A life insurance policy is a contract between the policyholder and the insurance company that authenticates the payment of a death benefit to the nominee upon the death of the policyholder.
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There are many types of insurance plans available for the customers and some of which are Unit Linked Insurance Plans, Term life insurance, and Endowment plans. Each of these plans has its own benefits. However, insurance plans can be tailor-made according to the needs of the policyholders and their families.
A life insurance company pools together the premiums of various policyholders and pays off the death benefit claims in the event of unforeseen deaths of an insured.
The owner of the policy is responsible for paying these premiums at defined time intervals. A beneficiary or a nominee is a person that the sum assured is awarded upon the passing of the policyholder.
The insurance company makes a profit that is the difference between the premiums that are paid and the benefits that are claimed.
Typically there are two broad categories of life insurance: Term life insurance and Whole life insurance.
Term life insurance is for a period ranging from 5 to 30 years. The premiums are paid for the said duration after which the policy lapses.
There is quite a bit of skepticism when it comes to the benefits of life insurance. However, a term insurance policy provides benefits when there is an unfortunate event in the family, and a member passes away during the policy tenure. It provides the highest cover of any form of life insurance with the lowest premiums.
The term period for the insurance is for a specified period and can be a minimum of 5 years and go up to 35 years.
The purpose of term insurance is to provide the same standard of living to the family of the policyholder in the unfortunate event of your death.
It is important to look into the pros and cons before investing in any policy-armed with the proper information
Whole or permanent life insurance is based on the same mechanism but also includes a saving benefit. It has an investment component referred to as cash value- and the policy is designed to maximize this.
A term insurance plan that provides guaranteed death benefit of Rs.1 Crore during the period of the policy tenure to the nominees upon the passing of the policyholder.
The ideal assumption is that the insured amount should be 15 to 20 times of the policyholder’s yearly salary- if he/she is the sole earner in the family. This should be adequate to run the household in the absence of the policyholder as well as pay off any house or education loans that are pending. However, these calculations do not take into account all the liabilities of the policyholder. A lot of forethought should be put into it.
This calculation accounts for inflation of 6-7% every year for the coming years as well.
The Standard of Living: With the exorbitant rates of inflation in our country and globally, it is prudent to plan for the future and not be caught unaware in the event of any unforeseen calamities in the family. A term insurance plan of Rs. 1 crore ensures that the family is well taken care of upon the death of the policyholder. The assured sum ensures a cushion for the family and makes sure that any education or wedding plans are not derailed by maintaining the same standard of living. It is obligatory for the policyholder to consider any financial dependents such as parents, spouse or children. It helps to compensate for the financial consequences that are ensued following a loss of life in the family.
Substitute for Monthly Income: The nominee can opt to take the policy amount either as a lump sum or as monthly payouts. Monthly payouts can help in the case that the policyholder was the sole breadwinner of the family. The amount received will act as a substitute for the salary earned until the family gets back on its feet.
Cover for Family Members: A term insurance plan acts both a risk mitigator for the family and a provider of the death benefit for the policyholder. At additional costs, the same term insurance plan can be used to cover additional members of the family. Parents and a spouse can be added on to the same insurance plan.
It is crucial to understand that life insurance is not an optimal investment tool. Other riders of the term life insurance policy also include the accelerated death benefit, disability benefits, waiver of premium rider and income benefit rider to name a few.
Low Premiums: The IRDA has certain regulations that the insurance companies must adhere to. This results in lower premiums and larger covers. The premium for a healthy non-smoking individual in their late 20’s or early 30’s is quite inexpensive. However, a smoker would pay twice as much for the same plan with the same benefits.Buying the life insurance term plan would be 30 to 40% cheaper if bought online rather than through an insurance agent.
Value for Money: The 1 crore term plan provides value for money and is a prudent investment. The premium of the term life insurance remains the same throughout the period of the policy unless specifically mentioned in a clause. Upon the declaration of a physical disability or the development of a life-threatening habit such as smoking, the premiums might be subject to change.
Easy Comprehension: Upon the modernization of term life insurance in our country, it has been quite simple to purchase a policy either online or from an insurance agent. This was not the case a couple of years ago. Customers prefer to buy policies that they understand and this is one of the reasons that the one crore term insurance policy is becoming popular. It is easy to get a quotes online, and insurance calculators make the whole ordeal hassle-free.
Accidental Death Benefits: A term life insurance plan is valid even in the case of accidental death. The sum assured would be paid to the beneficiary upon the death of the policyholder by accident. The riders added will ensure that the beneficiary is guaranteed an amount that is more than the actual assured sum in the case of a critical illness or physical disabilities.
Loan protections: In the case of a death in the family, the insurance money can be used to clear off debts and pay off loans.
Valid Outside India: A term insurance plan is also valid outside the country. There is a provision in the policy to state that the policyholder will be residing outside the country in the future and it is important to communicate this. The cover is valid in any foreign country that does not portray an outward risk to the policyholder.
Dignified Life: If the spouse of the policyholder is not working, a term insurance plan of this amount is capable of providing until old-age and enables a life of dignity. The higher the number of co-dependents, the higher the insurance cover should be.
Running of the household: Upon obtaining Rs. 1 crore amount after the death of the policyholder, this amount can be invested in various ways. The smart, risk-free option would be to put it in a fixed deposit where it would go on to earn an interest every month at an average interest rate of 6.5%. In this way, the family would gain approximately Rs. 55,000 every month. This should help to run the household and maintain the day-to-day activities. The devaluation of the currency must also be accounted for. Making realistic assessments of the family’s needs is crucial.
Peace of mind: A life insurance policy would provide the policyholder with some much-needed peace of mind knowing that his or her family will not be left in the lurch in the event of catastrophic death. Term life insurance is vital for the breadwinner of the family.
Human Life Component of Life Insurance: This is an important component to consider during the purchase of a term life insurance. Human life value is the calculation of the expected lifetime earnings of an individual during his or her remaining working life. It is expressed in rupee terms of the present time. It is also viewed as the monetary value of the needs of the financial dependents of the policyholder. This target should be kept in mind while buying a term insurance policy. This goal will help to ensure that the family’s needs are met despite the death of the policyholder in the family.
An average salary earner who falls within the age group of 30-35 can opt for this plan to secure his/her family from the uncertainties of life. This plan is more appropriate if the policyholder is the sole earning member in the family and if the family income falls in the Rs. Five lakhs to 7 lakhs bracket. It is a smart decision to ensure that the cover lasts well into the policyholder's '60s.
There are quite a few tools online that would help in the determination of how large the insurance cover should be. These help to give policyholders a clearer picture. An insurance agent can also help to take one through the overwhelming and tedious process and assist in choosing appropriate riders. Retirement plans are also to be considered at an early age not to estimate the costs but to come up with realistic figures.
If one cannot make large annual premium payments, additional policies can be bought down the line when there is more financial stability. This helps to achieve any set of financial goals. Any of the smaller policies can be surrendered in the case of a financial emergency- instead of surrendering a large policy which may result in large withdrawal penalties.
Premiums for term insurance of Rs.1 crore for an average salary earner in their mid-thirties with a good health record and no known disabilities:
Aviva- Rs. 7,965
Bharti AXA- Rs. 7,978
Max Life- Rs. 7,978
HDFC life- Rs. 11,461
SBI life- Rs. 12,237
ICICI Prudential- Rs. 14,607
These rates can differ based on the medical history of the policyholder and the additional riders required. The two important questions to ask to oneself before purchasing a term policy are - how big the cover should be? And how long the term should be?
However, with this being said, it is important to understand that Rs. 1 crore might not be adequate to cover the needs of a family after accounting for inflation. Rs 1 crore will not seem like a large amount of ten years from now. A higher cover may at times be required depending on the financial stability of the family. Rs 1 Crore may seem like a big amount now, but it does not always cover all the loses. Policyholders should be aware of the face value of the policy, premium amounts and the length of the cover before they sign the dotted line.
People do not like talking about life insurance plans because nobody likes discussing death, but it is important that the worst case scenarios be considered to make well-informed decisions. Term life insurance is a strategic financial instrument and an important part of any long-term goal. Professional financial advisors would help to make informed decisions and avoid unnecessary strain on one's finances.
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