LIFE INSURANCE

Life Insurance is a financial cover for a contingency linked with human life, like death,
disability, accident, retirement etc. Human life 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 loss of income to the household.

Though human life cannot be valued, a monetary sum could be determined based on the
loss of income in future years. Hence, in life insurance, the Sum Assured ( or the amount
guaranteed to be paid in the event of a loss) is by way of a ‘benefit’. 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.

All of us face the following risks:

 Dying too soon
 Living too long
Life Insurance is needed to ensure:
1. That your immediate family has some financial support in the event of your
demise.
2. To finance your children’s education and other needs.
3. To have a savings plan so that you have a constant source of income after
retirement .
4. To ensure that you have extra income when your earnings are reduced due to
serious illness or accident.
5. To provide for other financial contingencies and life style requirements.
Who needs Life Insurance:
Primarily, anyone who has a family to support and is an income earner needs Life
Insurance. In view of the economic value of their contribution to the family, housewives
too need life insurance cover. Even children can be considered for life insurance in view
of their future income potential being at risk.
How much Life Insurance is needed:
The amount of Life Insurance coverage you need will depend on many factors such as:

 How many dependents you have.

 Whether you have any debts or mortgages
 What kind of lifestyle you want to provide for your family
 How much you need for your children’s education
 What your investment needs are
  You should seek the help of an insurance agent or broker to understand your
insurance needs and suggest the right type of cover.
Types of Life Insurance Policies:
1. Term Insurance
You can choose to have protection for a set period with Term Insurance. In the event of
death or Total and Permanent Disability if the benefit is offered), your dependants will be
paid a benefit. In Term Insurance, no benefit is normally payable if the life assured
survives the term.
2. Convertible or renewable term assurance
A renewable term assurance is a term assurance with the option to renew (ie take out a
further term assurance) at the end of the original contract. The appeal of this option lies
in the fact that the renewal can be made without further medical underwriting. (Although
in South Africa, renewable contracts sometimes allow for a test to detect for HIV at
renewal.)
A convertible term assurance allows the policyholder to convert the term assurance into
another type of contract, such as a whole life or endowment assurance. The point(s) at
which conversion is allowed will vary depending on the particular policy conditions.
Conversion may be allowed on only one date, on any of several dates, or at any time
during the original term assurance contract.
A particular contract may offer only the renewal option, only the conversion option, or
both.

3. Whole Life Insurance

With whole life insurance, you are guaranteed lifelong protection. Whole life insurance
pays out a death benefit so you can be assured that your family is protected against
financial loss that can happen after your death. It is also an ideal way of creating an
estate for your heirs as an inheritance.

4. Endowment Policy
An Endowment Policy is a savings linked insurance policy with a specific maturity date.
Should an unfortunate event by way of death or disability occur to you during the period,
the Sum Assured will be paid to your beneficiaries. On your surviving the term, the
maturity proceeds on the policy become payable.

5. Money back plans or cash back plans:

Under this plan, certain percent of the sum assured is returned to the insured person
periodically as survival benefit. On the expiry of the term, the balance amount is paid as
maturity value. The life risk may be covered for the full sum assured during the term of
the policy irrespective of the survival benefits paid.
 6. Children Policies
These types of policies are taken on the life of the parent/children for the benefit of the
child. By such policy the parent can plan to get funds when the child attains various
stages in life. Some insurers offer waiver of premiums in case of unfortunate death of the
parent/proposer during the term of the policy.

7. Annuity (Pension) Plans

When an employee retires, he no longer gets his salary while his need for a regular
income continues. Retirement benefits like Provident Fund and gratuity are paid in lump
sum which are often spent too quickly or not invested prudently with the result that the
employee finds himself without regular income in his post - retirement days. Pension is
therefore an ideal method of retirement provision because the benefit is in the form of
regular income. It is wise to provide for old age, when we have regular income during our
earning period to take care of rainy days. Financial independence during old age is a
must for everybody.
There are two types of annuities (pension plans).
7.1 Immediate Annuity
In case of immediate Annuity, the Annuity payment from the Insurance Company starts
immediately. Purchase price (premium) for immediate Annuity is to be paid in Iumpsum
in one installment only.
7.2 Deferred Annuity
Under deferred Annuity policy, the person pays regular contributions to the Insurance
Company, till the vesting age/vesting date. He has the option to pay as single premium
also. The fund will accumulate with interest and fund will be available on the vesting
date. The insurance company will take care of the investment of funds and the
policyholder has the option to encash 1/3rd of this corpus fund on the vesting age /
vesting date tax free. The balance amount of 2/3rd of the fund will be utilized for
purchase of Annuity (pension) to the Annuitant.

8. Unit Linked Insurance Policy

Unit Linked Insurance Policies (ULIPs) offer a combination of investment and protection
and allow you the flexibility and choice on how your premiums are invested. In unit linked
plans, the investment risk portfolio is borne by you as you are the investor
Typically, the policy will provide you with a choice of funds in which you may invest. You
also have the flexibility to switch between different funds during the life of the policy. The
value of a ULIP is linked to the prevailing value of units you have invested in the fund,
which in turn depends on the fund’s performance. In the event of death or permanent
disability, the policy will provide the Sum Assured (to the extent you are covered) so that
you can take comfort in knowing that your family is protected from sudden financial loss.
A ULIP has varying degrees of risk and rewards. There are various charges applicable
for Unit Linked Policies and the balance amount out of the premium is only invested in
the fund/funds chosen by you. It is important to ask your insurer or agent or broker
questions to understand the sum total of charges that you have to incur. It is important to
assess your risk appetite and investment horizon before deciding to buy a ULIP policy.
You must also read the terms and conditions of the policy carefully to understand the
features of the policy including the lock-in period, surrender value, surrender charges etc.

9. Income drawdown
Some defined contribution arrangements allow for ‘income drawdown ’. Under such an
arrangement instead of buying an annuity the fund remains invested and the member
withdraws an amount of the fund each year. This may be just the income earned on the
fund or may also include some of the fund capital.
It is usual for this income drawdown product to be offered by an insurance company. At
retirement the member (ie individual) will transfer their accumulated fund from their
defined contribution arrangement to the income drawdown product.
Income drawdown is unlikely to be suitable for individuals with small, accumulated funds,
as the charges imposed by the insurance company to manage the income drawdown
product can be significant.

10.Investment bonds
These are single premium contracts, normally whole life, designed to enable
policyholders to invest for the medium to long term.
A policyholder can usually make withdrawals from an investment bond, however these
may incur a penalty in the first few years of the bond. There may also be restrictions on
the frequency with which withdrawals can be made later in the term.
On death, the bond will pay a lump sum. There may be a guarantee that this lump sum
will not be less than the original single premium investment. However, the amount paid is
likely to depend on the return earned on the investment chosen by the policyholder / their
advisor.
They are typically written on a unit-linked or investment-linked basis.

11.Critical illness insurance

The contract provides a cash sum on the diagnosis of a ‘critical ’ illness, such as heart
attacks, strokes or many forms of cancer, which could be used for nursing and other
care. It therefore meets an important need for financial security in the event of
contracting such illnesses.
Normally the specific critical illnesses covered will be explicitly listed in the policy
documentation.
The policy wording is critical (pun intended) in defining precisely which diseases are
covered, which could potentially have a huge effect on the claim experience.
In some jurisdictions the definition of illnesses may be standardised across all contracts
of that type. Policies are normally without-profit or unit-linked.

12.Keyperson cover
A life and / or critical illness policy taken out to cover the life of a key person within a
business.
Within a business, particularly a small business such as a doctor ’s practice or law firm,
there may be key individuals without whom the business may struggle. If the business is
a partnership these individuals (or partners) may each have made a financial contribution
to the business.
If one of these individuals dies, suffers a critical illness or long-term incapacity,
keyperson insurance pays a lump sum benefit to the business.

13.Long-term care insurance

The contract can be used to help provide financial security against the risk of needing
either home or nursing-home care as an elderly person, ie post-retirement. The contract
could pay for all the costs of care throughout the remainder of life (an indemnity
contract), or could provide a cash lump sum, or an annuity, to contribute towards the
costs of care.
A claim is payable on this contract when the policyholder is deemed to have reached a
specified level of disability, for example the policyholder may be unable to perform a
specified number of activities of daily living (ADLs).The different levels of care will differ
between one contract and another, but typically may include:
 cost of care in own home
 cost of being cared for in a residential (but non-nursing) home cost of being cared
for in a residential nursing home.
 These involve increasing costs as you move down the list.