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Life Insurance

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Life Insurance

Life insurance is a contract between an insurer and a policy owner.

A life insurance policy guarantees the insurer pays a sum of money to named beneficiaries when the insured dies in exchange for the premiums paid by the policyholder during their lifetime.

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For the contract to be enforceable, the life insurance application must accurately disclose the insured’s past and current health conditions and high-risk activities. Life insurance policies are not standardized, but they do have many similarities. The most fundamental of all definitions is the distinction among the owner of the policy, the insured, and the beneficiary. Often, the owner of the policy is the insured, or the beneficiary can own the policy, or they can be 3 separate parties.

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The owner of a life insurance policy

 is the one who has the rights stipulated in the contract.

These include the right to:
  • name a beneficiary
  • surrender the policy for its cash value
  • transfer ownership
  • receive participating dividends

The insured

who is often the owner of the policy, is the person whose death causes the insurer to pay the death claim to the beneficiary, who can be a person, trust, estate, or business. Although the owner has the right to name the beneficiary, whether the owner can change the beneficiary depends on whether the beneficiary designation is revocable or irrevocable.

The Beneficiary

The beneficiary is named in the policy to receive the proceeds of the death claim. Specific types of beneficiaries include primary and contingent beneficiaries; specific and class beneficiaries; and revocable and irrevocable beneficiaries.

One of its primary benefits is the plethora of different types of life insurance plan and policies on offer to prospective policyholders. One can choose their preferred plan based on their unique individual requirements.

Types of Life Insurance

Many different types of life insurance are available to meet all sorts of needs and preferences. Depending on the short- or long-term needs of the person to be insured, the major choice of whether to select temporary or permanent life insurance is important to consider.

Term life insurance

Term insurance is widely considered to be the simplest form of life insurance. Term insurance is a pure cover plan which offers protection for a specified time period 10, 20, 30 years, then ends. If the life insured passes away during that period, the nominee receives the predetermined death benefit. The most distinctive feature of term insurance is the high amount of coverage offered at extremely nominal premium rates. Certain term plans also boast of maturity benefits, i.e. the return of premiums in the event no claims have been made during the policy tenure. One can also enhance the amount of coverage offered by a term plan by opting for additional riders, such as Accidental Death Benefit or Child Support riders.

  • Decreasing Term Life Insurance—decreasing term is renewable term life insurance with coverage decreasing over the life of the policy at a predetermined rate.
  • Convertible Term Life Insurance—convertible term life insurance allows policyholders to convert a term policy to permanent insurance.
  • Renewable Term Life Insurance—is a yearly renewable term life policy that provides a quote for the year the policy is purchased. Premiums increase annually and is usually the least expensive term insurance in the beginning.

Unit Linked Insurance Plans (ULIPs)

Among the different types of life insurance policies available, ULIPs enjoy a high amount of popularity owing to their versatile nature. ULIPs come with the two-pronged benefits of both investment and insurance. A portion of the premiums paid towards ULIPs is directed towards ensuring insurance coverage, while the rest of the premium is invested into a bouquet of investment instruments, which can include market-backed equity funds, debt funds and other securities. ULIPs are extremely flexible instruments since investors can easily switch or redirect their premiums between the different funds available. ULIPs are also touted as having an edge over other market instruments in terms of tax-saving benefits, since their proceeds are exempted from LTCG (Long Term Capital Gains).

Endowment Plans

This is another type of life insurance policy which acts as, both, an instrument for insurance and saving. Endowment plans aim to provide maturity benefits to the life insured, in the form of a lump sum payment at the end of the policy tenure, even if a claim hasn’t been made. Endowment plans are ideal for people looking to ensure maximum coverage alongside availing a sizable savings component. They help the policyholder inculcate the habit of savings, even while providing financial security to their family. Endowment plans can broadly be classified into two types: with profit and without profit. Policyholders can choose from these two types based on their risk appetite.

Permanent life insurance

Permanent life insurance stays in force for the insured’s entire life unless the policyholder stops paying the premiums or surrenders the policy. It’s typically more expensive than term.

  • Whole Life—whole life insurance is a type of permanent life insurance that accumulates cash value. Cash value life insurance allows the policyholder to use the cash value for many purposes, such as a source of loans or cash or to pay policy premiums. Unlike term insurance, wherein the insured has coverage only for a specified period of time, whole life insurance offers coverage right until the death of the policyholder. You can opt for either a participating or non-participating policy, as per your financial needs and risk appetite. Though the premiums for participating whole life insurance are higher in comparison, dividends are paid out at regular intervals to the policyholders. The premium rates for a non-participating policy are lower, but the policyholder generally cannot avail the benefits of regular dividends.
  • Universal Life—a type of permanent life insurance with a cash value component that earns interest, universal life features flexible premiums. Unlike term and whole life, the premiums can be adjusted over time and can be designed with a level death benefit or an increasing death benefit.
  • Indexed Universal—this is a type of universal life insurance that lets the policyholder earn a fixed or equity-indexed rate of return on the cash value component.
  • Variable Universal—with variable universal life insurance, the policyholder is allowed to invest the policy’s cash value in an available separate account. It also has flexible premiums and can be designed with a level death benefit or an increasing death benefit.

Life Insurance Riders

Many insurance companies offer policyholders the option to customize their policies to accommodate their needs. Riders are the most common way policyholders may modify or change their plan. There are many riders, but availability depends on the provider. The policyholder will typically pay an additional premium for each rider or a fee to exercise the rider, though some policies include certain riders in their base premium.

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