Life Insurance- Your commitment to your loved ones

Death is never a good word even to mention, least of all to mention in first line. But death remains one of the biggest truths and an unavoidable event of our lives. A sudden demise at any stage of life of an earning member can bring havoc to the finances of his/her family. In Indian context where family responsibilities forms an important part of one’s lives, ensuring continuity of lives of family members becomes even more relevant.

Life Insurance basically means a product where your dependent/s (selected by you, generally blood relatives) receives a pre-determined sum of money in case of your death, in return of payment of a sum known as premium.  Life Insurance in India has been for long synonymous with Life Insurance Corporation (LIC) , the mammoth government undertaking. But for last one decade its dominance has been challenged by private players which have successfully made inroads into the still nascent Indian market by innovative products and aggressive sales practices.

Lets begin with terminology of the Life Insurance Industry –

•  Insurer – Life Insurance Company
• Insured – Life Insurance Consumer
• Life Cover – Sum to be paid to dependents of Insured in case of death, by the insurer
• Premium – Sum paid by insured at regular frequency to the insurer , for availing life cover
• Tenure – Period for which Insurance holds good

Life Insurance products can be classified into followed types –

1. Pure Life Insurance Products – One that offers only life insurance as service.
2. Hybrid Life Insurance Products – Products that provide investment as an additional feature of the insurance product.

Even between above categories, insurers these days provide variety of products.

Pure Life Insurance Products -

• Term Plan – Premium paid (generally annually) by the insured goes into covering for cost of life cover provided ONLY.
• E-Term Plan – Term plans sold over internet are known as e-term plans. They generally have lower premiums than one bought offline, as they have lesser sales cost.
• Term Plan with Increasing Cover – these term plans increases life cover at regular intervals at a pre decided rate (in percentage terms of the initial life cover)
• Term Plans with return of premium – this kind of product returns an amount equal to the sum of the premiums paid by the insured at the end of the tenure - in case insured survives the tenure of the product -decided at the time of availing the product.

Insurer ensures returns of the premium by investing a part of the premium in such a manner that it grows into the sum to be returned at the end of the tenure. So insured is basically paying premium to avail life cover in addition to getting all the money paid back. Needless to say these products have higher premiums than pure term plan.

Hybrid Life Insurance Products –

Remember the LIC policies, that inseparable part of our parents’ financial planning? They come under this category only. Hybrid products can be considered as a mix of investment and insurance. Insured person pays a premium which is invested by the insurance company and in case of any fatality, dependent of insured person gets a lumpsum life cover. In case insured person survives the tenure he still gets the same amount. These plans are called as endowment plans. LIC have long been pioneer of plans like these. These plans are very simple but goes against basic principle of personal finance “Insurance is an expense and not investment”. Various research have shown that investors are better off by picking term plans and investing money in other investment avenues than buying endowment plans. But these plans have remained in demand due to simplicity and penetration of LIC sales agents

ULIP’s are another class of hybrid insurance products- ULIP or unit linked insurance plan is market linked* insurance cum investment plan which acts as combination of mutual fund (debt or equity or both)  and insurance. It is one of most integrated financial product which allows investors to decide proportion of money kept in debt and equity, seamless transfer between them, without any tax or penalty implications. It is one of most evolved financial product available for individual investor. Though ULIPs are very simple to buy and take care of most of portfolio requirements, these remains one of complicated products to comprehend for a non savvy investor.  That is why this product constitutes one of the most mis sold products historically but over time regulation have catch up with salespeople and now IRDA have framed well defined guidelines to prevent investor exploitation.

Most of the life insurance products fall under one of these categories with slight variations. Tax treatment of most of the above products is similar with money put in being tax exempt under Section 80(C).**

*Market Linked are those products whose returns depends on the returns of the debt or equity market.

** Life Cover should be at least 10 times of the annual premium for the policy to qualify for Section 80(C) exemption.

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