The first thing that I was asked by someone when I started working was to buy a life insurance and my question was, well, why? And then I was told that it is an investment actually! Well, for most of us, insurance is actually an investment with added benefit of providing some money if something unwanted happens. And even now, most of the Indians will be either not knowing the concept of insurance as just insurance or will be unwilling to pay for insurance knowing that they will not be receiving anything if insurance lapses! And that is why, when we think of it, the fact that LIC is THE largest investor in the company, it does a whole lot of sense in the Indian Context.
Well, coming back to Life Insurance, it was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death. It has come a long way and now it is used, apart from the purpose mentioned above, as an instrument of investment (Well, my dad thinks of LIC he has as a decent investment offering him a return of around 8% annually. That I disagree strongly is a different matter) and well, tax purpose! In fact, saving tax is sole reason why many of my friends took LIC!
Life insurance provides one with the opportunity to protect oneself and one’s family from personal risk exposures like repayment of debts after death, providing for a surviving spouse and children, fulfilling other economic goals (such as putting one’s kids through college), leaving a charitable legacy, paying for funeral expenses, etc. Life insurance protection is also important if you are a business owner or a key person in someone else's business, where your death (or your partner's death) might wreak financial havoc.
My view is that life insurance is a great financial planning tool, but should never be thought of as a savings vehicle, which, sadly is what 99% of the policy holders in LIC does, thus allowing LIC and other private companies to rake up huge profits year after year, while the people whose money is actually used to generate that profit is paid peanuts in return. In general, there are often far better places to hold and grow your money as you get older and hopefully, wiser!
Now, before you buy anything, you think if you really need it. Why not do the same with Life Insurance? In fact, if you ask me, not everybody needs life insurance. If you are single and have no dependents, it may not be worth the expense (I do not have any Life Insurance, Actually!). I will write one article on whether one needs Life Insurance or not, maybe after this one! For now, let’s concentrate on various types of Life Insurance.
Life insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, durations, etc. vary tremendously across the types of policies.
I will start with the one that most of us are familiar with, the insurance plus savings idea or what is known as Whole Life Insurance. Whole life insurance provides guaranteed insurance protection for the entire life of the insured, also known as permanent coverage. These policies carry a "cash value" component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. The premiums are usually level for the life of the insured and the death benefit is guaranteed for the insured's lifetime.
With whole life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy. The interest you accumulate through the investment portion of your policy is tax-free until you withdraw it (generally, but that differs from policy to policy). Any withdrawal you make will typically be tax free up to your basis in the policy. Your basis is the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Any amounts withdrawn above your basis may be taxed as ordinary income. As you might expect, given their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provided cash is available. This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility.
Another variation of the above is what we call, Universal life insurance, also known as flexible premium or adjustable life. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured's needs change. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level.
Yet another type is what is known as Variable life insurance is designed to combine the time tested protection and the more popular savings features of whole life insurance with the growth potential of investment funds(I might begin to like this one! ). This type of policy is comprised of two components: the general account and the separate account. The general account is liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name "variable life”. And since it may fluctuate, this is not that famous in our country or rather has not been famous till now! A variation of this is Variable Universal life Insurance, an insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices.
Another most commonly used policy is what is known as Term life insurance. Term insurance can help protect your beneficiaries against financial loss resulting from your death; it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time(Unlike in Whole Life Insurance Policies). Term policies do not build cash values and the maximum term period is usually 30 years. Term policies are useful when there is a limited time needed for protection and when the rupees available for coverage are limited. The premiums for these types of policies are significantly lower than the costs for whole life. They also provide more insurance protection per rupee spent than any form of permanent policies, though the cost does increase with time. Term polices can have many variations such as Annual Renewable and Convertible term, which provides protection for a year and is renewable upon payment of some amount.
Fancy variations can be made and that would depend solely on the imagination of the insurer and the persons involved! But I do believe that by now, you must be having a good idea about the kinds of Life Insurance that you can have! Will take up the issue of which one to actually take in the upcoming articles!
Well, coming back to Life Insurance, it was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death. It has come a long way and now it is used, apart from the purpose mentioned above, as an instrument of investment (Well, my dad thinks of LIC he has as a decent investment offering him a return of around 8% annually. That I disagree strongly is a different matter) and well, tax purpose! In fact, saving tax is sole reason why many of my friends took LIC!
Life insurance provides one with the opportunity to protect oneself and one’s family from personal risk exposures like repayment of debts after death, providing for a surviving spouse and children, fulfilling other economic goals (such as putting one’s kids through college), leaving a charitable legacy, paying for funeral expenses, etc. Life insurance protection is also important if you are a business owner or a key person in someone else's business, where your death (or your partner's death) might wreak financial havoc.
My view is that life insurance is a great financial planning tool, but should never be thought of as a savings vehicle, which, sadly is what 99% of the policy holders in LIC does, thus allowing LIC and other private companies to rake up huge profits year after year, while the people whose money is actually used to generate that profit is paid peanuts in return. In general, there are often far better places to hold and grow your money as you get older and hopefully, wiser!
Now, before you buy anything, you think if you really need it. Why not do the same with Life Insurance? In fact, if you ask me, not everybody needs life insurance. If you are single and have no dependents, it may not be worth the expense (I do not have any Life Insurance, Actually!). I will write one article on whether one needs Life Insurance or not, maybe after this one! For now, let’s concentrate on various types of Life Insurance.
Life insurance protection comes in many forms, and not all policies are created equal, as you will soon discover. While the death benefit amounts may be the same, the costs, structure, durations, etc. vary tremendously across the types of policies.
With whole life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy. The interest you accumulate through the investment portion of your policy is tax-free until you withdraw it (generally, but that differs from policy to policy). Any withdrawal you make will typically be tax free up to your basis in the policy. Your basis is the amount of premiums you have paid into the policy minus any prior dividends paid or previous withdrawals. Any amounts withdrawn above your basis may be taxed as ordinary income. As you might expect, given their permanent protection, these policies tend to have a much higher initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provided cash is available. This is known as a participating whole life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some additional payment flexibility.
Another variation of the above is what we call, Universal life insurance, also known as flexible premium or adjustable life. Like whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can each be adjusted up or down during the contract term as the insured's needs change. Cash values earn an interest rate that is set periodically by the insurance company and is generally guaranteed not to drop below a certain level.
Yet another type is what is known as Variable life insurance is designed to combine the time tested protection and the more popular savings features of whole life insurance with the growth potential of investment funds(I might begin to like this one! ). This type of policy is comprised of two components: the general account and the separate account. The general account is liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds within the insurance company's portfolio, such as an equity fund, a money market fund, a bond fund, or some combination of these. Because of this underlying investment feature, the value of the cash and death benefit may fluctuate, thus the name "variable life”. And since it may fluctuate, this is not that famous in our country or rather has not been famous till now! A variation of this is Variable Universal life Insurance, an insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices.
Another most commonly used policy is what is known as Term life insurance. Term insurance can help protect your beneficiaries against financial loss resulting from your death; it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time(Unlike in Whole Life Insurance Policies). Term policies do not build cash values and the maximum term period is usually 30 years. Term policies are useful when there is a limited time needed for protection and when the rupees available for coverage are limited. The premiums for these types of policies are significantly lower than the costs for whole life. They also provide more insurance protection per rupee spent than any form of permanent policies, though the cost does increase with time. Term polices can have many variations such as Annual Renewable and Convertible term, which provides protection for a year and is renewable upon payment of some amount.
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