For beginners, a life insurance policy offers combined benefits of investment and protection. A life insurance policy covers you for your entire life or 100 years of age, whichever is lesser. Under such a life insurance plan, the insured person pays a specific amount of premium each year. A component of this annual premium is for the protection part, while the remaining goes towards the market investments. In case the company earns profits on the amount invested, then a bonus is declared.
Over the time, a life insurance policy, along with the bonus, builds cash value as well. This cash value can be anytime withdrawn or surrendered by the policyholder. In case of the policyholder’s survival for the entire policy term, the cash value is paid to the policyholder. This cash value is usually equal to the sum assured. In event of the policyholder’s unfortunate demise during the policy term, this sum assured I given to the beneficiary or nominee.
Term Insurance:
A Term Insurance Plan, on the other hand, is purely a protection policy as it guards the insured and his family against the unforeseen eventualities. The sum assured here is decided by the policyholder on the basis of his lifestyle and the amount of debt he is bearing at the moment. This ensures that the burden of his debts and responsibilities do not come on his family’s shoulders post his unfortunate demise. Term insurance plans do not offer a maturity benefit in usual cases.
However, there are add-ons or riders available in order to ensure returns of premiums when the policy matures. In an unfortunate event of the policyholder’s demise during the policy term, the sum assured is paid to the beneficiary. These term insurance plans are particularly suggested for the individuals who do not have a completely fit health condition. Term insurance plans are classified into following three types:
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Level benefit
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Increasing benefit
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Decreasing benefit
Case Study
Here is comparative study of three different profiles of a single individual, a married individual who has two young kids and a married individual who is in his late 40s and has grown up children. This comparison has been done by the way of discrete examples in order to explain the type of policy that suits each profile.
Assumption: None of the individuals has a life insurance policy as yet.
For an individual who is not married, insurers suggest term insurance plans as a better choice. The simple reason behind the logic is that term plans offer high risk coverage at an extremely affordable cost of premium. For example, under a term insurance plan, coverage of Rs. 10 lacs can be obtained by paying premiums as less as Rs. 2,500 per annum for a term of 25 years.
On the other hand, a married individual who has 2 young kids should always opt for a whole life insurance plan as suggested by the insurance companies. However, it is advisable to include a term rider in the plan. While the first whole life insurance plan enables you to do systematic savings with an option to withdraw funds as per your needs and requirements, the term insurance rider offers enhanced protection factor for a considerably low cost.
Simultaneously, for an individual who is in his late 40s and has grown up kids, the experts and insurance providers advice only a whole life insurance policy to be sufficient. The basis of this statement is that a whole life insurance policy apart from covering him for his entire life, offers the coverage at a very low cost as compared to a term insurance plan. And at such an age a whole life insurance plan tends to be more affordable.
The realistic function of a whole life insurance plan is that it can be utilized to build and leave behind some valuable assets for an individual’s heir(s). However, insurers caution that a policyholder should get only a minimal amount abstracted towards a risk cover.
Also, a plan must let you withdraw funds free of any charges and should also offer a surrender facility. Opting for a best life insurance plan that offers cyclic payouts post the completion of a certain specified period is also a good idea. Such an income could serve the purpose of a retirement income. Additionally, payouts from such options are also tax-exempt earnings, unlike a retirement plan.
Riders
Insurance providers claim that the riders are a must to be taken up with a life insurance policy as they keep the benefits of that policy relevant for the age profile of the policyholder. Insurance companies nowadays have come up with a range of riders that if attached to the life insurance plan can considerably enhance the coverage and the benefits of the policy. For example, if you opt for the ‘waiver of premium’ rider with your term insurance plan or a whole life insurance plan, then in event of your disability to pay premiums due to justified reason, the liability to pay the remaining premiums would not come on your family and the premiums would be waived off or settled by the insurer without having to discontinue the policy. Also, in such a scenario, your child would receive the complete maturity benefit without having to worry about paying the premiums to keep the policy active.
Some other riders that are recommended by the insurance providers and the experts are permanent disability and accidental disability riders. Critical illness or dread disease rider is another common type of rider. However, opting for a mediclaim policy instead of this rider proves be a lot more beneficial as a health insurance policy or a mediclaim policy comes with a lot more additional features and benefits.