Life Insurance is the contract between the insurer and the person who is insured against the risks to his life. Under this, the insured person pays the premium regularly to insurance company,once a policy is taken, and in lieu of this, the insurer promises to pay a fixed sum of money at the time of the death of insured or on the expiry of a specified period of time,whichever is earlier.The payment for life insurance is certain but the event for which insurance is taken is not very certain.
Life insurance is of utmost importance for all individuals, businesses, communities, society and general public at large. It offers protection against loss of income and compensate the titleholders of the policy. It provides many benefits, some of which are as follows:-
It provides protection to the family members or dependents against untimely death of an insured person.
- It facilitates savings for old age to enjoy secured and peaceful life as the earning capacity of a person is reduced after retirement.
- It encourages people to save money by making them obliged to pay premium regularly when a life policy is taken.
- It helps to mobilise savings of the public to channelise it for investment and thus promote economic development of the country.
- It (policy) can be used as a security to raise loans and thus improves credit worthiness of an individual or a business.
- It also has tax benefits as under Income Tax Act, premium paid is allowed as a deduction from the total income.
Types of Life Insurance Policies
Whole life policy:- the premium on this policy is payable throughout the lifetime of the life assured. The sum assured becomes payable only on the death of insured.
- Endowment policy:- this policy is taken for a specific period known as ‘endowment period’. The sum assured is payable either on the death of life assured or on the expiry of a fixed period. If the person does not die upto the maturity of the policy, he shall get back the insured amount after the maturity of life policy. It is the most popular form of life insurance.
- Joint life policy:- In this policy, husband and wife or the partners of a business can have a joint policy. The sum assured is payable at the end of the endowment term or on the first death of any one of the lives assured, which ever is earlier. Such policies are usually taken by partnership firms.
- Annuity policy:- In this policy, the amount is payable by the insurer not in one lump-sum but by monthly, quarterly, half-yearly or annual installments which are paid either until death or for a specified number of years. This type of policy is very useful to those persons who desire to provide a regular income for themselves and their dependents after the expiry of a specific period.
- Sinking fund policy:- this policy is mostly taken by firms and companies to accumulate funds to pay off a liability or for making a provision for the replacement of an asset after a period of time.
- Group insurance policy:- this policy may be taken out for the protection of lives of all employees in a business concern. Dependants of the employees are entitled to the benefits of these insurances.
Source : http://business.gov.in/
Why Do I Need Life Insurance?
Life is unpredictable. As the head of the family, everyone wants a secured life for their family members. The nightmares about your family’s financial protection keep haunting you.
You need Life Insurance because typically the need for income continues for those who are financially dependent on you, but there is no guarantee of your ability to earn consistently and for the rest of your life. Life insurance can help you safeguard the financial needs of your family.
Life insurance insures your life and reduce any hardship your family may have to bear in the unfortunate event of your death.
Here are some reasons people buy life insurance:
The death benefit may be used:
To replace income the family would need to maintain their standard of living after the death of a wage earner.
To pay off a mortgage loan and other personal and business debts or to create a rent fund.
To create a fund for children’s education.
To pay final expenses, such as funeral costs and taxes.
To create a family emergency fund or a fund for a family member with special needs.
Key Benefits of Insurance:
Buying life insurance for you and your loved ones helps provide some financial security in times of hardship. The money from your policy will be paid to your loved ones when you pass away or to you should you suffer a total and permanent disability or loss.
To ensure that your immediate family has some financial support after your demise.
To finance your children’s education.
To have a savings plan for the future so that you have a constant source of income after retirement.
To ensure that you have extra income when your earnings are reduced due to serious illness or accident.
You can claim for tax relief of up to a certain amount per year for an ordinary
life policy. This is inclusive of any contributions you have paid to an
approved retirement benefit scheme such as the Employees Provident Fund or other pension scheme.
Value of Insurance:
What is your Human Life Value?
Beyond all doubt, your life is invaluable. Yet, there is a certain worth that can be attributed to the financial support you offer your parents, spouse or children. This worth is referred to as Human Life Value (HLV). In the future, if your family does not have the protective blanket of your presence, they will no longer be able to enjoy the benefits of the income you earned. Put simply, Human Life Value is the present value of your future earnings.
Why should you calculate your Human Life Value?
You should calculate your Human Life Value so you can accordingly invest in insurance plans that provide your family with adequate finances and hence security even in your absence.
How do you determine your Human Life Value?
Factors to be taken in consideration while calculating Human life value:
1. Age
2. Current and future expenses.
3. Current and future income
1) According to 1st approach one should purchase insurance worth 5 to 10 times the current annual income. “This is an old thumb rule that does not take into consideration current assets and any special needs the customer or their family may have”.
Thus Insurance =Annual Income * 5
2) According to second approach when one’s annual income is known. The insurance need is calculated simply as annual income multiplied by the number of years of service left.
Insurance =Annual Income * No. of years of service remaining.
3) According to third approach one’s yearly outgo towards Insurance premium should be 10% of one’s annual Income.
Thus Insurance premium =Annual Income *10%
4) According to fourth approach life insurance need is, the financial need analysis approach. This is an approach which can take care of specific needs of an individual. Here, the basic objective is that the insurance coverage should be sufficient to provide for the dependants’ needs in case the breadwinner dies early.
Insurance = Dependant’s need in case breadwinner dies.
