Life Insurance Explained In A Simple Way

If go by the text book, definition of Life Insurance is ‘Life insurance is a contract between and Insurance Policy Holder and Insurance Company where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period’.

     So, we will tell you the real meaning of Life Insurance. It’s completely  about showing Care and having sense of responsibility towards your loved ones and your dependents. It can be your Parents, Your Spouse,  Your Children or Your in-laws for whom you care a lot, and always back of the mind you think  what would happen to them you won’t be there around with them ? who will fulfilling their needs and requirements in your absence? . If these questions are running through your mind, then what are you waiting for, go get a good life insurance cover for yourself.

     Your Life Insurance policy is just few clicks away. There are various companies who offer online Life Insurance Policy and Term Life insurance policy at very discounted rates.

     So, Let’s look at the Benefits of Life Insurance Policy and how Term Life Insurance Policy is always a better option rather than traditional life insurance.

1. You can live Stress Free Life

Suppose you have a family five members comprising of your Parents, spouse, one four-year-old child and yourself being the only earning member. Also, there is home loan of Rs. 20 Lacs in which you all are staying. Suddenly, you meet an accident and you pass away and there is no life insurance cover. Just think what will happen to your family. How will they survive ? What will they Eat ? Who will Pay the EMIs?

     Life insurance is required not just for securing burden of your loans but it is also required to take care of your loved ones and your dependents after your Death.  `

     Once should always opt for a Life Insurance Cover totaling to 10-20 times of your annual Income. Suppose you are earning 5 Lacs Per annum you should get a Life Insurance Cover Not Less than 75 Lacs to 1 crore.

So, when you get your Life Covered you can definitely live a Stress Free Life.

2. How Much Life Insurance Cover You Need?

As mentioned in earlier point, you should always opt for a Life Insurance Cover totaling to 10-20 times of your annual Income. Suppose you are earning Rs. 5 Lacs Per annum, then you should get a Life Insurance Cover Not Less than 75 Lacs to 1 crore. Simple calculation is , if you earn annually Rs.5 lacs and your insurance cover have to be Rs. 1 crore (maximum i.e., 20 times of your income). In case of your death, your dependents will get Rs.  1 crore.  If your family invests the claim amount of Rs. 1 crore they can easily live rest of their lives by just investing that amount for a minimum annual interest rate at 5% p.a. which will give them Rs. 5 Lacs per annum. Therefore, financial experts always say ‘ Get the maximum insurance cover at very early age and pay lesser premium at later age.

3. Why go for a Term Life insurance ? Is it better than Traditional Life insurance ?

Let’s understand the basic meaning of both .

What is term Life Insurance ?

A term insurance plan is a type of life insurance plan which covers the risk of death. In case of death of the insured person, during the term of the policy, the policy promises to pay a death benefit. Term insurance plans promise high insurance coverage at low premiums allowing you to avail a high sum assured which would be able to meet your dependent’s financial requirements in your absence.

There are various types of Term Insurance plans such as Pure term insurance plan, Increasing term insurance plan, Decreasing term insurance plan, Return of premium term plan, etc.  

Return of Premium plans return all your premiums paid after policy period is over, but premium of these plans cost you more than Pure Term Insurance plans where only death benefit is available.

What are other types of Life insurance ?

  • Endowment assurance plans
  • Whole life insurance plans
  • Money-back plans
  • Child Double benefit plans
  • Unit linked insurance plans
  • Pension plans

In all the above insurance plans if the Insured person completes the premium Paying term ( PPT) , he/she is eligible for a maturity benefit. This benefit is not available in all Term Life insurance plans.

If you are looking to buy an Insurance Policy as Investment and expecting a good return on maturity then you will have to compromise on the rate of return on your investment. Because, almost in all the cases of traditional or modern-day Insurance plans other than Term life insurance Plans, you will get a return on investment not more 5 percent to 6 percent annually. I know many of you have always selected for insurance plans thinking about the maturity amount and not the insurance cover. Let us compare the plans premium wise and decide which one is better.

Golden Tip–  ‘Never mix your insurance coverage with your investments.’

4. The Calculation Between –Term Life Insurance  and   Other Life Insurance Plans

For example:

Your Age is 25

Your annual earnings are Rs 5 lacs to Rs. 7 Lacs.

Insurance Coverage Required Rs.1 crore

Your Premium for Term Insurance coverage of Rs. 1 crore will range between Rs. 8,000 to 12,000 per month ( Annually Rs. 96,000 to Rs. 144,000  thousand) Refer Image below:

{Above quote source PolicyBazaar.com }

Similarly, if you opt for Insurance plan other than Term Life Insurance :

Your premium for insurance coverage of Rs. 1 crore will be approx. Rs. 10 lacs per annum

On maturity you will get Rs. 2 crores ( Approx.)

But the premium is Rs. 8 lacs to 9 lacs higher than term insurance annual premium. Refer below Image with details of premium for investment plan other than Term Life Insurance:

{Above quote source PolicyBazaar.com }

Also, in case of investment plan other than Term Life Insurance, if you pay premium of Rs.1 lacs per annum, you will get Rs. 10 lacs cover with maturity benefit of Rs.20 lacs ( Approx.) Refer below image:

{Above quote source PolicyBazaar.com }

5.Follow The Golden Rule ‘ Keep your Insurance and Investments separate’ :

In above situation, if you would have followed the Golden Rule, and if you opt for :

Pure Term Life insurance with coverage of Rs. 1 crore

Annual premium will be Rs. 1 lac ( approx.)

Premium paying term of 35 years

And

Simultaneously you start to invest Rs. 1 lac annually ( Rs. 8334 monthly) thru SIP ( Systematic Investment Plan)

SIP investment for 30 years

On maturity you will get Rs.  1.89 cores

( At an average return of 10% p.a.)

This will give you insurance of  Rs. 1 crore for 35 years  and also you will get Rs 1.89 crores after 30 years of investment

Please refer below image for calculation of return on SIP:

{Above calculation image source scripbox.com}

(Please note above calculations are subject to differ depending upon the market conditions, government regulations and income  of Individuals.)

The Bottom Line

Above information will definitely clear your doubts on what type of Insurance policy you need and why Life Insurance Cover is very Important. It will help you in understanding the difference between Insurance and Investment plans.

MoneyUrs

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