Life insurance deals with the life…sorry, death. Not the death of any living or non-living thing but specifically of human beings. The fundamental nature of insurance is, it deals with uncertainty. On the contrary, death is certain. So, how can a certainty be insured? True. Death is certain. But what is not certain about it is the time of its occurrence, which is paramount to human beings. Insurance is also fundamentally aimed at providing financial compensation for any financial loss suffered and not any sentimental or emotional relief or consolation.

The death of a person in old age, say for example someone in his or her eighties without any family member depending on him or her financially may not have a financial impact on anyone. However, the death of a person in his earning phase of life with a family looking up to him for their financial needs (not undermining the love, affection, moral strength, support, and other emotional needs) can be devastating to those dependants. So, life insurance, a concept that deals with uncertainty accepting death, which is certain, as a valid risk is not out of order because it is not about the event but time of the occurrence of the even that is critical.

Life insurance is a contract between an insurer and an insured (generally a policy holder). An individual proposes to insure his life by paying some amount or fee to an insurer. After a careful study of his or case, the insurer (or the insurance company), if the individual is qualifies for insurance, accepts his or her proposal. Upon acceptance, the individual pays a fee, which is called Premium, to the insurer. And, the individual’s life is insured by the company for a certain amount, which is called Sum Assured. In the even of untimely death of the policy holder or the insured during the term of the contract, the insurance company provides compensation i.e. sum assured amount (death benefit) to the nominee.

Insurance indemnifies actual financial loss. However, human life is invaluable. Nevertheless, insurance companies use a method called Human Life Value to estimate the maximum amount of risk cover (sum assured) for which a human’s life can be insured.

Life insurance if the most important of all insurance types. Originally, insurance was invented as an arrangement to protect traders from financial loss to their business inventory. Later, it evolved to protect the owner of an asset from financial loss or expenditure incurred due to the damage or loss to the asset. Human life is an asset because of its potential to earn money and provide for the needs of the dependents. Hence, over time, insurance extended to cover human lives and thus life insurance emerged.

The importance of life insurance can be understood when the financial position and needs of a family are discussed and understood. Imaging a family of four – a couple and their two young ones. The man is the only earning member and there are no other income sources in the family. In the unfortunate death of the man, the sole earning member, the family will be left without any financial support for survival. How will then the living expenses of the family be met? How will the kids pursue higher education? How can the surviving mother manage to get a girl child married off to a suitable young man from an acceptable family? How will she survive in the old age when she cannot work? Life insurance is a boon for such deprived families.

Points to be considered

  1. Understanding the need for life insurance
  2. Estimation of required life insurance cover
  3. Evaluating products and choosing right ones
  4. Understand the pros and cons, and the cost of product
  5. Disclose all material facts
  6. Check all details in the policy document
  7. Ensure continuity of the policy by paying premiums on time
  8. Understand the claim procedure
  9. Make family members know about the plan taken

Life insurance is broadly categorized as pure risk plan and a combination of risk cover plus savings or investment component.

    1. Term Assurance
      Term Assurance plans are commonly called term plans. They are pure risk benefit policies, provide high risk benefit for a low premium. These are suitable for those who have higher responsibilities and need high risk cover to protect their family’s financial needs.

There are 2 types of term plans

      • Term plan without return of premium –These plans provides only death benefit, which is the sum assured, in case of death of the life assured during the policy term.
      • Term plan with return of premium – These plans provides maturity benefit, which are total premiums paid excluding service tax if the life assured survives the policy term. In case of death of the life assured during the policy term, the nominee receives the sum assured as the death benefit.
    2. Risk Benefit in combination with savings – Endowment Plan, Money-back Plan, Whole Life Plan, Child’s Plan etc. These are also called Endowment Plans or more commonly, Traditional Plans.Endowment plans provide risk cover along with the savings option. It means, if something happens to the life assured and he or she is no more during the policy term, the nominee receives the sum assured and some benefits in the form bonuses (if any declared based on policy). If the life assured survives the policy term, he or she receives the maturity benefit.

Traditional plans are classified as PAR and NON-PAR plans based on the benefits offer.

    • PAR plans are known as participating plans, which mean returns in these plans depend on the product/company performance, which is not guaranteed. PAR plans provide yearly bonuses called revisionary bonus and a terminal bonus which is paid either on maturity or on death of life assured, whichever happens first.
    • NON-PAR plans are also known as non-participating plans These plans do not participate in overall performance of either the product or company. These plans provide guaranteed benefits which are shared to the investor and mentioned in the policy document. They do not provide any other benefits like revisionary and terminal bonuses.
    • Endowment plans –Any insurance plan that pays a survival or maturity benefit at the end of the policy term is called an Endowment Plan.
    • Money back plan –Provides survival benefits at regular intervals along with a maturity benefit at the end of term
    • Whole-life plan –Provides maturity benefit as per the policy contract and provides the life coverage for whole life. Unlike regular Term or other Endowment plans, they do not have a specific maturity period. Whenever death happens, they pay the sum assured to the nominee.
    • Child plans –These are similar to money back plans but provide survival benefit at specific intervals for child education and wedding goals. They are generally called children education endowment plan and marriage endowment plan.
  2. Risk Benefit in combination with investment – Market linked insurance plans, where returns depend on market performance. These are called ULIPs (Unit Linked Insurance Plans)ULIPs provide market-based returns along with life cover. ULIPs offers various investment options in a single product from high risk to low risk, and investors can choose an investment option based on personal risk tolerance or appetite and also have the flexibility to switch the investment across different investment fund options without any restriction within the product.
  3. Annuity Products (Immediate/Deferred): Annuity means pension. Annuity products are offered by insurance companies where an investor need to pay the premium either in lump sum or in series for a specific period. In return, the investor receives regular income (annuity), starting either immediately or at a deferred date (some time in future). Annuity rate is decided and offered at the time of the starting of the annuity as per the prevailing annuity rates. Annuity received from these products is taxable as per the individual income tax slab.
  4. A legacy to leave behind A lump sum death benefit can secure the financial future of your children and protect their standard of living.

Life insurance secures your family’s financial future. It helps them to pay off debts, meet housing payments and living expenses, fund college education of your children or grandchildren, and address many other financial needs. Life insurance provides cash when it is needed the most.

  1. Protection for you and your familyYour family depends on your financial support to enjoy a decent standard of living, which is why insurance is especially important once you start a family. It means the people who matter most in your life may be protected from financial hardship if the unexpected happens.
  2. Reduce stress during difficult timesNone of us know what lies around the corner. Unforeseen tragedies such as illness, injury or permanent disability, or even death can leave you and your family facing severe emotional stress, and grief. With insurance in place, you or your family’s financial stress will be reduced, and you can focus on recovery and rebuilding your lives.
  3. Financial security to dependentsNo matter how good your financial position is, one unexpected event can see it all unravel very quickly. Insurance offers a payout so that if there is an unforeseen event, you and your family can hopefully continue to move forward without any financial constraint.
  4. Peace of mind No amount of money can replace your health and wellbeing, or the role you play in your family. But you can at least have peace of mind knowing that if anything happened to you, your family’s financial security is assisted by insurance.
  5. A legacy to leave behindA lump sum death benefit can secure the financial future of your children and protect their standard of living.

Life insurance, as a product does not have any limitations or disadvantages or whatsoever. It is a product designed with a great vision for the welfare and financial wellbeing of the humankind in the face of financial loss due to damage of an asset or death of an earning member in a family. Nevertheless, it is important to be adequately insured to secure the needs of the financial dependents. Mentioning any limitations of insurance will only be theoretical and deliberate but not practical.

Nevertheless, one limitation that can be cited is more related to the product than the idea of life insurance. While human life is invaluable, insurers may limit the maximum amount of life insurance an individual can buy on his own life or the dependents such as spouse or children etc. Generally, the maximum life insurance cover one can buy is linked to the income of a person.

Life insurance policies provides tax benefit as EEE, it means exemption (deduction benefit) at the time of paying the premium, exemption on the earnings during the policy term, and exemption on maturity with some limitations and conditions.

Premium paid for insurance policy is eligible for deduction from the taxable income under SEC 80(C) of the Income Tax Act, subject to a maximum limit of Rs. 1.5 Lakh. It means, one can pay any amount of insurance premium but the maximum limit on the tax benefit is 1.5 Lakh.

All insurance proceeds like accumulated bonuses, surrender value, paid up value, cash bonus, maturity benefit, and death benefit, etc. either getting accumulated or paid to the policy holder or beneficiary during the policy period are exempted from tax under section 10 10(D). To get eligibility for tax benefit under section 10 10(D), premium paid in the policy should be less than 1/10th of the sum assured or 10 times annual premium should be the sum assured in the policy.