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What is life insurance?

Life Insurance Basics

What is life insurance?

Life insurance is a financial product that allows you to provide Life insurance is a financial product that allows you to provide for your dependents in the unfortunate event of your death and helps your family maintain the standard living that they are accustomed to. If you have any family members financially dependent on you then you should consider purchasing a life insurance policy. This will help make up for the income your family loses when they lose you.

How does a life insurance policy work?

When you buy insurance, you enter into a contract wherein you pay a monthly amount to the life insurance company in return for which your beneficiaries receive a death benefit when you die. A death benefit is the amount of insurance coverage that you have purchased. Not paying the monthly amount (premium) can lead to a lapse in your policy and the insurance company will not be required to pay your death benefit in such an instance.

Why do I need an insurance plan?

Insurance plans serve different purposes at different stages of one’s life. As a young individual, one can use them as a tax planning tool. Insurance plans help save for future needs like marriage, higher education and health insurance provides protection against the unknown.  For married individuals with children, life insurance plans can double as savings plans for higher education and marriage. Health insurance that protects the family are also to be considered at this stage in your life. Once you start earning, it is equally important to consider retirement plans and pension plans that provide for steady income in your retirement years and help you stay financially independent.

When should I consider buying life insurance?

You need to ask yourself; “If I die today will someone be directly affected by the loss of my income?” If the answer to that is “Yes”, you need to consider buying life insurance immediately to reduce the financial blow on your loved ones.  Planning for your retirement, saving for your future goals are also some of the things life insurance does for you in which case life insurance should be considered the day you begin earning.

How much life insurance cover should I have?

As a rule of thumb your dependents should be able to maintain the same lifestyle as when you are alive for a minimum of 10 years . A multiplication of your annual income by ten  is usually the first step. However, there are other things to consider like inflation, college expenses and healthcare which are probably not part of your current expenditure Reach out to our advisors to do the analysis for you  or  use the calculator

What is the difference between protection and investment?

In insurance terms, “protection” is the act of securing your family/loved ones. This is very different from an “Investment”, which is the purchase of an asset (tangible/intangible) with the expectation that it will generate some income or appreciate in the future.  An insurance policy with an investment option could provide the dual benefit of protection and investment. However, a pure insurance policy is a means of financially securing your loved ones in the face of an unfortunate event.

Difference Between Unit Linked Insurance Policy (ULIP) & Equity Linked Savings Scheme (ELSS)?

A ULIP is an insurance cum investment plan, that provides the investor an option to invest in equity, debt, hybrid and money market funds. The minimum sum assured under a ULIP is 10 times the Premium (7 if age at entry is more than 45).
ELSS on the other hand, are diversified equity funds that invest in stock i.e. pure Investment options.
ULIP offers a switch option i.e. a change in the ratio of invested amounts, as per risk appetite, however, ELSS does not permit any switch until the lock-in period is over.  Often the two are confused with each other as both provide investment and tax saving options.

How is Life Insurance different from Mutual Fund?

Life insurance is a protection plan for the holder and his/her beneficiaries. They can be classified into 2 types; Term Plan – Pay premiums over a specified period in exchange for benefits when you die) and Whole Life Insurance, which not only protects you throughout your life but also earns an income through investments. These are low risk – low return options, that provide tax rebates and tax-free benefits to you and your beneficiaries. High fees and administrative costs make it a less likely investment option.

Mutual Funds on the other hand are pools of money provided by an investor, invested in diverse portfolios and investment options. These are handled by fund managers who also have the liberty to invest them as they deem fit. These are high risk – high return options, and thus cannot be treated as a protection plans. Not all mutual funds are tax free.  Only one’s invested in government approved funds have tax exemption. Mutual fund earnings are often reduced by taxes and fees.

What is the difference between a rider and a policy?

A policy is the standard policy that the insurance company offers providing pre-determined benefits to all its subscribers. A rider is an add-on or a supplementary policy to the basic insurance policy, that provides specific added benefits at an additional cost. Basic policies sometimes do not cater to the individual needs of a buyer, a rider allows the buyer to customise the insurance plan to suit his/ her needs.

What is the difference between a term plan and an endowment plan?

A term plan is a pure life cover, that is essential to have if you have dependents. The plan is for a specified period and you get money only in the event of the policy holder’s death. If the policy holder survives beyond the term of the insurance plan no benefit is received. The premiums for a term plan are relatively lower. An endowment plan on the other hand is a combination of insurance and an investment. It provides a life cover as well as an investment opportunity. Premiums under this plan tend to be higher.

What is the difference between a linked plan and a non-linked plan?

Linked insurance plans basically refer to ULIPs where a part of your premium is invested into equity based funds and the money market. This is done by a fund manager. Non-linked plans are conventional insurance plans like term plans and health insurance. These usually invest in low risk-return options and often, offer guaranteed returns.  The benefits under linked and non-linked plans also differ. ULIPs offer the flexibility of investment and switching between funds and withdrawals. Non-linked plans allow you a fixed premium based on sum assured and offer bonuses, depending upon policy terms.

What is the difference between a participating plan and a non-participating plan?

Participating plans not only offer you the standard sum assured, but also allow you to participate in the profits of the Company i.e. it pays you dividends in case of profits. In this case the premiums are pooled together and invested by the insurance company itself and not a third-party fund manager.  These dividends are not guaranteed. Non-Participating plans only pay you guaranteed benefits on death / maturity.

What is a ‘Whole Life Insurance Policy’?

Whole life insurance policy is one, with both insurance and investment components. The insurance component pays the sum assured in the event of death/ maturity of the policy, while the investment component develops a secure cash fund the policy holder can borrow against or withdraw whenever required. This is the most basic type of life insurance and essentially provides security for the ‘whole life’ of the life assured.