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Life Insurance
Defining Life Insurance
Life insurance provides its beneficiaries with the financial coverage upon the
death of the insured person. A contract is signed between the insured person
and the insurance company under which the insurance company has to pay an
assured sum of money to the nominees of the insured person.

Need for taking Life Insurance

A life insurance policy assures complete peace of mind as it prepares the
family to face any financial crisis in case of untimely demise of the insured
person. Life Insurance also serves as a tax saving mechanism, and hence plays
a crucial role in the process of one’s financial planning to secure the future of
the survivors.

Types of Life Insurance Policies:

1. Term Life Insurance Policy - Term Life Insurance is named so because it
provides coverage for a specified period or term. In the event of death of the
insured individual, the insurance company pays the face value of the policy
amount to the beneficiary within the term. In case the term is over and the
policy is not renewed or the death occurs after the maturity of term period, the
insurance company is not liable to pay any cash benefits to the beneficiary.

2. Whole Life Policy - Under this type of policy, the person has to pay a fixed
premium based on his age and other factors. As the years go by, the insured
person earns a certain interest on his policy’s cash value. This policy
continues till your old age for the same premium you started with, and offers
not only permanent protection but also accumulates a substantial amount for
the family in case of any emergency.

3. Endowment Policy - Endowment insurance policy is specifically designed to

provide life insurance cover for a specific time period. It is a combination of a
risk cover with financial savings. Most people take this policy if they want to
purchase a product that provides both insurance cover and savings. Often, the
maturity amount is used to supplement the pension income. This policy,
although coming with a high premium payment, has worth its value.

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4. Money Back Policy - Under this type of insurance policy, the insurance
company pays a part of the amount assured at fixed time periods in the form of
survival benefits before the maturity date. The premium is payable for a
particular period of time. The nominee will receive the entire sum assured in
the event of death of the insured person during the term of the policy even if
the insured had received fixed portions of the sum assured.

5. Children Insurance Policy - Children’s Life Insurance policy aims at

securing the future of one’s children in case of any unforeseen circumstances
such as death of any parent. In this case, the beneficiary, i.e., the child, gets
the benefit in the form of a guaranteed lump sum amount.

Stage Analysis :
The need for life Insurance can be analyzed on the basis of the stages of one’s
life. Below are certain factors that help in identifying how much insurance is
required during different stages of life:-
1. Young Professionals - In the initial years of Life, a person has to face a
relatively lower level of responsibility. Thus, he can save more by paying a
low amount of Life Insurance Premium which is calculated on the basis of
your age. As one grows old, the premium for life insurance cover increases
many-fold. While planning to pay premium in the initial years, one can keep in
mind his future needs.

2. Newly Married - Newly married couples have to face lot of responsibilities as

you have a spouse who may be dependent on your income. This is a phase
where expenditure to be incurred is high. Moreover, there is an immediate
need for planning for the future. Thus, at this point of time, it is advisable to
take Whole Life or Term Life Insurance Policy.

3. Married with Kids - This is the phase when a person has to take the
responsibility of his children as well as elderly parents. One has to plan for
your children’s future needs and his education as well. If a person is going for
insurance policy at this stage of life, then it is advisable to go for such plans
which offer periodical returns to be used for your child’s education and
marriage. Thus, Term or Whole Life Insurance Policies are best suited.

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4. Planning To Retire - At this stage, one has to reduce his debts as one needs
to save for the retirement. It is advisable to go for Endowment Plans or
Deferred Annuity Plans at as these will fetch you guaranteed returns on your
investment.

5. Post Retirement - After one has retired, it is suggested to take Single

Premium Immediate Annuities and Whole Life Policy for wealth transfer as
this is the time when one has to save for medical expenditures for himself as
well as his spouse.
Defining Riders: In order to spread the risk cover, riders can be purchased
along with a life insurance policy. Availing riders along with Life Insurance
Policy add to its cost due to the prevalence of high rider premiums.

The most common riders are:-

1. Accidental Death Benefit Rider - Under Accidental Death Benefit rider, in
the event of demise of the insured person due to accident during the term
period, the insurance company has to pay an additional amount equal to the
sum assured to the nominee.

2. Critical Illness Benefit Rider - As per this rider, if there is any event of
diagnosis of a critical illness during the term of policy, the insurance company
has to pay an amount equal/less to the sum assured to the insured person. The
condition is that the diagnosed illness must be within the purview of the
categories of critical illness defined by the insurance company.

3. Guaranteed Insurability Rider - In this type of rider, the insured person can
purchase additional whole life insurance at several stages of his life without
even undergoing any further medical examination. Further, in case the person
wants to protect additional responsibility in the future, this rider is very useful.

4. Hospital Cash Benefit Rider - Hospital Cash Benefit Rider comes in handy in
case the insured person has to face sudden hospitalization. During the term of a
life insurance policy, if the insured person needs to be hospitalized for more
than two or three days due to any reason like injury, sickness or disease, the
insurance company has to reimburse an amount in proportion to the room
charge in the hospital or daily hospital cash amount , whichever is lower.

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5. Life Guardian Benefit Rider - During the term of the policy, in the event of
sudden demise of the parent/guardian of the insured child, all future premiums
will be waived off, with the policy still remaining in force. This rider ensures
that the benefit to the child will remain undamaged in case of death of the
guardian.

6. Term Rider - The term rider is a pure insurance policy and therefore offers a
low cost benefit. Under this rider, in the event of death of the insured, the
nominee gets an amount equal to the sum defined in the life insurance policy.

7. Waiver of Premium Rider - In the event of the insured being totally disabled
as a result of an injury or critical illness, premiums are waived until the insured
regains his ability to repay.

What is an Annuity Scheme?

Annuity schemes are those wherein policy holder’s regular contributions over
a period of time (or a one-time contribution) accumulate to form a corpus.
This corpus is used to yield a regular income that is paid to policyholders until
death starting from your desired retirement age. Some annuity schemes have
the option to pay your survivors a lump sum amount upon your death in
addition to the regular income you receive while you are alive.

What is Bonus?
Insurers distribute profits among policyholders every year in the form of a
Bonus. Bonuses are credited to the account of the policyholder and paid at the
time of maturity. Bonus is declared as a certain amount per thousand of sum
assured. The term “bonus” is used interchangeably with “with profit”.

What are Guaranteed Additions?

In some policies, insurers guarantee the bonus/profit declared as a certain
amount per thousand of sum assured. This assured bonus will be credited to
the policyholder irrespective of the insurer’s performance and is known as
Guaranteed Additions. Guaranteed Additions will be payable at the end of the
term of the policy or early death of the policyholders.

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What are Loyalty Additions?

In some policies, over and above Guaranteed Additions, the insurer will
declare and credit to the policyholder, an additional amount per thousand of
sum assured every 5 years, depending on its performance. This additional
amount is known as Loyalty Addition.

What is Surrender Value?

The cash value payable by the insurer on termination of the policy contract at
the desire of the policyholder before the expiry of policy term is known as the
surrender value of the policy. A policy can be surrendered provided the policy
is kept in force for at least 3 years. The bonus is also added to the surrender
value if the policy has been in force for at least 5 years.

What are the various modes of payment for premium?

Premiums other than single premiums can be paid by the policyholders in
yearly, half-yearly, quarterly or monthly installments or through a Salary
Savings Scheme. If the mode of payment is yearly or half-yearly, the insurer
offers a small discount on the premium amount.
When does a policy lapse?
When the premium is not paid within the days of grace provided after the due
date, the policy lapses. The grace period in case of yearly, half-yearly and
quarterly modes of payment is one month and in case of the monthly mode of
payment, it is 15 days.

How can a lapsed policy be revived?

A lapsed policy may be revived during the lifetime of the assured, but within a
period of 2 years from the due date of the first unpaid premium and before the
date of maturity. Different insurers have varying rules for policy revival.

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Review points while selecting Insurance:

Insurance coverage is essential for every individual. How much and what type
of insurance one needs will differ with every individual. Review the following
with your financial advisor to arrive at the life insurance solutions that suits
your needs:

1. Review your own insurance needs and circumstances. Choose the kind of
policy that offers benefits that most closely fit your needs.

2. Make sure you can afford the premium payments. If the premium amount
increases later, can you still afford it?

3. Do not sign an insurance application until you review it carefully to be sure all
answers are complete and accurate.

4. Do not buy life insurance unless you intend to stick with your plan. It may be
very costly if you quit during the early years of the policy.

5. Do not drop one policy and buy another without a thorough study of the new
policy and the existing one. Replacing your insurance may be costly.

6. Read your policy documents carefully. Ask your advisor or company about
anything that does not appear clear to you.

7. Review your life insurance program with your financial advisor every few
years to keep up with your changing needs.

8. Your insurance policy gives you long term protection while offering
immediate tax benefits. Your insurance needs are usually greater than the need
for a tax benefit in the current financial year.

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Tax benefits
Life insurance has always been bought more for tax benefits than to insure
human life. But the role of life insurance in an individual’s "tax planning"
cannot, in any way, be undermined.
Individuals can now invest up to Rs.100,000 in insurance premium to avail of
a deduction from taxable income.

Existing Players In The Field Of Life Insurance: IRDA has granted license
for one public sector and twelve private life insurance companies in India.
Public Sector: Life Insurance Corporation of India (LIC)
Private Sector:

• HDFC Standard life insurance company limited

• Bajaj Allianz life insurance company limited
• ICICI Prudential life insurance company limited
• Max New York life insurance company limited
• Birla Sun-life insurance company limited
• Kotak Mahindra life insurance company limited
• ING Vysya life insurance company limited
• MetLife insurance company limited
• SBI life insurance company limited
• Reliance life insurance company limited
• Dabur CGU life insurance company private limited
• TATA AIG life insurance company limited

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