Life Insurance (6)
Life insurance products can broadly be categorised as being:
1. Protection oriented policies: These products are primarily designed to cover the life of the insured and provide for a lump-sum benefit in case the life insured dies. Such products are generally referred to as ‘Term’ plans. Some key characteristics of ‘Term’ plans can be summarised as:
• Lump-sum benefit paid to designated beneficiaries only in the event of the policyholder’s death
• The lump-sum to be paid on policyholder’s death is significantly higher than what would be payable under a savings oriented plan for the same amount of premium BUT No survival benefits are available i.e. no payments are made by the insurer if the policyholder is alive when the policy completes its term
• If the policyholder stops paying the premiums when due at any time during the term of the policy, the policy ceases to have any value
2. Investment / Savings oriented policies: These products, while providing for life insurance, primarily facilitate the growth of capital on premiums paid by the policy owner. Some key characteristics of these plans can be summarised as:
• These products are primarily savings plans with attached life insurance
• Part of the premiums paid by the policyholder are treated as savings while the remaining amount is used to buy life insurance
• The policy will pay a lump-sum in case the policyholder dies during the term of the policy or will pay out the amounts saved if the policyholder is alive when the policy expires
• The lump-sum to be paid on death of the policyholder is significantly less than what would be available under a ‘Term’ plan for the same amount of premium. This is because a large part of the premium is being treated as savings and only a portion being utilised to buy life insurance
Investments / Savings oriented products can further be classified as being
o Unit Linked Insurance Plans
o Traditional Plans
Terms insurance policies are ‘protection oriented policies’ that provide a risk cover on the life of the insured. These policies do not accumulate any cash value, but provide life insurance for a specified period of time for a set amount of premium. There are no survival benefits associated with a Term insurance policy. In other words, the insured amount associated with a Term insurance policy is paid out to the nominees only in the event of policyholder’s death but nothing is payable to the policyholder if he survives the duration of the policy.
Since these policies cover only the risk element and provide no savings or wealth accumulation benefits, Term plans are amongst the cheapest form of insurance and should be actively considered to provide adequate financial protection to your family when you are not around.
It is advisable that when choosing how much insurance or risk cover to purchase, one should ensure that one’s needs for financial protection are adequately met. Please click here to see how to decide the right insurance amount for yourself.
Some of the variants of Terms plans that are available in the market are Level Term Plan, Mortgage Term Plan and Term Return of Premium Plan
This variant of term plans offers a survival benefit in the form of premiums paid by the policyholder during the term of the policy being returned at the end of the policy term. While this feature may seem attractive, one needs to bear in mind that by virtue of having this feature these plans are more expensive than Term plans and may not be as beneficial as taking a stand alone Term plan together with investing the amount you would save on the reduced premiums.
• One of the key reasons why one should consider Term insurance is to provide financial support and a means to replace lost income for one’s dependents and family in the event of death, especially if you are the primary earner for the family.
• At the same time, it can also be used to ensure that your liabilities, if any, are met without imposing an additional financial burden on your dependents if and when you are not around.
• In addition to this you could use it as a tool to provide for financial needs related to key events and requirements of your loved ones like a Child’s marriage or education.
• While there can be no replacement for the loss of a loved one, with the right life insurance product you can at least minimise the financial hardships and strife that your family may be exposed to.
• The lack of survival benefits should not be a deterrent in buying this product since the benefits and financial protection being secured for your family far outweigh the minimal cost of this protection.
• Term Insurance is a ‘must-have’ if you have a family that is financially dependent on you and if you are the primary source of income for your family. There’s never really a good time to die, but dying during one’s earning years is particularly burdensome to those who depend on us for income and support. Not having you around in such a scenario can impose a significant financial burden on your loved ones especially if you have outstanding liabilities as well such as Home Loans, Car Loans etc.
• It may not be as important a product to have if you are single with no financial dependents and limited or no liabilities.
• It is always better to start your coverage at an earlier age. With age, the associated risk to our life only increases, consequently making insurance more expensive with age.
• If securing your family’s financial future is a primary need, then you should actively consider a Term Insurance plan. If however, there is already adequate financial protection available for your dependents you may want to look at enhancing your long term savings and investments portfolio.