Life Insurance Guide to Policies and Companies
Life insurance plays an important role in the personal finance portfolio. But the real problem is choosing which life insurance to take. In this article, we will learn about different types of life insurance policies, why you should buy a policy, what precautions you must take before buying any policy, and how one can choose the best policy for him.
Life insurance is a contract in which the involved parties are the insurance company and the policyholder. Policyholders are required to pay regular premiums, and in exchange for that, the insurance company pays a death benefit to the beneficiaries of the plan.
In case of the death of the insured persons, the death benefit is received by the beneficiaries; therefore, the beneficiaries act as the recipients. In particular, the beneficiaries are often referred to as nominees and are specified by the person taking the policy.
The life insurance policy that a person buys should be sufficient to replace that person's income and also cover other costs that may be required by his family in the absence of that person, inevitably after death. It can also cover funeral expenses, college tuition fees, and the cost of caring for an older family member by adding beneficiaries to the policy purchased.
Adding beneficiaries or riders are often the given provisions by the insurance companies, which may offer additional benefits by paying some extra cost for that. It makes it possible for the purchaser of the policy to customize the policy according to his own convenience. Life insurance is also commonly called Insurance Plans.
The point which is important to remember here is that the beneficiaries are given the death benefit only after the death of the policyholder and not before that.
The life insurance policy covers almost all the situations or causes responsible for the death of the policyholder. For example, a death due to any kind of sickness or accident. But there are certain causes of death which are excluded from the scheme, and these include drunken driving, death during adventure sports, etc.
Types of Life Insurance Policy
1. Term Insurance
In this kind of insurance plan, the premium that a policyholder needs to pay is very low, but the benefits they receive are the best of all plans, making it the most affordable plan for the policyholders.
The insurance is provided for a particular number of years which may range from 5 to 30 years depending on the plan and the company from which you are purchasing the insurance plan.
In this type of insurance, the policyholder is not awarded the benefits upon the policy's maturity. The benefits are given to the insurance plan beneficiaries only upon the policyholder's untimely death and not before that.
For example, if the term insurance policy is for the term of 20 years, then if the 20 years is completed, but the person holding the policy did not die till the date, then in such a case, no benefits are given to the policyholder or to specified beneficiaries. But in the case where the policyholder dies before the period of 20 years, then the beneficiaries who are mentioned in the policy are given the benefits of the insurance policy. That is why the premium that the policyholders are required to pay is often low in the case of a term insurance plan.
After the expiry of the term insurance policy, the policyholder can renew it again for a fixed period as per the requirement.
2. Whole Life Policy
It is clear from the name itself that in this type of insurance plan, the entire life of the policyholder is insured. Also, the person insured under this policy cannot claim money from the insurance policy if he is alive. The rate of premium which needs to be paid under whole life insurance is comparatively lower than other policies. The nominee or the legal heirs are given the insurance plan benefits if the insured person dies.
3. Endowment Insurance Policy
Under the endowment insurance policy, the policy is taken for a specific period of time. Unlike the other two policies we discussed above, the benefits of the endowment insurance can be granted to the person insured upon the expiry of the period mentioned in the policy. If the person dies before the expiry of the term, then the beneficiaries are awarded the sum and the bonus mentioned in the policy.
4. Annuity Policy
In this kind of policy scheme, the person purchasing the policy needs to pay the policy's premium in instalments for a fixed period.
For example, if the insurer has taken the annuity policy for a period of 10 years and the amount is 1 lakh. Then, the insurer is required to pay this amount in instalments during that period, and after the expiry of the period of 10 years, the insurer will get the amount back with some interest in instalments for his whole life or for a fixed time period. It is very similar to a pension payment scheme.
5. Money-back policy
Money back policy is different from other policies that we discussed till now as the purchase of the money-back policy does not need to wait for the expiry of the policy period to receive the benefits because, in the money-back policy, the insurer starts receiving a percentage of the sum during the lifetime of the policy. Also, if the insurer dies, then it guarantees the payment of the sum and the benefits to the dependents of the insured.
The term for money back policy is usually available in 12 years, 15 years, 20 years, or 25 years, etc.
6. Child Insurance Policy
A child insurance policy is beneficial for making the future of the child; it is a saving cum investment plan. This kind of policy becomes important as it is designed in such a way that the financial needs of a child can be met in the future.
This policy helps the children in achieving their dreams by providing them with financial help in the future. The advantage of this policy is that the parents can start investing in their children's plans right after birth.
After the maturity period of the policy, the child or the parent can withdraw as a benefit of the policy.
7. Retirement Plans
It is a policy in which insured persons get the policy's benefits after retirement. It is very helpful as it becomes a source of income after the insured person gets retires. The insured person receives a certain sum of money periodically as a pension. For private employees, this policy has worked over time.
Who needs life insurance?
Life insurance is something that should be included in anyone's financial plan. This is something that creates security and protection for your family and loved ones during the time when you are no longer here.
If you have a life insurance plan, then you can enjoy your life to the fullest without worrying, and it provides peace to your mind that you have plans for those times, too, for your family when you will no longer be with them. Let us understand the need for life insurance for different categories of people:
We all know that homeowners have a lot of debt to fulfil the needs of the family, like a car loan, home loan, credit card debt, etc. Suppose someone dies without paying his debt; then, in that case, the family has to pay for that. This is where life insurance can help you and your family. If you have a life insurance plan, the family will not face difficulties in clearing the debt the homeowners have taken, as the life insurance benefits could be used in such a case by the family to pay those debts.
Newlyweds are the ones who work together to contribute their income for the maintenance of the family. But what if one of them passes away, the household income decreases, and the burden to maintain the family will shift to one person only? So, in such a case, life insurance is the only thing that can help the other (alive or left) person ease the burden of running a household and paying bills. The benefits of the policy can also help the family cover the funeral expenses of the deceased person.
Individuals Looking Towards Retirement
Life insurance is an important tool in designing a well-organized and well-balanced individual's retirement plan or account. It acts as a sustainable growth protection strategy that supports a stockpile of cash that you can access with withdrawals during the later days of your life, especially post-retirement. Life insurance is an alternative thing for people, especially private workers, to build future options and help some of its profit pay taxes and admissible bills. Consult your financial advisor on the best policy you need.