Ch. 2: What is Life Insurance?

Life is full of uncertainties. In fact, the word ‘life’ itself contains an ‘if’. This ‘if’ depicts all of life’s challenges and obstacles. The best way to deal with these challenges and uncertainties is to be prepared for them. And, one product that can help you do this is life insurance.

Life insurance, in simple words, is a contract between you and the insurance company. The insurance company covers your financial risks. In exchange, you are required to pay a fee. Under this contract, the insurance company promises to pay a sum of money to your family members in the event of your death.

So -

• You will be the ‘insured’ or ‘life assured’.
• The fee that you are required to pay is the ‘premium’.
• The money that the insurance company will pay so that your family continues living their lifestyle is the ‘cover amount’.
• The family members who will get the money from the insurance company are called the ‘nominees’ or ‘beneficiaries’.

The main purpose of life insurance is to provide financial protection to your loved ones when you are not around anymore. However, besides this, life insurance also helps you make long-term savings and achieve financial goals related to retirement, child’s education or wedding, etc.

Life insurance policies sold by insurance companies can either be linked or non-linked. Let’s see what linked and non-linked life insurance policies are, and how they work.

➔ Linked Life Insurance Plans
These are insurance cum investment plans. These plans are ‘linked’ to the stock market - and hence, the returns you get under them will depend on how the market performs.

Under a linked life insurance policy, a part of the premium you pay goes into providing insurance cover to you. The remaining premium is invested in various stock market funds of your choice, as per your risk appetite, and financial goal.

➔ Non-Linked Life Insurance Plans
These plans are the exact opposite of the plan we discussed above. A non-linked insurance plan is a low-risk plan, which will pay a death benefit to your nominee or a maturity benefit to you. The returns you get under non-linked life insurance plans are guaranteed - and are not linked to the performance of the market.

The nature of life insurance policies can vary too. In general, life insurance policies can either be participating or non-participating in nature. Let’s take a look at the exact meaning of participating and non-participating life insurance plans.

➔ Participating Life Insurance Plans
These plans give you an opportunity to share the profits of the insurance company. So, under these plans, the insurance company will share profits with you in the form of bonuses and dividends along with the fixed death or maturity benefits.

➔ Non-Participating Life Insurance Plans
You don’t get to share the profits of the insurance company under these plans. The insurance company will only pay the maturity benefit to you if you survive the policy term or the death benefit to your nominee if you pass away while the policy is active. They won’t pay any bonuses, dividends, etc. along with the death or maturity benefit.

The type of life insurance plan you choose to buy can be a combination of -

➔ Linked and Non-Participating
➔ Non-Linked and Participating
➔ Non-Linked and Non-Participating

Now, let’s take a look at the types of insurance plans available in the market.

Here are the main types of life insurance plans sold by insurance companies today -

1. Term Insurance Policy:

It pays a fixed sum of money to your family if you pass away while the policy coverage is active. Your family can use this money to settle any outstanding loans/liabilities, pay for their day-to-day expenses, etc.

2. Whole Life Insurance Policy:

It offers insurance coverage up to the age of 99/100 years and practically covers you for your entire life. As it is less likely you will survive such a long term, a Whole Life Plan is a sure-shot way of leaving a financial legacy for your loved ones when you are gone.

3. Child Insurance Policy:

It is a combination of insurance and investment plan that helps you save money systematically and build wealth for your child’s future needs. The plan will give you sufficient returns as well as protect your child in your absence.

4. Endowment Policy:

It offers a combination of insurance and savings, often providing guaranteed returns and financial protection to your family. It allows you to systematically invest in a low-risk instrument, and get a large sum after a set period of time.

5. Money-Back Policy:

It is a blend of both insurance and investment. The insurance part helps secure your family’s financial future and the investment part offers guaranteed returns at specific intervals. You get back a fixed percentage of the sum assured or the annual premium you’ve paid under the plan periodically, regardless of the market conditions.

6. United Linked Insurance Policy (ULIPs):

It is somewhat similar to a mutual fund that invests in market-linked investments, but also offers an insurance cover. A part of the premium you pay under a ULIP goes into providing a life insurance cover whereas the remaining premium is invested in several funds of the stock market that may yield high returns. The premium is invested in funds of your choice and preference.

7. Retirement Policy:

It helps you meet your financial requirements after retirement. Two main types of retirement plans sold by insurance companies include a Pension Accumulation Plan and an Annuity Plan.

a. A Pension Accumulation Plan can be linked or non-linked. A non-linked Pension Accumulation Plan works exactly like an Endowment Plan whereas a linked Pension Accumulation Plan works exactly like a Unit Linked Insurance Plan.

➔ Under a Non-Linked Pension Accumulation Plan, you are required to pay premiums for a specific period. When the policy matures, you will get a fixed amount of money that you can use for your needs and goals post-retirement.

➔ Under a Linked Pension Accumulation Plan, your savings will be invested in market-linked instruments and systematically get accumulated in a fund. When the policy matures, it will offer a lump sum amount that you can use for your retirement needs and goals.

b. Under an Annuity Plan, you need to make premium payment/s for a specific period, which will get accumulated into a fund. This fund will be converted into an annuity, i.e., a steady stream of income. You will start receiving this income periodically in your post-retirement years.

While all types of life insurance plans cover death, a few life insurance plans help you fulfil several goals related to retirement, child’s education or wedding, etc. Let’s take a look at four important goals that a life insurance policy can help you achieve.

➔ Goal Of Financially Securing Your Family’s Future
If you are the only earning member in your family and have dependents, one of your top goals would be their financial security. In your absence, you would want to make sure they don’t compromise on their dreams and lifestyle. Or, in case you have loans or liabilities, you’d want to ensure that the burden of repayment doesn’t fall on your family’s shoulders if something happens to you.

A term insurance policy can help you with your goal of ensuring your family’s financial protection.

➔ Goal Of Building Wealth For Long-Term Objectives
As you grow in life, your responsibilities will only multiply. You may dream of buying an expensive bike or a car. Or you may dream of buying a house after you get married. You’d want to build wealth for all these long-term goals.

This is something that life insurance can help you with. Life insurance policies like a Unit Linked Insurance Plan, a Money Back Plan, an Endowment Plan, etc. can help you grow your wealth and achieve your objectives.

➔ Goal Of Saving For Your Child’s Future Needs
If you have or plan to have children, you would want to save up or set aside funds for their school education, college expenses, wedding, etc. You’d want to accumulate enough money to take care of all their future financial needs so that they can achieve all their dreams and aspirations.

You can consider investing in a Child Life Plan if you want to offer your kids enough financial support so that they accomplish all of their dreams and don't give up on their aspirations in your absence.

➔ Goal Of Preparing For Post-retirement Life
Another major life goal you may have is living a worry-free life after retirement. After you retire, you may have aspirations of travelling the world with your spouse, pursuing a hobby, etc. and hence, you’d want to create a retirement fund. Or you may simply want to make sure you have enough funds so that you can continue enjoying the same lifestyle after you retire.

Life insurance can help you achieve the goal of retirement planning. If you don’t want to face any financial difficulties during your retirement years, you can consider buying an Annuity Plan or a Pension Accumulation Plan.

A life insurance policy helps you achieve many goals in life besides offering a death benefit, i.e., a sum of money to your family if you pass away in the middle of the term. If you want to safeguard your family’s future in your absence, you can choose to buy a term insurance plan. If you want to secure your children’s future needs, you can invest in a Child Life Plan. If you want to live a worry-free retirement life, you can invest in a Pension Accumulation Plan or an Annuity Plan. A ULIP, Money Back Plan, and an Endowment Plan will help you build wealth for your long-term goals, like buying a house, car, etc.