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Life Assurance is “a contract in which the insurance company agrees to pay a given sum on the happening of a particular event, contingent upon the duration of human life or pay the sum assured on maturity”.
Though human life cannot be valued, a monetary sum could be determined based on the following:
- Duration of the policy and/or Age
- Individual Risks of the Life to be insured
- Loss of income in the future years
- A person’s ability to pay premium
- The purpose for which a policy is sought
Life Assurance has two components, i.e. a savings component and a risk component. Some may select to protect risks only while some may cover risk with a savings element. Life Assurance products provide a definite amount of money to the life assured or his/her dependants in case of death of the policyholder during the period or becomes disabled on account of an accident or sickness causing reduction/complete loss in his/her income earnings whilst the policy is in force. An individual can also provide for his/her old age when he/she ceases to earn and has no other means of income through purchasing an annuity.
The basic Life Assurance products, which offer protection with savings, are as follows:
- Pure Endowment product is one in which benefits are payable on a specified date if the life assured survives at that time. If the person whose life is assured died before that date, no benefits are payable under the policy.
- Term Assurance products provide fixed amount of money on death during the period of contract. This policy provides protection for a selected period or term. The sum assured is payable only if insured person dies during the period or term of contract, i.e. no payment will be made if the insured person survives the period of contract. Premiums are paid throughout the selected period.
- Decreasing Term Assurance policy is similar to the Term Assurance policy, except the fact that benefit decreases annually until it is extinguished at the end of selected period. This policy is suited for a temporary need, which is reducing, such as housing loans repayable in installments. Premium may be paid in one lump sum or over the selected period.
- Convertible Term Assurance policy is a Term Assurance policy with the option to convert to another policy (such as an endowment or whole life) without the evidence of health. The right to convert (change) is subject to certain restrictions, such as;
- Right to convert must be exercised within a specified period
- Conversion may not be permitted beyond a certain age (55 or 60)
- Premium will change after conversion
- This policy is ideally suited for those who are about to begin a career
- Endowment Assurance products provide a fixed amount of money either on death during the period of contract or at the expiry of contract if life assured survives. Should the insured survive the term, the policy is said to mature. Thus the insured amount becomes payable either at death or at maturity. Premium is payable throughout the period of contract. There are two types of endowment assurance policies;
- Participating Policies where the policyholder is allowed to share the profits of the insurance company, which is usually paid as dividends or bonus.
- Non-participating Policies where the Policyholder is not entitled for the profits of the insurance company.
- Whole life Assurance products provide a fixed amount of money on death whenever it occurs. Premium may be payable till death or may be limited to a selected period (say up to age of 60).
- Annuity/Pension policies provide series of monthly payment on stipulated dates that the life assured is alive on the stipulated dates.
Insurers modify these basic types of life assurance products and add “labels” for sales purposes.
Human life is subject to risks of death and disability due to natural and accidental causes. Loss of a life could result in loss of income to the dependents resulting in hardships to the family, sometimes making survival of dependents dreadful. Risks are unpredictable. Death/Disability may occur when a person least expects it. An individual can mitigate the effects of such unexpected risks through life assurance.
Life Assurance is useful in a number of situations, which includes:
- Protection: The purpose of Life Insurance remains an important element in the event of early death:
- To ensure immediate family members (dependents) are able to finance their basic needs and are able to maintain their standard of living,
- To ensure dependents has cash and income to settle all bills, taxes, loans and fulfil other obligations,
- To ensure the children have money for their education, and
- To ensure that there is extra income when the earnings are reduced due to a serious illness or accident.
- Savings: Providing for one’s family and oneself, as a long-term exercise (If a policy with a savings component is obtained for a desired purpose such as lump sum at retirement, marriage, settlement of loans etc).
- Investment: The accumulation of wealth and safeguarding it from the ravages of inflation.
- Retirement: Provision for old age becomes increasingly necessary, especially in a changing cultural and social environment.
There could be countless options to choose from, policy types, and policy conditions. Anyone who desires to buy a life assurance policy needs to be diligent when choosing a policy to suit the needs. It is worth taking time to discuss with the insurance company or its intermediary (the insurance agent or the insurance broking company) about the policy that fulfils one’s requirements. Deciding the adequacy of the amount to be insured needs a careful consideration. Prior to deciding the sum to be assured, it is advised to analyse and compare the financial needs of the dependents and their potential earnings, one’s capacity to save and invest and potential returns of the policy, if any. The value of the insurance policy that one decides to buy should fulfil the gap.
Affordability is an important consideration and before a policy is effected, it is advised to examine carefully, bearing in mind possible future financial commitments, such as those which may arise following a change in civil status, parenthood, etc. Statistics prove that this aspect is not receiving adequate attention that is evident from the large number of policies lapsing, even after one year or several years, due to non-payment of premiums as the needs and the circumstances have changed since purchasing the policy.
It is advisable to avoid going for unwanted additional coverage, which comes in “packages”. Instead, a suitable additional coverage of one’s choice can be obtained at an additional premium, which gives better value for money. It is always advisable to buy only what really requires for the intended purpose and/or future requirements. It is a pre-requisite for person who decides on a certain life policy to make sure that the life policy recommended is right for the purpose.
The other important factor is to make sure that the terms and conditions of the policy are understood properly. Insurance Policy is an evidence of a legal contract between the policyholder and the Insurance Company. As in other contracts, it is better to make sure that all provisions in the policy are understood and any doubts clarified with the agent/broking company or the insurance company. Generally the insurance companies give a specific time period (majority of companies give 14 days) from the effective date of the policy within which a policyholder could reject the policy if he/she is not satisfied. In such situation a company will refund the premium paid, subject to deduction of initial expenses, if any.
We all recognize the importance of life insurance. After all, we want to make sure that our loved ones are taken care of when we die. But before you run out and purchase a policy, do some research ahead of time. That way, you’ll be sure to get the best possible coverage at the right price. Here are some helpful tips to get you started:
- Shop around
- Never buy more coverage than you need
- The healthier you are, the better the rates
- Buy sooner rather than later
- Realize the importance of periodically reviewing your coverage
- You may be paying more for monthly premium payments
- Don’t rely solely on the life insurance offered by your employer
- Tell the whole truth and nothing but the truth
- Buying more is sometimes cheaper
When it comes to life insurance, it pays to shop around because premiums can vary widely. And thanks to the Internet, it’s now easier than ever. Try out one of the many insurance websites that can provide you with instant quotes. Make sure the website you shop from takes into consideration the factors in your medical history that can affect the premiums.
Never buy more coverage than you need
The key to purchasing the right amount of life insurance is to have just enough coverage to meet your needs. If you have more life insurance than you need, you’ll be paying unnecessarily for higher premiums. On the other hand, it’s important not to have too little coverage, resulting in you being underinsured.
The healthier you are, the better the rates
It’s true – healthy people get better rates on life insurance. You will be asked to pay a higher rate for anything that shortens your life expectancy (e.g., if you smoke, take medications regularly, are overweight, have a bad driving record).
Buy sooner rather than later
If you’ve been putting off purchasing life insurance because you don’t want to pay the premiums, you may be doing yourself a disservice in the long run. The younger you are when you purchase life insurance, the lower your premiums will be.
Realize the importance of periodically reviewing your coverage
Any life change signals the need for a review of your overall financial plan. When it comes to life insurance coverage, you’ll want to make sure that this major life event (e.g., birth of a child, children are grown) won’t leave you underinsured or overinsured.
You may be paying more for monthly premium payments
You may not realize it, but you may be paying more for your life insurance if you pay your premium in monthly installments. Many insurance companies charge extra fees if you make monthly premium payments instead of paying the annual premium.
Don’t rely solely on the life insurance offered by your employer
Many employers offer their employees some sort of group life insurance. But this amount of coverage is usually not enough to adequately meet your life insurance needs. In addition, group life insurance policies are not portable, meaning that if you leave your job, you can’t take your life insurance coverage with you.
Tell the whole truth and nothing but the truth
If you’re thinking about lying on your insurance application, think again. If your insurance company finds out that you lied about a health-related condition or your lifestyle (e.g., smoking habit), they may be able to terminate your coverage.
Buying more is sometimes cheaper
Life insurance usually costs less per thousand rupees once you get into higher coverage amounts (e.g. Rs. 250,000). If the numbers work out, you may be able to pay a lower premium while increasing your coverage.