Life Insurance: Assurance And Investment
Life Insurance is assurance by the Insurer that upon the demise of the insured person the claim amount as per the contract or agreement will be paid to the nominee of the Insurance holder in exchange of the premium paid by the insurer for the same. The payment of premium can be on the monthly, quarterly, yearly basis depending on the terms agreed upon. There are various types of Insurance policies in the market which not only provide Life cover but also provide additional benefits such as Accidental and Disability benefits. Life Insurance is very essential for every individual as you are not aware about the future shortcomings. Moreover you have responsibilities and obligations to fulfill which make insurance even more important. Thus individuals should assess the future needs and requirements too while availing Insurance policies.
Life Insurance: The Investment Myth
People often confuse between Investment and Insurance and end up assuming both to be the same. But in reality both are totally different and cover different aspects of life. One provides you with life cover while other tries to accelerate your Capital Growth. Thus both are different and serve different purposes as well. Life Insurance provides protection and insures your family that incase of any tragic incident it will cover the financial need as per the contract. Some Contract also provides lumpsum return on completion of the term stated in the contract along with sum interest incase no liability arises during which the contract is active. However these returns are much lower in comparison with other Investment options and hence should not be considered for Capital Growth purpose. As they premium paid for the same also includes certain sum kept aside to meet the Liability which may arise in the future.
Hence the term Insurance and Investment should not be intermingled.
FEATURES OF LIFE INSURANCE POLICIES
- Life Insurance Policies attract Income Tax Deduction u/s 80 C up to the limit of `1,00,000 on the insured value.
- Premium can be paid on Monthly, Quarterly, Semi Annually or Annually as per the term agreed upon while entering into an Contract.
- Medical Expenses are also taken care of incase of detection of any Critical illness or aliments which are covered under the agreement.
- Loans are also forwarded on the policies after premium has been paid over certain period of time as per stated in the contract.
- Policy Certificate bear the Name of The Nominee to him the benefits will be forwarded incase of demise of the policyholder.
- Life Insurance allows you to mitigate certain amount of Financial Risk thus providing Security to the family.
Types of Life Insurance Policies
Term Policies: These are the pure insurance policies which only provide insurance against the premium paid for it. They do not provide any return on the investment on completion of term but only provide financial security against life for the contracted period. As per the agreement in the contract they will settle any claim if at all and pass on the benefits to the nominee. The policies are available at very economical premium as they do not have investment and return aspect to it. The term of the policy can range from 5years to 30years or even more as the case may be. The face value of the policy is the amount which would be paid against the death of the insured.
Endowment Policies: These policies provide combination of both investment and security. They are also known as the Traditional Policies. Here the sum assured is paid back along with additional bonus and interest to the Insured if no claim arises during the tenure of the policy. If partial benefit was availed then accordingly adjustments are made and same is remitted to the Insured. However the return on the Investment in this type of policies is less as there is charge against Life Cover provided which gets deducted. However as these policies provide more security Conservative Investors prefer them over other Investment option which may involve some risk or fixed return with no life cover. They are more expensive than Term Policies and ROP.
Return of Premium Life Insurance Policies (ROP): This a new concept in which the Premium paid by the Policyholder is paid back on completion of the tenure. If no claim arises during the tenure the amount of premium paid as per the contract is remitted back to the policyholder. However these types of Policies are more expensive than Term Policies. These policies cannot be considered as Investment option as they do not provide any return on the vested amount.
I will cover various Insurance policies in my upcoming posts.