Life insurance An Introduction

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What is Life Insurance?

Human life is perhaps the most important and invaluable asset. This asset is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is a loss of income to the household.

Though human life cannot be valued, it is possible to estimate the loss of income that would be suffered in future years in the event of a risk like death or disability. Life insurers try to place a monetary value on such loss and provide insurance cover for such loss. Life insurance is a financial cover for a contingency linked with human life, like death, disability, accident and retirement. Life insurance products provide a definite amount of money in case the life insured dies during the term of the policy or becomes disabled on account of an accident.

Who needs life insurance?

i. Primarily, anyone who has a family to support and is an income earner needs life insurance.

ii. In view of the economic value of their contribution to the family, housewives too need risk cover.

iii. Even children can be considered for life insurance in view of their future income potential that is at risk.

Basic types of life insurance policies

i. Term insurance: Under this plan, the sum assured is paid only on the death of the insured during the period specified. There is no maturity value in term insurance.

ii. Endowment assurance: Under this type of plans, the sum assured is paid at the end of the term as maturity or on the death of the insured during the term of the policy. This is available as With Profits (Bonus) or Without Profits type. Money-back plans are endowment policies with the provision for return of a part of the sum assured in periodic installments during the term and balance of sum assured at the end of the term.

iii. Whole life insurance: It offers to pay the sum assured when the life assured dies, no matter when the death occurs. There is no fixed term for cover of death. The premiums can be paid throughout one’s life or for a specified limited period.

iv. Unit Linked Insurance Plans: These are essentially life insurance plans where the premiums are invested in the capital markets and the returns are therefore linked to the performance of the specific fund and the overall market. The fund choice is made by the customer and therefore the investment risk is borne by the customer. There is also specified life insurance risk cover available for which premium will be deducted before investment. There are also various charges applicable in this type of policies.

v: There are other varieties among life insurance policies such as Variable Insurance Policies, Joint Life Policies and children’s policies.

*Courtesy: Insurance Regulatory and Development Authority of India.