More on Life Insurance

· What is Life Insurance?

Life Insurance is a contract between you and a life insurance company, which provides your beneficiary with a pre-determined amount in case of your death during the contract term. Buying insurance is extremely useful if you are the principal earning member in the family. In case of your unfortunate premature demise, your family can remain financially secure because of the life insurance policy that you have purchased. The primary purpose of life insurance is therefore protection of the family in the event of death. Today, insurance is also seen as a tool to plan effectively for your future years, your retirement, and for your children's future needs. Today, the market offers insurance plans that not just cover your life and but at the same time grow your wealth too.

· Do I need life insurance?

If you have dependants and financial responsibilities towards them, then you certainly need insurance. Having a family means dependants; this in turn means financial commitments. Financial commitments come in the form of loans, children's education, medical expenses etc. Imagine what would happen if you were to lose your life suddenly or become disabled and cannot earn. Being insured in a situation like this is a necessity. When you insure your life, in effect what you are doing is insuring your earning capacity. This guarantees that your dependants will be able to continue living without financial hardships even in case of your demise. Most insurance plans available today come with a savings element built into it. These policies help you plan not only for protection against death but also for a financially independent future, which would enable you to have a comfortable retirement.

· Who Is an Insurance Broker?

An insurance broker is someone who acts as a go-between for businesses and insurance companies. They typically have access to dozens of carriers, and can quickly find several policies for you to consider. Provided, you do not have to pay for the services of a business insurance broker; the insurance company you end up doing business with pays the broker a commission. A good insurance broker knows the industry, and can begin searching for additional insurance plans for you to consider. They know the procedures and processes of the various companies that offer coverage, and can cut through the red tape and interpret the jargon found in most contracts.

· Is there any other benefit of buying insurance other than the risk cover?

There are several benefits of buying insurance. Other than the risk cover, the most important benefit you receive is Income Tax Relief under Section 80C of the Income Tax Act, which means premiums paid by you reduces your tax liability. Besides it helps you build up compulsory savings. Also through a valid assignment the beneficiaries of the policy are protected from claims of creditors. One could also surrender his policy in case of emergencies. For a policy taken under the MWP Act 1874, (Married Women's Property Act), a trust is created for wife and children as beneficiaries.

· How much does life insurance cost?

In order to buy a life insurance policy, you must pay certain amount as premiums to the life insurance company. The amount of premiums payable depends upon the type of policy, term of policy contract, sum assured and your age. You could pay these premiums monthly/half-yearly/annually or as a single premium.

· How much do I insure myself for?

One of the simplest rules is to assume that insurance is a replacement for your lost earning capacity. Calculate your total income for the years that you expect to work. Assuming that the prevailing interest rate is 8%, you need to insure your life for at least 12 times your current annual income. Assuming that a family needs Rs.100 annually for household expenditure and the rate of interest would be at 8%, then the breadwinner needs to have a life insurance policy of approximately Rs.1200. If the insurance amount were to be put in the bank by the family, the family would get a comfortable Rs.96 p.a., which would at least let the family maintain the current life style. However to calculate your insurance need more precisely, use the following steps: Calculate Monthly Livable Income required (Post tax). This is the monthly amount that the survivors of the policyholder will need in the event of his death. This is taken at 70% of the current total family expenses. Denote this as "M". Calculate Monthly Income required (Pre-tax) as M/(100-t)%. Denote this as "M1". Here t = Tax rate. Calculate Annual Income (A) = M1*12. Assume Estimated-earning rate on capital as 8%. Denote this as "r". Calculate Capital livable income required (C) as (A/r)%. Subtract Existing Insurance Cover amount (if any) from "C". The final amount you arrive at is the amount for which you should buy insurance.

· Are there any advantages of buying insurance at an early age?

Yes. The premium that you pay on your insurance policy is mainly dependant upon two things—your age and the tenure of the policy. The younger you are the lower is your insurance premium amount. At younger age, you would be physically sound and may not be suffering from illnesses. This would entitle you to a lower premium on the policy. Therefore it is advisable to buy insurance at an early age to reduce the cost of insurance.

· Is there any policy with which I can plan for my retirement?

Yes! We have the Unit Linked Pension Plan, which helps you to regularly invest your savings during your earning life in order to build up a retirement corpus to take care of your post retirement needs. Further you may be eligible for a tax deduction on the premiums paid up to Rs 10,000 (as per current tax provisions) per financial year under section 80CCC of the Income tax Act.

· Is insurance better than other savings plan?

Other savings plans like Bank Fixed Deposits, NSC, PPF have short maturity tenures, compared to life insurance policies. (Eg.: NSC for 6 years, PPF for 15 years & life insurance can be up to 100 years). Hence, other saving plans have limited impact on financial planning prospects. Whereas, a Life Insurance Policy pays the Sum Assured even if the Policyholder expires before the end of the payment term. Hence, this provides greater security to the person and his/her family. As such, insurance policy is definitely a better savings plan.

· What is the Unit-Linked Insurance Plan (ULIP)?

ULIP is a market-linked life insurance plan, which invests the premium money in various proportions in the equity and debt markets. In effect, this ensures that the returns on such plans are linked to the performances of the markets while also offering the individual an insurance cover at the same time.

· What is Term Insurance?

Term Insurance, also known as pure life cover, is the cheapest and the simplest form of insurance. Under this insurance policy, against payment of regular premium, the insurer agrees to pay your beneficiaries the sum assured in event of your premature death. However, if you survive till the end of the policy term, nothing is payable to you. This policy has no savings component and the premiums you pay are purely a cost to buy you life cover. This is suitable for you if You are looking for a low cost life cover without any savings benefits attached. You are at that stage in life where insurance cover is vital but you cannot afford high premium payment due to low income.

· What is the difference between traditional life insurance and unit-linked life insurance?

The main difference is in the flexibility in the choice of investments. In the case of unit-linked life insurance, the insurance company would usually offer a choice of different funds (say, with a differential mix of bond and equity investments) in which the policyholder can opt to invest his/her contributions. The policyholder can decide which funds his/her contributions need to be invested in and in what proportion. Therefore, the returns under the policy are dependent on the investment choice made by the policyholder. The policyholder can also opt to invest top-up contributions over and above the regular contributions at any time and to switch his/her investment pattern at any time during the term of the policy. In the case of traditional life insurance, the policyholder is usually offered a guaranteed sum assured. In addition, non-guaranteed bonuses in the form of a share in the profits of the fund may also be offered depending on whether the policy is a participating policy or not. The premium amounts are usually fixed at the outset and the same quantum of premium needs to be paid throughout the term of the policy.

· What is the difference between "term" and "whole life" insurance?

Term plans are the purest and cheapest form of insurance where benefits are payable only on the death of the policy holder within the term. Whole life plans are a special type of term assurance wherein the term of the policy is whole of the life. So it follows that benefits under the policy are payable only on death of the policy holder

· I have a physical disability, but I am economically independent. Will it disable me from getting life insurance coverage?

A physical disability like polio or loss of any limb should not in any way exemplify you from getting life coverage. However depending on the severity of the disability there might be an increase in the premium charged.

· Can my policy ever be cancelled due to health or other reasons?

Once a life insurance policy is issued, it cannot be cancelled by the insurance company during the policy period for any reason including changes in health, provided the required premium payments are made and the information on the application was not misleading or inaccurate.

· Do all life insurance policies require a medical test?

Life insurance companies underwrite risk on the basis of the health status of the person. The amount of evidence of health required by the insurer depends upon the amount of risk involved i.e. the sum insured under the contract. In the case of a low sum insured of the life to be insured or younger age, the company might ask only for the statement of health in the form of a health questionnaire from the customer and not a medical examination. In other cases a full medical examination may be required.

· Can I take policy on somebody else's name? What is the procedure for this?

Yes, But for an insurance contract to be valid, the insured must have an insurable interest in the subject matter of insurance. The insurable interest is the pecuniary interest, whereby the policy-holder is benefited by the existence of the subject matter and is prejudiced by the death or damage of the subject matter. The subject matter is life in the case of life insurance. It can be further explained by way of following example: Husband and wife have unlimited insurable interest in each others life. Parents can buy a life insurance policy for their children to protect their future just in case if something happens to the parents. A creditor has insurable interest in the life of a debtor to the extent of the amount involved plus a reasonable amount of interest. Partners in a business have insurable interest in the lives of their co-partners. A company has insurable interest in the lives of the key employees of the company.

· Does the insurance company disclose the investments made in each fund?

The insurance company usually provides investment information at periodic intervals through news bulletins and other means.

· What is underwriting?

The process of evaluating risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk.