Let us start with the basic question, “What is life insurance?” In layman language it is an agreement between the policy holder (the person who is going to buy the insurance policy and get himself insured) and the insurer (the insurance providing company). According to the agreement the policy holder is bound to pay the premium (agreed amount) to be paid each year till the completion of agreement and in return the policy holder or its heirs will get the sum of large claim amount (the amount this is agreed to be paid to policy holder by insurer) in case of either maturity of policy or death of policy holder.
Let us more elaborate it. There are different type of line insurance policy that are currently offered by insurer. Depending on the type of life insurance, the insurer is bound to provide the sum of money either to the insured person or beneficiaries of insured person. If the policy get matured then the policy holder will receive the sum of claim money otherwise in case of death of insured person the beneficiaries / legal heirs of insured persons are entitled to get the claim. The sum of claim money is mutually agreed at the time of agreement between the insurer and insured person.
This is the fundamental block of financial planning that provide the safety and security to policy holder and his/her family members to overcome from any bad incident. And most importantly all the claims are tax free.
Types of Life Insurance
Different insurance companies provides different types of life insurance, which are designed to meet the requirements of current market. But the most common and popular types are:
- Term Life Insurance
- Universal Life Insurance
- Whole Lifetime Insurance
TERM LIFE INSURANCE POLICY COVERAGE
The ‘term life insurance’ provides coverage for specific period of time. It is more likely the investment to get the profit after completion of term. In case of death of policy holder before the maturity of policy (i.e completion of term) the beneficiaries of insured person will get the claim money and all the remaining premiums will be waived off which means that the heirs have no liability to pay any premium amount. Every insurer has fixed term period containing different number of years but mostly the predefine terms are like 10 year term, 20 year term or 30 year term. The premium in term life insurance is fixed, it will not increase with time. After completion of term the policy holder can also continue the protection for next term on new premium rate, which is of course higher from previous rate.
The term life insurance policy will be beneficial in paying debts and loans, paying college fees of children, buying house or car. In short it will provide financial benefits to achieve life goals.
The term life insurance is very beneficial if planned properly, for example one can buy the policy for term equal to years remaining in his / her retirement. The policy will get mature on his retirement and he will entitle to get the claim amount.
It’s vital to keep in mind that, the insured will not get the pay checks but will get the lump sum amount on maturity.
Term life insurance policy is easy to buy, more affordable, flexible in choosing number of years, fixed premium and mostly no medical test required to buy the policy.
UNIVERSAL LIFE INSURANCE PLAN
The ‘universal life insurance’ is a permanent life insurance that provides protection to whole life of policy holder as oppose to the term life insurance where coverage is for fixed period of time. The premium paid by policy holder in universal life insurance is flexible which allows the policy holder to change the policy premium at any time of life as per his / her ease. However, as the premium is not fixed it will increase with time.
In universal life insurance the portion of premium is used to build cash value and provide investment component. The policy holder can get the loan against the cash value. Or the investment component you will able to get the interest. The interest rate may increase or decrease depending upon policy performance.
The policy holder can also lift the face value of policy by passing the medical test. So this is one of the best option to choose especially whose life style is healthy and having no major disease.
WHOLE LIFETIME INSURANCE
The whole life insurance provide lifetime protection till the death of insured person. Generally the premium is higher than universal insurance, but the premium is fixed as contrast to whole life insurance policy’s where premium is flexible. Similar to universal, whole life insurance policy builds cash value and provide high interest rates. This will give ease and flexibility in in financial matters and also provide tax defer facility with time.
Both whole and universal life insurance falls under the permanent life insurance category, where policy consist of two portion one is the insurance portion and other one is the investment portion. Because of having insurance and investment portion the policy holder has to pay high premium as compared to term life insurance policy premium.
HOW COST OF LIFE INSURANCE IS CALCULATED
The premium of life insurance policy is calculated on the basis of different components, like type of insurance, health condition of insured and so on. Insurance companies uses world recognized practises like rate courses, or risk-related classes, to ascertain the insured person’s superior obligations. With the help of these classifications the insurer can determine the duration or amount of policy. The premium of life insurance of each person is calculated differently based different factors such as that specific person’s health history, family disease history and also how the person live. For example the person who intakes tobacco has high risk and has danger to its life so it will definitely increases the premiums as compared to the person who does not use any tobacco.
So, it is advised to go through different insurer and check their pros and cons, terms and conditions about policy to get the best rates as per your circumstances. If you have any question please feel free to comment.