Life Insurance is a much straightforward concept – you basically buy a policy that offers your beneficiary or beneficiaries a compensation when you are no more. However, certain decisions like the kind of life insurance policy to buy, the amount of death benefit and the premium you pay for your policy might be complex. Human life is very precious. You get financially as well as emotionally disturbed when you lose a family member. So, life insurance policies offer a financial sense of peace to your family in your absence. It provides them an amount in a lump sum or in installments to take care of their finances or to pay for your unpaid bank loans or debts.
What is Life Insurance
Life Insurance is the biggest financial security for your family in your absence!
It is the simplest and cheapest insurance policy available in the insurance market that provides financial benefits to the family of the insured in case of untimely death of the policy holder. The benefits are transferred to a family person nominated (nominee) by the insured. While buying a Life Insurance, the buyer can choose the term (period) of the policy, as per the options made available by a particular insurance provider - based on his/her age and other important parameters. Today, there are a huge number of insurance plans floating in the market fulfilling different needs of insurance buyers. Life Insurance Plan is definitely the most basic yet the most important insurance for every individual with a family.
Key Features of Life Insurance Policies
LONG TERM SAVING
Life insurance helps you in saving and building your wealth. It is a systematic way to safeguard you financially and take care of your future plans like a child’s education, marriage, retirement etc. Therefore, you get the dual benefits of Savings as well as Protection.
LIFE STAGE SPECIFIC PLANNING
Life insurance companies offers plans customized for different stages of life. Every family has certain goals for which a lot of planning is required. These goals may include planning for your kid’s education, buying a house, planning funds for your retirement, etc.
The primary and the most important advantage of a life insurance policy is providing a life cover. The insurance company is liable to pay the life cover to your nominee in case of any unfortunate event. This life cover ensures to keep you and your family secured always in an unfortunate event.
Types of Life Insurance Plans
There are various types of life insurance policies. They are mentioned below:
Life insurance is the simplest and most affordable type of life insurance cover. This type of life insurance plan basically provides financial aid for a specified period only. It offers your beneficiaries an amount in lump sum or annually / monthly or a combination of both once you are gone. But, Life insurance doesn’t offer any paybacks, if you survive the term.
For example, The Mutinda siblings Peter and Victor bought Life plans in December 1985 with life covers of Ksh. 10 Million each with a policy term of 30 years. They paid the premiums on time for the entire term. In 2010, Peter passed away, leaving behind loads and loads of bank loan’s. But his wife (nominee) provided the necessary documents for the claim settlement and received the entire life cover worth 10 Million.
On the other hand, Victor outlived the policy term. He was upset that he did not get any benefit from the life insurance plan for which he had paid the premiums regularly. However, the reason you should buy a life insurance plan is to get a larger coverage at a minimal premium. This would provide financial security for your beloved family.
This type of life insurance plans offers both insurance as well as investment benefits. Endowment plans allocate certain value towards the life cover, while the balance value is invested by the insurance company. In this type of life insurance plan, bonuses are also declared periodically, which are paid either on maturity of the policy or on the death of the insured. A lump sum amount comprising of the life cover and accumulated bonuses is paid on maturity or after the specified duration, or to the beneficiary on the death of the insured whichever is earlier.
For example, Robert bought an endowment plan for tenure of 30 years for a sum assured of Ksh. 10 Million. Robert survives the entire tenure of 30 years and therefore the insurance company pays him the maturity benefit, i.e. the entire sum assured of Ksh. 10 Million and the accumulated bonus (if any). But, if Robert doesn’t survive the policy term, the nominee would receive the sum assured (as death benefit) of Ksh. 10 Million (Plus Bonus (if any) and the policy will be terminated.
Unit Linked Plans (ULIPs)
In this type of life insurance, a certain portion of the premium is paid towards the life cover of the insured while the balance amount is invested in equities and debts as per your choice and risk appetite. In these plans the investment risk is borne by the policyholder.
For example, Amos bought a ULIP for 20 years with an annual premium of Ksh. 20,000. The plan would fetch him a cover of Ksh. 20 Million (10 times of Ksh. 20,000). Post deduction of charges, say Ksh. 5,000, the balance amount of Ksh. 15,000 would be invested in a fund. Suppose the NAV of the fund is Ksh. 10, Amos will get 1500 units (15000/10) of the fund. The value of your fund will also increase if the NAV increases and would decrease if the NAV decreases.
Money Back Life Insurance
In the Money Back Life Insurance policies, a periodic payment is made to the insured only if he is alive as a survival benefit. However, on death of the insured, the insurance company pays the entire sum assured along with the survival benefit.
For example, Rita bought a money back life insurance plan for a term of 20 years and a sum assured of Rs.5 lakh. She would get 15% of the total sum assured after the 5th, 10th and 15th years of the policy term. In short, she would get 60% of the sum assured as the survival benefit and 40% of the sum assured on maturity.
Whole Life Insurance
Here, a dual benefit of insurance, as well as an investment, is offered. An insurance cover for 100 years or for the whole life of the insured, whichever is earlier is provided by the whole life insurance plan. The nominee or the beneficiary is also paid a bonus that is calculated on the total sum assured. This amount is paid only after the death of the insured. The whole life insurance is also a good option for senior citizens, This is because along with the comprehensive coverage, whole life insurance also offers no age bar when it comes to the eligibility criteria. A whole life ULIP insurance offers benefits like growth of cash value, uniform premium payments, tax benefits and cash withdrawal options.
For example, Sheilla got a whole life insurance plan with a sum assured of 10 Million for a term of 20 years. She pays an annual premium of Ksh. 10,000/= regularly. In case of any critical illness, Sheilla would get a certain amount and the future premiums would be waived off. In case of death, the whole life insurance will pay the nominee a compensation too.
A child insurance plan pays a lump-sum amount equal to the sum assured on the death of the parent and the policy continues till the end of the policy term with all future premiums waived off. At the end of the policy term maturity, the benefit is paid to the child. Thus, parents can ensure that their child's needs are taken care of even if they are not around.
For example, Mukesh buys a Child Insurance Plan for a sum assured of Ksh. 10 Million and policy term of 20 years. In case of his death during the 5th policy year, Nadia his daughter will immediately get Ksh. 10 Million. The policy will continue as planned and the remaining future premiums will be waived off by the Insurance Company. Then when the policy matures at the end of 20th year, the insurance company will pay the maturity benefit to Nadia.
A Pension plan helps in building a retirement corpus by inculcating saving habit within one. One pays regular premiums for a certain period of time after which he gets a regular income to have a happy retired life. This premium is invested by the insurance company into a safe fixed income product or in the markets as per one’s choice. On the determined retirement date, the accumulated amount is used for buying an annuity plan, which pays a certain income on a regular basis. These annuity payments can be either monthly, quarterly, half yearly, or yearly as per the options offered by the insurance company.
For example, James buys a pension plan and pays Ksh. 50,000 every year, regularly for a period of 20 years. At the end of the policy term, the accumulated money is used for buying an annuity plan which pays James a regular monthly income of Ksh. 25,000 until his death.
Benefits of Buying Life Insurance
- Provides Life Cover: The life insurance company offers plans that provides you a life cover. The policyholder is covered against the risk of death either for a specific term or for the entire life.
- Financial Security to Family: In case of an untimely death of the life assured, the life insurance company pays the nominee/beneficiary the sum assured (coverage). This way, life assured’s family is financially secured and wouldn’t have to undergo the hardship to make ends meet.
- Build Corpus: With a life insurance policy you can safely build corpus while you enjoy your life’s precious moment with your family. You also get complete assurance of being provided guaranteed sum assured from the day of policy inception.
- Financial Goals: You can meet your short-term and long-term financial goals without worries. Financial goals such as your child’s education and marriage or building funds for your retirement can be easily met with a life insurance.
- Opt for a Bank Loan: You can opt for a bank loan on your life insurance plan. There are plans that covers you for life-long, and on the accumulation of corpus, the bank approves your loan.
- Tax Benefits: All the premiums paid are tax exempted under Section 80C of Income Tax Act, 1961. And the death benefit (payouts) received by the nominee is tax exempted under the Section 10(10D) of Income Tax Act, 1961.
- Peace of Mind: Your family is financially secured in case of unfortunate eventualities, you can make a roadmap to meet your various life stage financial needs, all these along with tax exemption gives peace of mind.