The primary purpose of life insurance is to give financial protection against the following two risks, to which a person is exposed –
- Risk of an early death, because family and dependents need financial protection in the event of death of the bread-winner.
- Risk of living too long, because those who live too long also needs assistance through insurance.
As such, following are the two basic elements of life insurance products, usually referred as ‘plans of insurance’.
• Death cover; and Maturity benefit
Classification of Life insurance plans:
Classification of Traditional Plans
Term insurance is the simplest form of life insurance, which provides the insurance protection at the lowest premium. The policy benefit is payable only if the insured dies during the specified term and the policy is in force when the event happens. Term insurance provides temporary life insurance protection for a specified period of time called the policy term. The policy period may be for 1, 5, 10, 15, 20 years or expiring at some specific age. Term insurance provides only death cover.
Santosh takes a pure term plan from ABC insurance company for a sum insured of 50 lakhs for 30 years. The Policy document specifies that compensation is payable in the event of death of Santosh during the specified term of the policy and the policy is in force. In the event of death of Santosh during the term of the policy the insurance company will pay Rajeev a sum of Rs.50 lakhs.
However, if Santosh survives the policy term of 30 years then he will not get any maturity benefit.
It is designed to provide a permanent form of insurance coverage on the life of the insured. This plan is basically a term life insurance plan for unspecified period. This plan covers the individual throughout their entire life. On the death of the life insured, the nominee/beneﬁciary is paid the sum insured. A whole life policy allows for limited payment period where premiums are payable only for a limited number of years.
Endowment assurance combines elements of protection and savings. The sum assured is payable at the end of fixed term or upon premature death whichever is earlier.
A unit linked insurance plan acts just like a savings vehicle, but also has the benefits of an insurance contract. Unit linked insurance plans allow for the coverage of risk, and provide the option to invest in number of qualified investments, such as stock, bonds or money market instruments. When an investor purchases units in a ULIP, he or she is purchasing units along with a larger number of investors, just like an investor would purchase units in a mutual fund.
The investment in ULIP is denoted in units and is represented by the value that it has attained at the point of time. This is known as net asset value (NAV).
ULIP – Key Features
- Unit Linked Insurance plans offers benefits of both life insurance and returns on investment.
- Under ULIP all decisions in allocating of investment to different asset class is taken by insured. ULIPs offer a complete selection of high, medium and low risk investment options under the same policy.
- ULIP does not offer any guaranteed returns and investment risk is borne by the insured.
- Policy holder has the opportunity to switch between fund options without any additional expense for specified number of switches.
- ULIPs provide the flexibility to choose the sum assured and investment ratio in the annual targeted premium.
- ULIP policies allow you to withdraw part of your investment after 5 years. This helps a lot for investor as it provides liquidity to meet the needs.
- Investment in ULIP is eligible for tax deduction u/s 80C of income tax act.
- Riders can be attached to ULIP
Following are the charges, fees and deductions in ULIP
- Premium allocation charge: to meet initial and renewal expenses apart from commission expenses. A percentage of premiums are appropriated towards this charges.
- Mortality charges: to meet the cost of insurance coverage. Mortality charges depend on number of factors such as age, amount of coverage, state of health etc.
- Fund management charges: towards the management of funds and are deducted before arriving NAV
- Policy administration charges: for the administration of plan. This could be flat throughout the policy term or vary at a pre-determined rate. These charges are levied by cancellation of units.
- Surrender Charges: may be charged if in case premature partial or full encashment of units is opted for (wherever applicable), as mentioned in the policy conditions.
- Fund Switching Charge: is levied for fund switches when number of switches exceeds the limit under the policy conditions. Generally a limited number of fund switches may be allowed each year without charge, with subsequent switches, subject to a charge.
Benefits payable under ULIP
The Sum Assured or value of the fund units, whichever is higher is normally payable to the beneficiaries in the event of death of the life assured during the term. Some policies provide to pay both sum Assured and value of the fund units.
The value of the fund units is payable on maturity of the policy.
There is hardly any need to emphasis the advantage of post retirement regular income till we are alive. An annuity product is one which provides benefits in the event of survival at a stipulated time interval, besides other benefits, if any.
a) Deferred Annuity
A deferred annuity is one which provides an annuity starting after a specified period, called ‘determent period’.
b) Immediate annuity
Immediate annuity is one which provides a series of payments, each at a stipulated interval, on survival. For instance, if Mr. A buys an immediate annuity, he would be entitled to receive an amount of Rs. X (series of payments) every month (stipulated interval), provided that he survives at the end of every month. Here, the event is ‘survival’, and ‘benefit amount’ is Rs. X. The contract ceases on death of annuitant.
Disclaimer: This data above does not purport to be advice nor a complete guide on products or investing. An Investor must consult a licensed professional, on any of his investment decisions before investing.