that happen and these developments impact the extent to which you need protection. Hence the requirement for protection should be reviewed periodically and if there is a shortfall, it should be covered as soon as possible by buying additional insurance cover. For the purpose of illustration, some of the events in your life that are likely to have an impact on the levels of protection that you need are:
- You or your children are getting married.
- You have become or are becoming a parent.
- Your parents or your spouse have retired / are retiring and are / will be financially dependent on you.
- The health of your dependents or your own health has taken a downturn.
- You have acquired large capital assets like a new home or a car.
- Your children are about to enter school or college.
- You or your spouse has got a large raise in salary or the family income levels have significantly increased.
Life insurance products can be classified into two broad categories:
- Pure protection plans or Term plans
- Protection cum investment plans like Unit Linked endowments.
Pure protection plans or Term plans are those products that provide benefit only upon death of the life insured. These are the cheapest form of life insurance and are suitable, especially in younger ages when you are yet to build up your finances.
Protection cum Investment plans
These plans not only insure the individual to the risk associated with one’s life but also help in wealth creation. Portion of the premiums paid by insured go in for insuring life and the balance is invested on their behalf by the insurance company. The unit linked plans offer huge flexibility and complete control to insured on how these investments need to be managed. They also provided options to withdraw money from the policy incase of need or to invest over and above the premiums in case of extra cash flows.
Happy Reading.
With Regards,
YOURFINANCEUGURU.COM
Very interesting and resourceful article on the topic of life insurance. Many people don't understand what this policy covers and you gave really good tips, like starting early in life with this coverage. Thank you so much for sharing - Mr. Driving Safety
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