Tuesday, May 22, 2012

Life Insurance Simplified

This article was originally published in Postnoon on May 18th, 2012


http://postnoon.com/2012/05/18/life-insurance-simplified/49106

As I walked into the lobby of my apartment block, Mukherjee was waiting for me, sitting on a sofa, with a piece of paper in his hand. The moment he saw me, he jumped up and extended his hand to greet me.

Me: How are you Mr. Mukherjee?

Mukherjee: I am fine, except that I don’t understand your world.

Me: My world?

Mukherjee: Yes, your world of investments, financial jargons, markets, assets.

Me: Ah! That? What’s troubling you?

Mukherjee: See I want to buy a life insurance. So I contacted an agent. After meeting him, I am totally confused. There are so many different types of policies. Now which policy should I buy?

Me: That’s it? Let me explain a few basic things about insurance to you. Hopefully, then you will be able to decide about which policy is suitable for you.

Since you have already made up your mind to buy a Life Insurance policy, you probably already know that such an insurance provides the beneficiaries, that is, your family, the financial protection in case of the death of the insured or in the case of terminal/critical illness of the insured. Most of the policies have exclusion which will not cover you in the event of suicide, war, natural disaster, fraudulent claims etc.

The sum that will be paid to the beneficiaries depends on the sum assured at the time of buying the insurance. The premium that you will pay, will depend on a number of factors, like age, sum assured and the type of policy.

There are basically two types of Life Insurance policies. They can be for a specific number of years; term policies. Or for the entire life of a person; whole life policies.

Term Policies: As the name suggests, term policies are for a specified period, say 5, 10, 15 years up to a maximum of 35 years. The beneficiaries are paid the assured sum in the event of the death of the insured during this period. However, no money is paid to either the beneficiaries or the insured, if he or she survives the term of the insurance. These policies are known to have the least premium amongst all types of life insurance policies.

Whole Life Policies: Whole life policies assures the payment of the assured sum to the beneficiaries, irrespective of when the insured passes away. Similarly, the insured needs to pay the premiums throughout his life time. There can be variants of these policies as well.

For example, you can buy a cash back policy where a certain amount of cash is returned to you after a few years, and the balance is paid to the beneficiaries after the death of the insured.

Mukherjee: But have a look at this sheet. It says that there are other policies too like the endowment plan and ULIPs.

Me: The other types of policies are nothing but additional features added to these two. For example, Endowment plans are term policies with elements of savings attached to them. So you buy a policy which ensures a certain sum to your family in case of your death, during the term of the policy, and in case of survival, you get the sum assured along with a bonus or return.

You might even opt for an annuity plan. Which basically returns you the money in the form of an annuity (divided into equal annual payments over certain number of years), instead of a lump sum, upon survival.

Unit Linked Insurance Policies, popularly known as ULIPs are again like term plans, where a part of the premium that you pay, gets invested in the stock markets.

Mukherjee: So it is not as complicated as it looks in this sheet?

Me: Not at all. Go home, discuss with your wife, and then decide on the policy you want to buy!

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