A life insurance policy is an agreement between an insurance company and a policyholder that offers financial coverage under which in the unfortunate event of the insured person's demise during the term of life insurance plans the insurance company guarantees to pay a certain amount to the nominated beneficiary. In exchange, the policyholder agrees to pay a predefined amount of money as premium either on a regular basis or as a single premium. Buying Life Insurance has many advantages including its usage as a loan collateral, smooth continuity of business and also tax benefits.
The purest and most basic form of Life Insurance is called Term Insurance Plan. Term Plans help you safeguard your family from financial worries that arise due to unfortunate circumstances. Term plans are pure risk cover plans with or without maturity benefits. These pure risk plans cover your life at a nominal cost for a specific period or term.
They are all the more important if you are the chief wage earner in your family. No matter how much you have saved or invested over the years, sudden eventualities, such as death or critical illness, always tend to affect your family financially apart from the huge emotional loss. Term plans also let you avail of the benefit to cover your outstanding debts like mortgage, home loan, etc. In case something happens to you, the financial burden is borne by the insurance company and not your loved ones.
High insurance cover at lower costs
Financial security against loans and mortgages
Additional rider benefits like critical illness, accidental death/ disability
Rewards you for healthy lifestyle with lower premium rates for non-tobacco users
Option to pay premiums single, annually, half-yearly, quarterly or monthly for regular & limited premium paying term policy
While buying a term insurance plan, the buyer must evaluate the following features:
Claim Settlement Ratio
The insurer’s claim settlement ratio provides a clear picture of the insurance provider to the prospect policy buyers. The ratio of claim settlement is released by the Insurance Regulatory and Development Authority (IRDA) India every year. A claim settlement ratio that is consistently good indicates that the insurance provider has been quick and robust in its claim settlement process.
The solvency ratio is something that tells whether the insurance provider chosen will be capable financially for settling the claims if the requirement arises. As per IRDA, every life insurance provider should maintain a solvency ratio of 1.5 at least.
Some insurance companies offer the option of enhanced cover in the term insurance policy. In this option, the policyholders can enhance the coverage of the policy under particular circumstances or critical situations.
While purchasing a term plan, it is important to check the rider benefits offered by the insurance company such as terminal illness, critical illness etc. An insurance rider is extra to the essential plan that offers advantages far beyond the subject of the policy in case of any eventuality.
The premium rate of a term insurance plan plays a vital role while purchasing the plan. Hence it is important to compare term insurance policies online and choose the term plan which offers higher coverage at an affordable premium rate. Additionally, choose a company that provides discounted premiums to non-smokers.
Below are some of the key factors that affect the premium of a term insurance policy:
Smoking/ Drinking Habits
Child plans are a combination of investment and insurance that help in financial planning for your child's future needs. As a parent you can secure your child’s future with plans that include children insurance plans and children education plans. A child plan ensures payment of a lump-sum amount to a child on maturity to cover higher education or marriage expenses.
A child plan helps you to build a corpus for your child and save enough for his/her future. With timely premium payments, the lump sum amount helps the child meet later educational expenses without any stress or financial burden.
A child's education plan is enough to pay for higher education, even in a foreign country. The corpus depends on the terms and conditions of the plan and on the amount invested through premiums.
Kitty for Medical Treatment of the Child
Child plans also allow the option of withdrawing money during the tenure of the child investment plans. This can be used for the medical treatment of the child if he or she falls ill. Such partial withdrawals can come in handy when the child is hospitalized due to an ailment, a minor accident, or a serious medical condition. The best child plan helps to reduce the financial burden caused by medical expenditure and such payouts act as an add-on for one's health insurance plan.
Waiver of Premium
The consequences of a parent’s death can be severely damaging for the child’s future. The insurance company offers a premium waiver if the parent (i.e., the insured) passes away during the policy term of a child education plan.The premium waiver benefit often comes inbuilt with the best child education plans and if not, then is available as a rider. The child receives a lump sum amount promised at the time of purchasing the best child plan and does not have to pay the balanced premium.
Some child savings plans provide regular income to children, which is equal to 1% of the sum assured if parents are not around to pay the premiums.
Collateral for Higher Education Loans
A Child plan comes in handy if one intends to secure a loan for higher education as they can be used as collaterals. They can be used as collateral for other child-related borrowings as well.
You can access your funds during the term in the form of partial withdrawals, subject to conditions. This takes care of your child’s different educational milestones.
A children education plan helps you save tax. You are not only eligible for annual deduction from your total income of upto Rs 1.5 lakhs under Section 80C of the Income-tax Act, 1961, for premiums paid for child plans but you also benefit from tax free maturity proceeds under Section 10(10D) of the Income-tax Act, 1961, subject to fulfilment of the terms and conditions stated therein.
There are following types of child plans available:
ULIP plan: This plan offers market-linked returns on investment. A part of the investment goes towards securing the child’s future and the other part is invested in a mix of equity and debt. Along with saving for your child’s future, you have the potential of benefitting from market-linked returns.
Savings plan: If you want to save for your child’s future without any market exposure, you can opt for a savings plan. It combines life cover, maturity benefits, along with providing you tax benefits.
Single-premium plan: Instead of annual premium payment or multiple payments a year, parents could opt for a single premium plan, which gives them the same benefits. One no longer has to worry about setting aside money or remembering to pay the premium every time.
Child insurance plans do not cover the following eventualities:
Drug or Alcohol Abuse
In case the policyholder dies due to drug overdose or alcohol abuse, the nominee does not receive any benefit.
Self Harm or Suicide
The nominated beneficiary does not receive any claim amount in case of the death due to suicide within one year of buying the child policy.
In case the insured happens to take part in any adventurous or risky sports like skydiving, rock-climbing, racing, etc. that leads to death, the insurance provider does not entertain claims.
Any criminal or illegal act or act of war leading to the demise is also not covered under a child plan.
The standard set of documents required for starting an insurance plan for your children are:
Proof of address: Any document from a passport, driving license, Aadhar card will work.
Policy form: This form will contain all details of the plan and the terms you opt for.
Income proof Parents who plan to buy an insurance policy for their children need to show the source of income for paying the premiums like salary certificate.
Identity proof: The commonly used identity proofs in India include PAN card, aadhar card, driving license, voter ID, etc.
Proof of age: You could submit your passport copy, birth certificate or your education marksheets.
Unit Linked Insurance Plan is a product that unlike a pure insurance policy gives investors the benefits of both insurance and investment under a single integrated plan. Unit linked insurance plans allow for the coverage of an insurance policy, and provide the option to invest in any number of qualified investments, such as stock, bonds or mutual funds. Depending on your risk appetite, you have the option of choosing from a host of funds having varied degrees of risk exposure. Flexibility and transparency are some of the other attractive features that make ULIPs an attractive long term investment option.
When you put money away in a ULIP every month, you’re making disciplined savings a habit. Investing in ULIPs helps inculcate the habit of saving and investing, both of which are essential for building long term wealth.
One of the most significant benefits of ULIP is that it offers life cover along with investment options. So, apart from creating wealth for yourself, these plans ensure that your family will be taken care of financially if anything untoward were to happen to you.
Market Linked Returns
ULIP plans present an opportunity to earn market linked returns. A part of the premium paid in a ULIP plan is invested in funds which invest in various market instruments including debt and equity in varying proportions. The returns you receive grow your money and could help you achieve your long-term financial goals.
A unit-linked plan offers death benefits in case of the death of the insured during the policy term. While the death benefits are catered to as SA together with the value of the fund, benefits may differ based on the cause of the demise of the insured.
A ULIP plan also comes packed with maturity benefits in case the policyholder endures the maturity period of the plan. Usually, maturity benefits are catered to the insured as the sum of the value of the fund. Nevertheless, some insurance companies may cater to add-on benefits based on the terms and conditions.
Long Term Investment
The longer you stay invested in your ULIP, the more time you have to enjoy bonuses such as loyalty additions or wealth boosters. Once you invest, you should commit to it for the long-term.
ULIPs offer tax deduction benefits. Both, the premiums and the returns can be exempt from taxes as per Sections 80C and 10D of the Income Tax Act, 1961 respectively.
ULIP plans are categorised based on the purpose they serve:
ULIP for Retirement
In this plan, you need to make the payment during your tenure with your employer, which is automatically collected in a corpus amount, which is paid in the form of annuities to a policyholder after retirement.
ULIP for Wealth Creation
This plan primarily accumulates your wealth over a period of time. Such plans are recommended for people who are in their late twenties and early thirties and by investing in this plan; they get the flexibility to fund any future financial goal.
ULIP for Children’s Education
As a parent, you want to ensure that no unforeseen event affects your child’s overall education in any condition. There are several ULIP plans that provide money in small chunks in the key events of your children’s life. This ensures that no unforeseen event hinders their life in any manner.
ULIPS for Health Benefits
In addition to some common benefits, ULIPs efficiently provide financial assistance to meet medical contingencies.
Below is a comparison between ULIPs and Mutual Funds:
Investment cum Insurance Plans
Pure Investment Products
Only after a lock-in period of 5 years
Can be withdrawn anytime
Alternating between funds is allowed and not subjected to taxation
Switching is permitted between schemes of the same fund house. However, it’s treated as a redemption and the resulting capital gains are taxable.
Mortality charges, premium allocation charge, fund management charge and administration charges
No entry load, the annual fund management charges apply and an exit load, if applicable.
In addition to some common benefits, ULIPS efficiently provide financial assistance to meet medical contingencies.
Premium Allocation Charges
The charges, namely premium allocation charges are imposed - beforehand on the premium paid by the investor. These are the initial expenses incurred by a company in issuing the policy, like medical expenses and underwriting cost.
Policy Administration Charges
These charges are deducted regularly for the recovery of expenses borne by the insurance company for maintaining a life insurance policy.
These charges are levied for premature encashment of units. They are charged as a percentage of the fund value and depend on the policy year in which the policy has been surrendered.
Depending upon the age, and the amount of cover, these charges are levied towards providing a death cover to the insured.
Partial Withdrawal Charges
Lump sum withdrawals are allowed from the fund after the lapse of three years of the policy term and subject to pre- specified conditions. However, such withdrawals attract charges, as mentioned in the respective policy brochures.
You can switch between the funds available to suit your changing needs and goals. In a policy year, a fixed number of such switches are available free of cost. Subsequent to this, each switch would attract a certain charge. These charges are deducted by cancelling units proportionately from each of the funds you have chosen.
Retirement Plans also called pension/annuity plans are a category of life insurance plans that are specially designed to meet your post-retirement needs such as medical and living expenses. To ensure that you can enjoy your golden years with financial independence, these policies help you plan for your expenses and secure your future.
Some of the key benefits of these plans are as follows:
No Investment Cap
When there are investment caps upon POMIS and Senior Citizens Savings Scheme there is no such investment cap when it comes to an annuity.
No Risk of Reinvestment
Probably the greatest favourable position that annuities offer is that they dispose of reinvestment chances. Since in India we are moving towards lower financing costs, the hazard is that when you go to reinvest the head, you may get a lower pace of premium. Momentary instruments like the Post Office Monthly Income Scheme (POMIS) convey reinvestment chances. In any case, when you put resources into an annuity, you are ensured a similar pace of payout forever.
An annuity gives you the affirmation that you will keep on accepting cash every month for a mind-blowing remainder. The insurance agency assumes the danger of making sense of how to bring in the cash keep going as long as you live so you don't need to stress over it. Pick your installment recurrence. You may decide to get your fixed payouts at stretches that suit you best - month to month, quarterly, half-yearly or yearly.
There are following types of annuity plans:
An Immediate annuity is a contract that is purchased with a single lump-sum payment and in exchange, pays a guaranteed income that starts almost immediately. An immediate payment annuity is especially suitable for retirees who are concerned about outliving their savings.
Deferred annuity is a contract which allows you to save a regular amount of money for your retirement. This type of annuity has two main phases, the savings phase (accumulation phase) in which you invest money into the account, and the income phase (payout pase) in which the plan is converted into an regular annuity and payments are received.
Well periodic annuity essentially provides the funds to the annuitant at the regular point in time. This is more similar to the system of a pension plan wherein the intervals could be based on every month. Besides, the payments could also be done in a phased manner from time to time towards the end of 5th, 10th and 15th years even though payments of the premiums have been earlier done or not.
Lump Sum Annuity
Some annuity plans give the alternative of giving a single amount payout. Such a singular amount payout is normally discretionary and accessible after a specific period. In any case, by and large, the whole retirement advantage can't be gotten as a single amount.
The variable annuity plan includes varieties in the annuity payments between one payout and the following. This variety is in significant part connected to the market execution of the speculations made by the benefits store or annuity plan that the individual has put resources into.
In a fixed annuity plan, the payments will stay consistent over the whole time frame during which the payments happen. A fixed annuity is ideal for a risk averse person because this framework ensures regular payment to the person during retirement.
Minimum and Maximum Entry Age: For most pension plans, the minimum age of entry is generally 30 while the maximum entry age is 75.
Minimum and Maximum Vesting Age: In most cases, the minimum vesting age is 45 years while the maximum age is 80 years.
Policy Term: Depending on the chosen pension plans the policy term generally ranges from 10 years to 30 years.
Annual Premium Amount: There is no maximum limit, and the minimum annual premium amount is close to ₹ 50,000/- in most cases.
Premium Payment Term: Generally, the premium has to be paid for the same period as that of the chosen policy term
Endowment plans are traditional long- term, regular savings plans with a fixed term. They are an ideal choice for customers who want to avoid risk. At the end of the term you receive the sum assured plus accrued /guaranteed bonuses that have been declared over the years, as a lump sum. In case of unfortunate death the sum assured with or without bonus as per the policy condition is paid to the nominee.
Death as well as Survival benefits: In case of demise of the insured, the beneficiary/nominee of the policy gets the sum assured along with bonuses. Also, the insured is allowed to get the sum assured if he/she outlives the policy.
Higher returns: An endowment policy is helpful in building a corpus for future and providing financial protection to your family. The payout for survival benefit and death benefit of an endowment plan is higher than that of a pure life insurance policy i.e. Term Plans.
Premium payment frequency: The policyholder can make payment of the premium based on the policy chosen by him/her. Payment can be done on monthly, quarterly, half-yearly, and on yearly basis.
Flexibility in Cover: Riders like critical illness, total permanent disability, and accidental death can be added to the base plan and enhance the life cover. In addition to this, there are a few plans that offer waivers in the premium payment on total permanent disability or critical illness.
Tax Benefits: The policyholder is entitled to get tax exemption on both premium payments, maturity and final payouts under the Section 80C and Section 10(10D) of the Income Tax Act, 1961.
Low Risk: Traditional Endowment policies are considered safer as compared to the other investment option such as the Mutual Fund or the ULIP’s because the amount here is not directly invested in equity funds or the stock market.
There are following types of Endowment plans:
Unit Linked Endowment Plan Under Unit Linked policies, the insurance premiums are bifurcated into multiple units held under a specific investment fund which can be chosen by the policyholders.
Full /With Profit Endowment Under this plan, the basic amount i.e. sum assured will be provided to the policy holder. This amount is guaranteed right from the start of the policy. However, the final payout provided is comparatively higher depending on the bonuses announced from time to time by the company. The bonuses once declared form a part of the policy are paid out in the event of death of the policyholder or maturity of the policy.
Low-Cost Endowment This type of endowment plan was designed with an intention of allowing the policyholder to accumulate the funds which have to be paid after a specified time period, usually mortgage.
Non-profit Endowment These are endowment plans which do not participate in the profits generated by the company (bonuses). However, in order to make them competitive against other products, companies offer guaranteed additions in these plans which help in generating returns for the policy holder.
The following optional benefits can be chosen with an endowment plan:
Critical Illness: If the policyholder is diagnosed with a critical illness like cancer, heart attack, paralysis, kidney failure, etc. The policyholder will get a lump sum amount.
Accidental Death: When the policyholder opts for this additional rider, the insurer will pay accidental death benefit in addition to the Death Benefit to be given to the beneficiary.
Disability: The disability rider proves to be highly beneficial to the policyholder if he/she suffers from a partial or permanent disability.
Waiver of premium: Through this rider the insured is not liable to pay the premiums of the endowment policy in case the policyholder suffers from a critical illness or is permanently disabled.
Hospital Cash Benefit: Hospital Cash Benefit provides you for daily allowance as well as post- hospitalization benefits, in case of hospitalization of the policyholder.
A whole life insurance policy or permanent life insurance provides life coverage until the death of the life assured. The policy stays in force throughout the life as long as the life assured pays the premium. The sum assured or the coverage is decided at the time of policy purchase and is paid to the nominee at the time of death claim – when the life assured dies. Usually, the maturity age is 100 years. If the life assured dies before the age of 100 years, the nominee receives the sum assured. However, if the life assured outlives the age of 100 years, the insurance company pays the matured endowment coverage to the life insured.
This means that on a whole life policy, the premium amount is set and guaranteed and not liable to vary throughout the life of the plan. So, in case, you are paying Rs. 2500 per month for your insurance, you will continue to pay Rs. 2500 per month forever.
In case of the death of an insured life, the policy being still in force and all premium payments being fully paid till date, the nominee will receive the total sum assured on the day of death along with applicable accrued bonuses, if any.
Protection for Life
A whole life plan is mainly engineered to deliver estate to the heirs of the policyholder in the form of the payment of an assured sum together with bonuses, if any upon the policyholder’s death.
However, the whole life plan also delivers the payment of assured sums together with bonuses, if any in the form of maturity claims upon completing a stated age or upon expiry of the premium payment term from date of starting of the policy.
Tax benefits u/s 80C and 10 (10D) of the Income Tax Act, 1961
The premium paid towards the policy is tax exempted under the Section 80C of Income Tax Act, 1961. The pay-out made to the nominee/policyholder is also tax free under the Section 10(10D) of Income Tax Act, 1961.
Cover For Life
Whole life plan provides coverage until the death of the life assured. The insured is covered against the risk of death for his entire life or up to the age of 100 years.
Assurance Of Coverage
The coverage of whole life insurance promises to be the financial source for the family in case of the demise of the insured.
Upon maturity of the policy, you get the promised sum together with the accrued bonuses as a lump sum under the endowment option. Alternatively, some plans also give you survival benefits in the form of periodic payments. This means that the total accrued bonus till the completion of the premium payment term is given as lump sum and then a percentage of the sum assured is paid out till the life insured survives or completion of the policy term.
The premium paid towards the policy is tax exempted under the Section 80C of Income Tax Act, 1961. The payout paid to the nominee is tax free under the Section 10(10D) of Income Tax Act, 1961.
Serves as A Source of Cash
Experts believe that people should usually keep aside six to nine months of expenses in liquid form to be utilised in times of emergency such as illness, or job loss. While it is not easy to maintain such a large repository of money, a whole-life plan delivers a large amount which is received at the end of the premium payment term.
Access to Loans
You can obtain a loan against a life insurance policy when the policy has completed 3 years.
Building a Legacy
Whole life plans are a great option at helping you leave a legacy for tomorrow. For instance, a whole-life plan for both spouses will deliver an extra financial resource that can be depended upon at a later part of retirement. In case one of the spouses dies, the policy death benefit will go to the surviving spouse.
Further, the policy of the spouse will go on to deliver a minimum bequest to children or grandchildren after the insured person's death. This makes whole-life plans a good idea for future planning of wealth creation and its passing to the heirs.
There are followings types of whole life insurance:
Non-Participating Whole Life Insurance: A non-participating whole life plan is a low-cost life insurance policy with a level premium and face amount feature. It does not pay any dividends nor does it receive any bonuses as it is non-participating.
Participating Whole Life Insurance: In this plan, the premiums are invested by the company. The profit or the excess amount that the company has earned through various investments, savings left out of cost expense, etc. is distributed as bonus to all policyholders. However, there is no guarantee of bonuses being declared every year.
Level Premium Whole Life Insurance: In this payment plan, premiums are paid regularly till the insured is alive. The premiums remain constant throughout the policy term.
Limited Payment Whole Life Insurance: The policyholder pays the premium for a limited period of time, under this plan. But, the life protection cover is for the whole life or till age 100. The difference is also the amount. Since it is for a limited period, the premium amount is relatively higher than the regular premium in whole life plans.
Single Premium: A whole life plan where a large sum of cash is paid as payment guarantee to the beneficiary. While a single-premium policy is fully funded, the money invested builds up rapidly, making for quite a large benefit even in the event of the policyholder's sudden demise.
Indeterminate Premium: This is a kind of whole life policy that has two premium rates. First, a maximum guaranteed rate and second, a lower rate. The carrier charges the lower premium rate while the policy is invested in for the first time. After maintaining that rate for a given time period, the insurer utilises its actual mortality, interest, and expense experience to establish a new premium rate that may vary from the previously premium rate.
A money-back policy is one which gives money-back at regular intervals. This money-back is paid during the plan tenure and is a percentage of the Sum Assured. Money-back pay-outs are called Survival Benefits. These benefits are paid during the plan tenure and on maturity, the remaining Sum Assured is paid along with vested bonuses. However, if the insured dies during the plan tenure, the full Sum Assured is paid irrespective of the Survival Benefits already paid. This is what makes the plan unique.
Some of the salient features of Money Back Policy are:
The Survival Benefits are calculated as a percentage of the sum assured.
Survival Benefits are paid at regular intervals during the plan tenure. There is a fixed interval when the benefits would be paid. Every plan has a different payout structure. Similarly, the percentage of Sum Assured paid as Survival Benefits is also not fixed and varies between different plans.
If the plan matures, the remaining portion of the Sum Assured (actual Sum Assured less the Survival Benefits already paid) is paid as maturity benefit. However, in case of death, the entire Sum Assured is paid irrespective of the money-back benefits already paid.
Money-back plans usually come as participating plans where bonuses are added. The accrued bonus is then paid on maturity or on death.
Riders are also available under many money-back plans. Rider benefits are paid as a lump sum only when the contingency covered by the rider occurs during the plan tenure.
A money back plan provides survival benefits like a percentage of sum assured (at specified intervals) and maturity benefit along with accrued bonus.
This is the superiority of this plan as it pays a certain amount of the sum assured at regular intervals during the policy duration. This, in turn, provides you the required liquidity and you may plan your finances better to meet different goals during your life.
Provides risk-free returns
Money back plan is an ideal choice for risk averse people.