Life Insurance

Life Insurance is a contract between a policyholder and an insurance company, where the insurer
agrees to pay a specified sum of money to the beneficiary upon the death of the insured person or
after a defined period, in exchange for regular premium payments.

Benefits of Life Insurance

1. Risk Coverage
Life insurance provides financial protection to the insured's family by offering monetary
compensation in exchange for the premiums paid. It acts as a safeguard against
unforeseen events.
2. Variety of Plans
Insurance companies offer a range of policies tailored to different needs—such as term
plans, endowment plans, and unit-linked plans. The benefits typically increase with
higher premiums.
3. Health Coverage
Many life insurance policies also include coverage for hospitalization and critical illness,
helping to manage health-related financial burdens.
4. Savings and Wealth Creation
Certain insurance plans combine protection with investment. A portion of the premium is
invested in market instruments, which helps build wealth over time.
5. Guaranteed Income
Some policies offer a guaranteed payout, either as a lump sum or in regular installments,
upon the occurrence of a specific event like death or maturity.
6. Loan Facility
Policyholders may borrow against their insurance policy, depending on the policy type
and accumulated value. This feature is available in select policies only.
7. Tax Benefits
Premiums paid towards life insurance are eligible for tax deductions under Section
80C of the Income Tax Act, 1961, helping reduce taxable income.

Principles of Life Insurance

1. Utmost Good Faith (Uberrimae Fidei)
• Both the insurer and the insured must disclose all material facts truthfully.
• The policyholder must provide accurate information about age, health,
occupation, etc.
• Failure to disclose relevant facts may lead to claim rejection or policy
cancellation.
2. Insurable Interest
• The policyholder must have a financial or emotional interest in the life of the
person insured.
• It must exist at the time of policy initiation.
 • Example: A person can take insurance on their own life, spouse, or dependent
child.
3. Indemnity
• This principle ensures the insured does not profit from a claim.
• Note: Indemnity does not fully apply to life insurance, since the value of human
life can't be measured precisely.
• Life insurance policies pay a predetermined sum (sum assured) rather than
compensating actual loss.
4. Contribution
• If a person has taken multiple policies from different insurers, this principle
ensures that the claim is proportionately shared by all insurers.
• Note: This principle applies more to general insurance; in life insurance, full
claim is paid as per policy terms.
5. Nomination
• Nomination allows the policyholder to name a person (nominee) who will receive
the policy benefits in case of death.
• Can be changed any number of times before the maturity of the policy.
6. Assignment
• Assignment is the transfer of rights and ownership of the policy to another person
or entity.
• Can be done for securing a loan or gifting the policy to someone.
• It can be absolute (complete transfer) or collateral (for loan security).

Types of Life Insurance:

1. Whole Life Policy

Definition: A Whole Life Insurance policy provides coverage for the entire lifetime of the
insured individual. The death benefit is paid to the nominee upon the death of the policyholder,
regardless of when it occurs, provided the policy is active.

Key Features:
• Coverage lasts until the insured’s death.
• Fixed premiums throughout the policy term.
• Accumulates a cash value over time, which can be borrowed against.
• Death benefit is guaranteed.

Advantages:
• Ensures lifelong protection for the family.
• Suitable for estate planning and wealth transfer.
• Cash value grows over time and can be used during the insured’s lifetime.
• Premiums remain consistent over the years.

Disadvantages:
• Premiums are higher compared to term life policies.
 • Does not provide maturity benefits.
• Returns may not keep pace with inflation.
• Withdrawals or loans can reduce the death benefit.

2. Endowment Policy

Definition: An Endowment Policy offers both insurance protection and savings. If the insured
dies during the policy term, the nominee receives the sum assured. If the insured survives the
term, a maturity benefit is paid.

Key Features:
• Combines life cover and investment.
• Maturity benefit if the insured survives the term.
• Participating policies may earn bonuses.
• Fixed term and fixed premium payments.

Advantages:
• Provides financial protection along with a savings component.
• Offers lump sum on maturity for future financial goals.
• Encourages disciplined long-term savings.
• Eligible for tax benefits under Section 80C and 10(10D).

Disadvantages:
• Lower returns than market-linked plans like ULIPs or mutual funds.
• Premiums are higher than term plans for the same sum assured.
• Surrendering the policy early leads to a loss.
• Investment portion is not very flexible.

3. Child Insurance Plan

Definition: A child insurance plan is designed to secure the financial future of a child. It
combines life insurance and investment to ensure that funds are available for a child’s education,
marriage, or other major life events.

Key Features:
• Offers maturity benefits aligned with the child’s milestones.
• Waiver of premium on death of the parent.
• Policy continues with insurer paying future premiums.
• Pay-outs structured to support key educational stages.

Advantages:
• Ensures child’s future goals are not affected by the death of a parent.
• Offers financial discipline through long-term investment.
• Can serve as a financial backup for higher education.
• Premium waiver benefit ensures continuity of investment.
Disadvantages:
• Comparatively high premiums.
• Early withdrawal or surrender may result in low returns.
• Market-linked child plans carry investment risk.
• Limited flexibility in fund usage.

4. Money Back Policy

Definition: A Money Back Policy provides life coverage during the policy term along with
periodic survival benefits (a percentage of the sum assured). The remaining amount is paid at
maturity or to the nominee upon death.

Key Features:
• Regular pay-outs during the policy term.
• Balance sum assured paid at maturity.
• If the insured dies during the term, full sum assured is paid regardless of previous
payouts.
• Participating policies may receive bonuses.

Advantages:
• Periodic pay-outs help meet short-term financial needs.
• Suitable for individuals needing liquidity.
• Combines protection, savings, and regular income.
• Tax benefits under Section 80C and Section 10(10D).

Disadvantages:
• Lower returns compared to other investment options.
• High premium for the sum assured offered.
• Can be complex due to structured payouts.
• Not suitable for wealth creation or long-term growth.

5. Term Life Insurance

Definition: Term Insurance is the simplest and most affordable type of life insurance. It provides
coverage for a specified period. The sum assured is paid only if the insured dies during the policy
term. There is no maturity benefit if the insured survives the term.

Key Features:
• Pure risk coverage with no savings or investment component.
• Fixed term, such as 10, 20, or 30 years.
• High coverage at low premium cost.
• Option to add riders like critical illness, accident benefit, etc.

Advantages:
 • Inexpensive and easy to understand.
• Offers large cover at a low cost, making it ideal for income protection.
• Suitable for young individuals and those with dependents.
• Can be customized with riders for enhanced protection.

Disadvantages:
• No return of premium unless opted as an additional feature.
• No savings or investment component.
• Premiums increase with age if not taken early.
• Not ideal for wealth building.

6. Pension Plan (Retirement Plan)

Definition: A pension or retirement plan helps individuals accumulate a corpus for retirement. It
provides regular income (annuity) after retirement from the accumulated fund.

Key Features:
• Two phases: accumulation and annuity.
• Maturity amount partly available as lump sum, rest used to purchase annuity.
• Can be taken as deferred or immediate annuity.
• Life cover may or may not be included.

Advantages:
• Financial independence post-retirement.
• Encourages disciplined long-term savings.
• Reduces reliance on children or government pension.
• Tax benefits under Section 80CCC and 10(10A).

Disadvantages:
• Returns may be fixed and modest.
• Income received as annuity may be taxable.
• Lock-in period is long; low liquidity.
• Not ideal for short-term goals.

7. ULIP (Unit Linked Insurance Plan)

Definition: ULIP is a hybrid insurance product that offers both life cover and investment. A
portion of the premium provides life cover, while the rest is invested in equity or debt funds as
per the policyholder’s choice.

Key Features:
• Offers flexibility to choose and switch funds.
• Returns are linked to market performance.
 • Lock-in period of 5 years.
• Transparent structure with disclosed charges.

Advantages:
• Potential for higher returns through equity exposure.
• Combines investment and insurance in one plan.
• Policyholders can switch between fund options based on risk appetite.
• Tax benefits under Section 80C and 10(10D).

Disadvantages:
• Subject to market risk and volatility.
• Multiple charges (fund management, premium allocation, etc.) reduce net returns.
• Complex structure not suitable for all investors.
• Not ideal for risk-averse individuals