Life Insurance

It provides the financial protection to dependents on the untimely demise of Breadwinner. The concept of life insurance was started in 16th century while the marine insurance came into existence in 1347.

There are three life insurance products (Term, Endowment & Whole life) while Annuity is an insurance product.

TERM INSURANCE

Term Insurance: Term policies are those policies under which the benefits are paid only if the assured dies during the policy term.

Nature: Term Life Insurance protects an individual for a limited number of years and face value is payable only on insured’s death during the stipulated term and nothing is payable in case the insured survives.

Period: Term policy can be of one year or more. Generally term policy is for 10 or 20 years or specific age say 60 or 65 or 70 or 80.

Characteristic: Term insurance can be compared more with general or property insurance rather than with the other life insurance products. It is low premium product with maximum sum insured.  

Uses of Term Insurance: Term insurance will serve the policyholder adequately only when the protection need will expire simultaneously with the expiry of the term period.

Limitations of Term Insurance

  1. The policyholder may be uninsurable at the expiration of the term period and therefore unable to secure new policy. If it is available then the premium rate may be very high.
  2. An important use of life insurance is to provide income for old age but the term insurance is not having any cash values at retirement and cannot be used for this purpose.
  3. The disadvantage of term insurance for the average person is its lack of cash values, which means that if a policyholder is unable to meet his premium payment because of financial difficulties his protection will expire. There are no cash values out of which he can get a loan.

ENDOWMENT INSURANCE

Endowment Insurance: The endowment policy offers not only insurance protection against death for a specified period of time but if the insured lives to the end of the endowment period, the policy pays the face amount either in a lump sum or if elected by the insured, in installments.  If he dies prior to endowment date, the face amount is paid to his beneficiary or “nominee”.

Uses of endowment:  Endowment insurance is used properly when there is need for protection against premature death and there is a specific need for a fixed amount of cash at a given time in the future.

Limitations of Endowments:

  1. The temptation of receiving a large sum of cash at the end of a relatively short period of time leads many people to purchase the plan when their real need is for protection against premature death.  Many individuals have reached the endowment age to find themselves in possession of several lakhs of Rupees in cash at fag end of life, which may be adequate to meet old age needs of the individual, but inadequate to offset family needs on death.
  2. Although Endowment policy appeals to people as it provides win-win situation i.e. you are paid, whether you “live or die”. But in insurance, one never receives more than he pays for this concept operates on the fact that insurance is not a wager.  

Types of Endowment Insurance:  Under this type of Insurance product there are maximum number of policies which are available because the sum assured are paid along with interest & bonus (with profit policies) even if the insured survives the expiry period of policy or on death if it occurs during the currency of the policy. Thus endowment policies are marketed both as with profit & without profit options. The products fall under this category are ULIP, Children, Marriage Endowment etc.,

Premium: Though the premium is based on the age and term of the policy but the thump rule to compute the tentative premium would be sum insured dived by the term of the policy. It may vary by 5to 10%.

WHOLE LIFE INSURANCE

Whole Life Insurance: The name describes its nature. The essence of whole life insurance is that it provides for the payment of the face amount upon the insurer’s death regardless of when death occurs.  The face amount payable under whole life policies typically remain at the same level throughout the policy duration although dividends are often used to increase the total amount paid on death.  In whole life insurance policies the gross premium also remains at the same level throughout the premium payment period.

Whole life as Endowment or as Term Insurance: The whole life insurance is based on a mortality table that assumes that all insurers die by a certain age.  The age 100 is considered to be a terminal age.  All insured do not, in fact, die by age 100 or whatever terminal age is used but insurance companies price the insurance as if the terminal age is 100.  Therefore, the insurance company pays the policy face amount to those few persons who live to the terminal age – as if they had died.  Therefore, the whole life policies are termed as “Endowment” at age 100 policies.

Similarly, the whole life policies become. ‘Term’ at the age 100.  At age 100, payment can be considered as a death benefit payment because the mortality table assumes that all individuals surviving to age 99 die during this year.

Uses of whole life policy:

The whole life policies are the needs of any individual. Although some protection needs diminish as the individual grows older, no one ever outlives all need for protection against the financial loss occasioned by death.  Death itself creates expenses usually rather heavy.  Consequently, there is always a need for such life insurance protection for the family regardless of the age of the individual.

The whole life policy is further versatile as that it contains savings element, the cash value, which permits the individual to protect simultaneously against the premature death and loss of family income and vesting of finances during old age. The whole life policyholder has the option to encash the policy at cash value.

Types of whole life policies: Whole life policies are classified according to the period over which premiums are paid namely:

  1. Continuous premium whole life policies: Under this type of policy, the premium is paid continuously until death. The insured pays the premiums on each due date as long as he survives. When he dies the proceeds go to his beneficiaries.
  2. Limited Payment Life Policies: Limited payment policies are those in which the premium is payable for a stated period i.e. ten years, twenty years, thirty years or untill the insured reaches a given age, 55 or 60.

The limited payment policy must not be confused with an endowment policy. With the payment of the last premium, a limited payment policy is fully paid up but it is not matured. A matured policy is one under which the face amount is paid either by reason of death or by reason of the survival of the insured to the end of a given period.  A paid up policy does not mature when it is paid up.  The insured simply is relieved from the direct payment of any more premiums.

  1. Single Premium: The extreme in limited payment life insurance is the single premium whole life policy wherein the policy is fully paid up from inception with a single payment.  Such a policy has immediate, substantial cash value. Consequently, such a contract requires a substantial outlay.  It is beneficial for those who get windfall in their income which is not regular. Like, Sportspersons who get huge amount in case of winning gold, Silver or Bronze medal in World/National  Tournaments or lottery winner.

ANNUITY PLANS

Annuity Plans: The annuity has become an important instrument in planning financial security for old age. The annuity has been called the “upside-down application of the life insurance principles.” The purpose of a life insurance contract is the systematic accumulation of a fund and the purpose of an annuity contract is the systematic liquidation of a fund. One function is as important as the other because the family which improperly liquidates its fund may suffer eventually as much as the family which has no funds at all.

When a person purchases a life insurance contract, he agrees to pay the insurer a series of payments in return for which the insurer will, on his death, pay his beneficiaries a specified capital sum. When a person purchases an annuity contract he pays the insurer a specified capital sum in return for a promise from the insurer to make him a series of payments as long as he lives.  The person who receives the periodic payment under annuity is called annuitant. Thus under a life insurance contract the insurer starts paying upon the death of the insured whereas under an annuity contract the insurer stops paying upon the death of the insured.

Like Life Insurance, the annuity is a risk sharing plan based upon a group, the individual numbers of which are all the same age. Individual has the fear of using his capital/ saving before he dies. Under a risk sharing plan, the funds of those who die early can be used to offset the excess withdrawn by those who live long after their principal is spent. While the Insurance company does not know how long any one given individual member of the annuity group will live, it does know how to apply the law of large numbers to the experience of a specific group of annuitants so as to approximate the actual result for that group. Therefore, when the savings or investments of a large number of individuals are combined each member can be paid an annual or monthly amount, actuarially calculated to assume that no one will outlive his capital or income, yet the capital will be paid out & not hoarded. Thus, uncertainty is reduced & losses (the cost of “living too long”) are shared.

The amount of periodic income drawn by each member of the group is determined by his contribution & type of annuity selected. The older a person is when he begins to receive his annuity income, the greater will be his periodic payments per rupee of contribution. If an annuitant is willing to have his payments terminated at his death, he will receive a higher periodic income than if he insists on a guaranteed minimum number of payments.

Method of disposing of proceeds: Annuities may be classified on the basis of the time at which benefits stop.

    1. life annuity no refund
    2. the guaranteed minimum annuity with further classification i.e.Life annuity period certain annuity and Life annuity refund annuity
    3. short term Annuities further classify i.e.  Annuity Certain and Temporary life annuities but not very popular.  

BEST POLICY

All are good but not all.

Most people buy life insurance for one or more of three basic reasons.

  1. to pay the cost of dying and to provide an income for surviving dependents
  2. to provide cash or income for old age
  3. to utilize the semi compulsion in features of the life insurance plan to build a saving fund.

In order to determine the best policy for the individual buyer, it is necessary to know which of the three reasons predominates in a given case. The best policy is the one which gives the policyholder what he finally decides he wants regardless of whether someone else agrees or not that what the buyer wants is best for him.

All this means that in order to determine the best policy, it is necessary to know what each policy offers in the way of the three basic objectives for buying.

The best policy is not to be determined by a study of policies themselves. It can be determined  only by the objectives of the prospective buyer.  The best policy for him is the policy, which is best suited to his need based objectives. What a man wants is not always what he needs. While the professional life insurance selling calls for doing everything possible to see that a man buys a right kind of insurance to fill important needs.

When the Broker meets with a prospect who wants what he wants even though it is not what he needs, the agent has the choice of refusing to be a party to any other options than the most effective prescription leaving the prospect uninsured.

The only way for a buyer to select the best policy is for him to make an honest objective appraisal of his needs or of the exact combination of savings and protection, which constitute his needs.

The man who is not well can ask the advice of friends and he often does. If he is, sick however, he asks the advice of any expert, the physician. Similarly a man who is seeking a diagnosis of his insurance needs can ask his friends – and often does. If he is wise he asks the advice of an expert or a competent Broker.

There are no good and bad policies and every policy has its use. Any policy can be used incorrectly. It is good policy when it is used for the right need.  It is a bad policy when used where it does not apply.  The best policy is determined by a study of the economic situation of a man not by study of policy rates, riders and provisions.

The man who learns to study his need first and policies second is on the way to intelligent life insurance buying.

Therefore, All policies are good but not all.

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