Life Insurance simplified –
What is life insurance?
Life insurance is a product which pays out a sum of money either on the death of the insured person or after a set period in return for a specified premium
What are different types of Life insurance?
- Term Plan-Pure Risk Cover
- Endowment Policies-Insurance Cover + Saving
- Non-Linked Participating Endowment Plan-Insurance cover + Sum Assured
- ULIP-Insurance + Investment Benefits
- Non-participating ULIP-Fixed Insurance Cover
Which Insurance policy to buy?
Insurance is a pure product to hedge life risk. Investments should never be made using insurance products. A pure-play term plan is the only life insurance that one should buy!
What is term plan?
This is the simplest type of life insurance policy. It pays your family a sum of money in case of your death, during the policy term. It does not pay anything if you survive the policy term
Who should buy a term plan?
Have dependents, i.e non-earning family members ( eg children, retired parents). Have loans that might burden your family, in case of your death.
When to buy a term plan?
As soon as it is established that you have dependents, buy a term plan! The sooner you buy a term plan the cheaper it is! As life goes on the risk of contracting a disease is also higher and hence buy a term plan as soon as possible.
How long should be the term plan for?
The term plan should cover you as long as you have dependents on you. Once you are free from all the duties there is no need for a term plan.
Pro TIP – Ultra long-term plan like one for 85 years has poor returns and is not recommended.
What should be a sufficient cover?
A sufficient cover will depend on your living expenses and your goals. Add up your expenses and your goals and any liability you may have. That generally will be the cover that you may need.
- Lumpsum: Entire cover is credited in one go!
- Lumpsum+Annuity- Some amount is credited upfront while the rest is paid out as monthly income
- Annuity- All the money is paid as monthly income
Choose a model that will helps your needs!
Premium pay models
Companies provide the following options –
- Pay over the lifetime of the insurance policy
- Limited Pay Options: Companies now offer an option to pay within 3-5 or 10 years.
One should calculate the NPV (Net Present Value) of each of the faster payment options to find the cheapest. If you have the money and wish to not take on additional liability, then paying off the premium faster makes sense.
Critical Illness(CI) Rider
- Companies provide a rider of accelerated payment of the sum insured in case of any CI
- These are inferior to a pure-play CI cover
- Rather than buying an embedded CI rider, one must buy a standalone CI cover
Waiver of premium on critical illness
- This rider will help you waive the burden of paying your premium in case you are diagnosed with a listed critical illness or are permanently disabled due to an accident
- This is a must-have rider as it will protect ur insurance.
Our 2 cents on Life Insurance
- Evaluate the need for Life Insurance
- Buy only a term plan
- Be careful with the customizations
- Carefully evaluate the amount of cover, the age uptil which it should cover you
- Disclose all the medical history to the best of your knowledge
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