What is Life Insurance Policy and Types of Life Insurance

Life Insurance Definition:

Life insurance assures financial protection in unforeseen situations. Insurance companies intended to start life insurance to ensure that income of the families are unaffected due to sudden or pre-mature death of the family members. You can avail Life cover for yourself and your family members from personal risk. Life insurance stands on top most important point under financial planning. This will ensure that no matter if you are alive or death your family members won’t face any financial crisis whether it may be fulfilling day to day financial necessity or children education or reimbursement claims after death or cost of funeral and memorial services or financial crisis due in business to death of owner or co-owner. Now a day’s life insurance are used for multi-purpose. For instance: wealth preservation, tax exemptions, etc.

Why do we need Life Insurance?

It does not matter for those who are single and have no dependents; But life insurance is necessary for any individual who has family relies on your income or have dependents to take care of it. Before you decide of buying life insurance, few things you should ask yourself like: Do I require life protection cover, If yes then how much do I require or for how long will require or what type of policy will fulfil your required protection cover.

General rule of life cover says that atleast you should select insured amount 6-10 times your gross annual pay. This is just a general thumb rule but you should analyse your entire requirement for life, your family goals, children education and other circumstances before selecting life insurance amount and duration for coverage.

Types of Life Insurance:

Below are some of the popular types of life insurance. There are other flavours, add-ons available for life insurance. Let us check out some of the types of life insurance available in the market:

Whole Life Insurance:

This policy protects policyholder complete life span against death. Whole life insurance is also called as permanent life insurance which guarantees protection for whole life span of the insurance holder. Normally premiums get higher with the age of life and you can choose to pay premiums monthly or quarterly or yearly basis. The advantage of whole life insurance is that this policy does not expire and upon death corpus fund will be paid to beneficiaries. This helps beneficiaries to stay away from financial crisis and fulfil their financial needs.

Endowment Policy:

Endowment policy is the combination of life cover and financial saving at the same time. Major disadvantage of endowment policy is that it is valid for certain period. Insurance holder gets benefit in two ways:

• In case of death within policy tenure, beneficiary will be paid assured amount
• In case of survival after policy tenure, policy holder will get premium paid with other benefits like: bonus, share on investment returns, etc.

Endowment policies are one of the most popular policies. General concept behind this policy is to give best returns to policy holder on survival. It can be also believed that it is the better and advanced version of ULIP (unit-linked life insurance product). Under this, policyholder can select various investment options provided based on risk desire for their premiums.

Money Back Policy:

Money back policy, another flavour of life insurance policy liked by most the people. This policy gives policyholder regular income on survival after certain period of policy. It is like some part of sum assured is paid as a regular monthly / yearly income on survival. In case of death, beneficiary will be paid remaining sum assured value.

For example: Mr. Roy has purchased money back policy valid for 25 years with the sum assured of Rs.25,00,000 upon 10 years insurance company will pay Rs.15,000 as a regular monthly payment. After 12 years of policy Mr. Roy died. In that case, regular payment of Rs.15,000 monthly will be paid for 2 years (total amount paid: (15,000 * 24 = Rs.3,60,000) and on death beneficiary will be paid remaining sum assured of Rs.21,40,000 (25,00,000 – 3,60,000 = Rs.21,40,000) .

Annuities and Pension:

Under this policy, policyholder will pay single premium or regular premium instalments for certain years and in return insurance company pays regular income (monthly / yearly) for the entire life or for a fixed number of years. Major disadvantage of annuities and pension policies are they do not provide any life time cover it only offers regular income for entire life or certain years. This policy is similar to money back policy only unique about this policy is that it does not offer sum assured upon death. Therefore this policy is opted to get regular payments after retirement.

Term Insurance Policy:

Term insurance policy is purely risk cover policy for specific period of time. This term insurance policy has been bought tremendously in last few years. Now days this policy is highly accepted and opted by every other countries of the world. Top policies among other life insurance protection purchased by insurance holders consist of term life insurance policies. Let us detail understand and discuss more clearly about term insurance in our next tutorial session.