Life insurance: holding out hope for the future
When life ends prematurely, hope has another name. Life insurance.
The real benefit of life insurance has been clouded by less important objectives like investment returns and tax benefits, especially in India. At its core, life insurance protects against the risk of dying too soon.
What is insured is the future earning potential of the person whose life is insured, which would have sustained life, living style and plans for the future of loved ones.
In India, life insurance companies duly registered with Insurance Regulatory and Development Authority of India (IRDAI) can sell life insurance.
There are 24 of them now, government-owned Life Insurance Corporation of India and others promoted by various private business houses, both Indian and foreign.
The policies they offer are vetted and regulated by IRDAI and have to follow norms of cost to the policyholder and of investment of the premium monies with a view to maximise safety.
Here are various types of life insurance policies:
A term policy offers coverage on death during a specified term. It has no maturity value if the insured survives at the end of the policy period. It is the most cost-efficient form of life insurance as the premium is charged only for the risk of death.
An endowment policy combines life cover and offers an investment return, usually a fixed return that can be pre-fixed or announced from time to time.
There are various formats for this policy, including money-back, participating or non-participating policy (refers to participating in the investment profit for this category of policies with the insurer), joint life policy for spouses, policies with maturity pegged to a certain event or expense, such as higher education or wedding, to create funds for it and so on.
A whole life policy insures a person for their entire life. This policy too can be participating or non-participating and can also be for a limited premium paying term.
A unit-linked policy is the most investment-oriented of life insurance policies. It has a life cover component and an investment component, with the return from the latter being from capital market investments with all its attendant returns and risks.
A pension or annuity policy covers the risk of living too long, the converse of a life insurance policy which covers the risk of dying too soon.
Add-on covers
Almost all policies can have add-on covers, called riders, which come at an extra premium. Accidental death can be covered by a rider and there are riders for various purposes. Riders are an option you can exercise only while buying the policy.
What is common to all life policies is that they cover a life and death-related risk and, in India, they offer a tax break. To buy a policy you have to fulfil certain requirements. You have to have an income and that will be the basis for the insurer to offer you a sum assured — the value of the coverage. It also establishes your ability to pay your premiums going forward.
Insurable interest
You can take a life insurance policy on your own life and certain others also. In the latter case, you have to have an insurable interest on that person’s life.
Put simply, you should stand to lose financially if that person dies. So, a spouse can be said to have an insurable interest on a person’s life and an employee on his employer and vice versa.
So, which policy should you buy? That depends on the reason you are buying a life policy in the first place.
Various interesting factors converge when you decide to buy a life policy.