Risk Management - Life Insurance
Updated: Sep 11, 2022
Financial planning is about achieving one’s goal with proper management of their income, expenses, risk and investments. We all talk about investing money into different assets and schemes to achieve our financial goals but shy away from investing into the most principal asset that is we, ourselves. We are the most important asset as we cannot measure the potential one might be.
It is important to take care of ourselves whilst taking any financial burden on our shoulders. There’s a Hindi saying - "Jaan hai to Jahan hai" (जान है तो जहान है) meaning only when we are able to take care of ourselves, will we know and realize our true potential. We tend to forget about insurance, without which the financial planning is incomplete. Risk management helps us protect us, our family, assets and property from any uncertain future financial risks/losses. The most significant insurance that one needs to have are the following:
Property Insurance -
Other insurance that one can be protected from are travel insurance, fire insurance etc. However, the four listed above are the ones we should ponder upon. The latter is subject to one’s income and requirements.
Let's understand the difference between above listed insurance:-
A life insurance policy is a contract between a person and an insurance company in which the insurer provides financial protection to the policyholder in exchange for monthly payments (known as premiums). When you obtain a term insurance policy, you pay a little annual cost to protect yourself from the risks. In the event of your death, the insurance company will pay a substantial quantity of money to your family or loved ones. Consider 1 crore, 5 crores, or even 10 crores. This money should, in theory, be able to replace your income. When you're no longer the breadwinner, it should be able to support your family.
Ideal Cover :-
The first question should be self-evident by now: how much money do you require to financially replace yourself?
It's a difficult question, and to be honest, it's also subjective. However, there are a few crucial points to keep in mind. To begin, consider your expenses. If your way of life necessitates a certain level of spending, you'll have to maintain it if you don't want your absence to be noticed. So, if you spend Rs. 50,000 each month, your term insurance policy should cover the difference. And at that rate, you're looking at a cover costing a million rupees.
Ideal Duration :-
Remember. You pay your premiums until you die with a term insurance policy. Alternatively, the policy may expire. So your insurance has an expiration date, and it's up to you to determine how long you want to maintain it. This is a decision you must make at the time of purchasing. You won't be able to modify it later.
So there's a lot on the line here. You're aiming to replace yourself monetarily once more. But you're only doing it because — your family won't have much in the way of funds when you're young. That, however, changes as you get older. Your children, for example, will be fully matured by the age of 60. Your spouse is likely to have a retirement fund, and you won't have many dependents to consider. As a result, 60 might be a decent spot to start. The insurance company, on the other hand, has information.
In India, the average life expectancy is around 70 years. If you want to keep your policy past the age of 70, be aware that your rates will skyrocket. That indicates the sweet spot is between 60 and 70-degrees Fahrenheit. Any number in that range should work nicely for you.
While this review should help you comprehend term insurance, there are a few add-ons, also known as riders, that you can purchase in addition to the main policy to ensure that your financial replacement is as strong as you are.
Terms Associated with Life Insurance: -
Insurer - An insurance company that protects a person for a set amount for a set fee.
Insured - A person whose life is protected by a policy of insurance.
The person who pays the premium to the insurer is known as the owner. The insured and the owner can be the same person.
Nominee - A person named by the Owner to manage the insurance proceeds after his or her death.
Beneficiary - A person who has a financial stake in the policyholder's life.
Death Benefit - This is the amount paid to the Nominee by the Life Insurance Company if the life assured passes away during the policy's term.
Free Look Period - A period of time during which a new Life Insurance policy owner can cancel the policy without incurring any penalty. The Free Look period is usually 15 days.
Grace Period - An extension of time to pay premiums after the Due Date. (It usually takes 15 to 30 days.)
Paid-Up Value - A policy can be changed to a paid-up policy if premium payments are discontinued after a particular period of time.
Defaulted Policy - If the premium is not paid during the grace period, the policyholder is in default. A "Lapse" is the phrase for such a termination.
Surrender Value - If the policyholder stops paying the premiums and decides to cancel the plan, the life insurance company gives the policyholder a set amount known as Surrender Value.
MWP Act - Taking out insurance under the Married Women's Property Act will help protect your family's financial interests while you're away. Courts may not attach a policy obtained under the MWP Act for the recovery of your obligations. Aids women in safeguarding their insurance money.
Types of Life Insurance: -
Term Life Insurance Plan
Term life insurance plans are the purest form of life insurance because they provide life insurance without any savings or profit features. Term life insurance policies are the most cost-effective sorts of life insurance policies since premiums are lower than for other types of policies.
Unit linked insurance Plan (ULIP)
A unit-linked insurance plan, which is one of the most unusual life insurance types, is a comprehensive blend of investment (market-linked returns) and insurance. The premium paid for a ULIP plan is partially utilized as a risk (insurance) cover and partially invested in various funds, according to the life insurance definition.
The policyholder can invest in a variety of funds offered by the insurance company, depending on their risk tolerance. The insurance company then invests the money in other money-market securities, such as stocks and bonds.
The endowment plan is a sort of typical life insurance policy that combines insurance and savings. If the life guaranteed lives longer than the policy period, the insurance company pays a maturity benefit to the policyholder with life insurance types such as an endowment plan. Furthermore, some endowment plans may give periodic bonuses that are paid either on maturity or to the policyholder's beneficiary in the event of the policyholder's untimely death.
Money-back life insurance plans are a type of life insurance policy in which the insured receives a portion of the sum assured as a survival benefit at regular periods. In this method, the policyholder can meet his or her short-term financial goals.
Whole Life Insurance
Whole life insurance plans are one of the types of life insurance that cover the life insured for the rest of their lives, or in some cases, up to the age of 100. The sum assured is decided when a whole life insurance policy is purchased. A nominee is stated during the purchase process. They are paid with the death claim and any bonuses, if applicable, in the event of an unfortunate event, as defined by the whole life insurance policy. Nonetheless, if the life promised survives for more than 100 years, the insurance company pays a maturity reward equal to the endowment corpus to the life assured. Mostly this type of policy are used for Estate planning/ Succession planning purpose (even more when there are Estate Taxes)
Child life insurance plans are designed to build a fund for a child's future development. Typically, this sort of life insurance aids in the paying of a child's education and marriage. Following a child's important life milestones, such programmes pay out payments annually or in one large sum. In the event that the insured parent dies unexpectedly during the insurance term, future premiums are forgiven, and the policy benefits continue uninterrupted.
Retirement life insurance policies aid in the development of a secure financial foundation for a person's retirement years. The goal and aim of life insurance for retirement is to assist people become financially self-sufficient and worry-free.
On reaching the age of 60, most retirement life insurance definitions fall under life insurance kinds that provide an annual pay-out (through annuities) or a one-time lump sum pay-out (via commutation of the cumulative amount, up to the permitted restrictions). If something happens during the policy term, the insurer will pay the insurance benefit to your family.