Everything About Life Insurance you Should Know
Life insurance is not a new term to any of us. However, there are a lot of myths related to the ideal age to start investing in life insurance plans and about the benefits and types of insurance, not to mention risk in some types of insurance. Some people are even under the impression that capital invested in insurance is always lost, if the policyholder survives the policy term. People end up wasting their capital on policies that are either too short or too long, or on policies that do not suit their requirements, simply because their understanding of the concept is rather half-baked.
Life insurance agents will tell you what they have been trained to say, or whatever they need to tell you to make a sale and take home their commission or meet their targets. Similarly, life insurance companies will use marketing gimmicks and smart branding of features to make their product look better than the next. This is just fair game, folks, and part of business. Life insurance policy buyers need to wise up and develop sufficient understanding, in order to make more discerning choices.
In today’s post, we are going to delve into the key points related to life insurance that should help you to make more informed decisions on life insurance investments in the future.
What is life insurance?
Life insurance is a long term investment vehicle aimed at providing financial security to the policyholders’ loved ones, or dependents, after their death.
A life insurance policy is a legal agreement between the buyer of the policy and the seller of the policy (that is the insurance company) that in the event of death, critical illness or terminal illness of the policy holder, a pre-agreed sum will be paid out to a predetermined nominee or set of nominees, in a specified mode.
To obtain this core benefit, the buyer of the policy agrees to pay a certain sum (premium) at predetermined intervals. The terms and conditions of the policy will usually indicate the period for which the said cover will remain in place, and other factors like cause of death.
Does that mean that if you survive the policy, you end up losing all your money? Well, that brings us to our next point for this post, because the answer to that depends on the type of life insurance policy plan that you have opted for.
Types of life insurance
This is the most important part of this post. Be sure to understand and use your knowledge to evaluate and sift through plans with care:
Whole life insurance plan: This type of policy covers you for the duration of your life, whatever it is. For as long as the policyholder lives, the life cover remains intact and when the policyholder dies, the payout is made, according to the pre-agreed terms, to the survivors or dependents.
Endowment life insurance policy: In this life insurance policy plan, the life cover stays in place for a predetermined period, or for a certain number of years. At the end of the period, or upon the policyholder’s death and in some cases even if the policyholder is terminally or critically ill, the predetermined sum, or life cover, is paid out as agreed. Although the premium on such a policy is high, the fact that payout occurs either way makes it more worth it for many insurance buyers.
Term insurance policy: In a term insurance policy, the duration of the coverage period is of utmost importance. In term insurance policies, the predetermined sum is paid out only if the policyholder dies or is critically or terminally ill (depending on the terms and conditions) within the policy period. This type of insurance is more affordable than other types of insurance because there is a cap in the coverage period and a chance that the policyholder will survive the coverage period and as a result, forgo the life cover amount.
Money back policy: In this type of life insurance plan, the sum assured is paid back at predetermined intervals throughout the policy term. This might be suitable for people who know that certain moments of high capital requirement are on the way, like college fees, marriages and so on.
Hybrid policies: Today’s life insurance companies try to appeal to a wide variety of customers and are very cognisant of the fact that life insurance buyers have a world of options at their fingertips. You might be able to find policies that combine certain elements of the above types of policies.
ULIP: This type of insurance puts a part of the investor’s capital into providing insurance and another component into the stock market. Investors get to choose their stocks and what they get back from this second component, is linked to how the stocks perform. In other words it is variable. This type of insurance comes with serious capital risk and investors should be cognisant of this stock market risk no matter how the life insurance agent may try to sugarcoat it. Perhaps you do have a risk appetite, but do read more about this in our section below on top considerations.
Points to consider
If you are looking to bring home the best life insurance policy, join the club. So does everyone else. Here are some points you should consider, in order to successfully choose the best life insurance policy for your needs:
1. Your age and the value of the payout (considering inflation) in the decades to come
2. The risk you are taking when buying a term insurance plan or an ULIP – are there other investment options that can offer comparable payout (if not life cover) with less risk?
- For instance, a fixed deposit or PPF will pay out a guaranteed sum by a certain date to you or your nominee. It isn’t compulsory for you to die for the payout to be made.
- Similarly in a ULIP, you select stocks directly and can only change your choices on specified dates. If you do have risk appetite you might prefer a mutual fund where a fund manager at the asset management company (mutual fund house) manages your capital for you (chooses stocks and bonds to invest in and the correct timing to enter and exit) or if you are confident choosing stocks, then you may as well invest directly where you change your stock holdings whenever the market is right, rather than on specific dates.
3. Have you shopped around and compared premium rates and life cover amounts?