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Insurance covers risk, life insurance covers the Risk to life. Life insurance has become an important tool of providing security to the family in case of premature death of the earning member. It has come a long way from being a simple life insurance; from a protection to family against the earning member’s death to investment and wealth generation. Know your purpose of buying life insurance. It could be:
Lifetime income for dependents
Children’s education fund
Get added income along with insurance
Provide for the retirement years
Life insurance still remains Risk Cover first. It insures life. Other benefits are added to support and cater various situations that one may face in life. It is as important to understand that in most cases, insurance is a long Term contract and the terms cannot be changed in between. Each life insurance type has a specific purpose and we need to understand that and compare with our needs before finalizing anything.
Term insurance is a pure risk cover plan taken for a fixed duration to cover a specific risk. You pay a specific Premium for a specific sum Assured for a given period. The Policy ceases as soon as the payment term is over. It is the cheapest life insurance one can get; maximum cover for minimum possible premium. The reason for this is that there are no returns if the Insured person outlives the insurance term. The policy simply stops. Though there are options like term plan with return of premium option, the premium is higher.
It is ideal for those who are sole earning members, have dependents and who want to cover the dependents in case something happens to them. In case one has liabilities like home loans etc. and also has dependents, Term Insurance becomes even more relevant.
Child plans make sure that the child’s financial requirements are met with effectively at their crucial life stages. They work more like investment plans where you pay a specific premium over a given period of time and get back a substantial corpus when the child reaches a certain age. The duration of the policy depends on the child’s age.
Child plans usually come with payer benefit or Waiver of premium attached. So, in case something happens to the parent or the payer of the policy, it still remains in force, without the premiums being paid and the child gets the Maturity amount as planned.
It is ideal for people with young children who wish to plan for their children’s higher education and training needs. It can be planned as a means to be prepared for extra expenditures for professional training. One can choose between a pure endowment child plan and child plan that ensures periodic payments.
Investment plans combine the benefits of investment and wealth generation along with the security of insurance. They can further be classified into Traditional plans like endowment and money back plans or unit linked insurance plans commonly called ULIPS.
Endowment plans are investment linked insurance plans. They have a fixed maturity date for a fixed sum assured. The premium is calculated on the basis of maturity amount and duration of the policy. Every parameter is specified in an endowment plan. Some plans have the option of Bonus payments. This depends upon the performance of the insurance company, calculated on the sum assured. The amount is added to the maturity amount.
It is good option for those who anticipate major expenditure at a particular time. The insured gets a lump sum amount on the maturity date that may become a good financial support.
Money back plan is also traditional investment linked insurance plan. It gives periodic payments of fixed percentage of the Sum Assured to the insured person during the policy term. If the policy holder survives the policy term he gets the maturity amount. If he/she dies during the term of the policy, the nominees get total sum assured irrespective of the previous payments. Some money back plans may also have the bonus option. The bonus is added to the final payment of the maturity amount or the sum assured as the case maybe.
It is preferred by those doing life stage planning who may require financial assistance at regular intervals over a period of time. The added advantage of getting full sum assured in case of an eventuality without deducting any previous payments makes it even more attractive when planning.
Unit linked insurance plans or ULIPs are market linked insurance plans. Here the investment or the wealth generation part is linked to the market. While in the traditional plans the risk if any is borne by the insurance company, in a ULIP the market linked risk is borne by the insured. If the market is doing well, the policy may do much better than any traditional plan. If the market is down, the returns may be lower.
t is a better option for those who can afford to take the market linked risks. Here the insured have the option to choose the type of funds they wish to invest in, based on their risk profiles. These ULIPs are more flexible and transparent but riskier.
Pension plans also called retirement plans or annuities are somewhat contrary to insurance yet included in insurance plans. They do not cover the life of the insured in case of untimely death but ensure income if one outlives the earning age. The Annuity can be immediate or deferred depending upon the stage at which the plan is taken. In a Deferred Annuity plan, a fixed premium is to be paid to the insurance company during the decided accumulation phase. On vesting up to a 1/3rd of the accumulated amount can be withdrawn and the rest (or even whole of the amount) is used to purchase annuity. Immediate annuity allows to purchase immediate annuities with a lump sum amount that can start paying regular Pension immediately.
One must keep in mind the purpose of buying a plan. Make sure that you use the Free look period to read through the policy document and see if it fulfills your purpose of buying a particular plan