Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the benefit) in exchange for a premium, upon the death of an insured person (often the policy holder). Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum.
Life insurance products tend to fall into two major categories:
Protection policies
Designed to provide a benefit, typically a lump sum payment, in the event of a specified occurrence. A common form of a protection policy design is term insurance. Term insurance provides life insurance coverage for a specified term. The policy does not accumulate cash value. Term insurance is significantly less expensive than an equivalent traditional policy but will become higher with age. Policy holders can save to provide for increased term premiums or decrease insurance needs (by paying off debts or saving to provide for survivor needs).
Investment policies
The main objective of these policies is to facilitate the growth of capital by regular or single premiums. Common forms of such policies are whole life, money back, endowment, ULIP (Unit Linked Insurance Policy), Retirement Plans etc.
According to the section 80C of the Income Tax Act, 1961 (of Indian penal code) premiums paid towards a valid life insurance policy can be exempted from the taxable income. The total amount that can be exempted from the taxable income for section 80C is capped at a maximum of INR 1,50,000. The exemptions are eligible for individuals (Indian citizens) or Hindu Undivided Family (HUF).
Life Insurance Riders
Many insurance companies offer policyholders the option to customize their policies to accommodate their personal needs. Riders are the most common way a policyholder may modify their plan. There are many riders, but availability depends on the provider.
- The accidental death benefit rider provides additional life insurance coverage in the event the insured's death is accidental.
- The waiver of premium rider ensures the waiving of premiums if the policyholder becomes disabled and unable to work.
- The disability income rider pays a monthly income in the event the policyholder becomes disabled.
Upon diagnosis of terminal illness, the accelerated death benefit rider (ADB) allows the insured to collect a portion or all of the death benefit. Each policy is unique to the insured and insurer. Reviewing the policy document is necessary to understand coverage in force and if additional coverage is needed.
Human Life Value (HLV)
The human-life approach is a method of calculating the amount of life insurance a family will need that is based on the financial loss the family would incur if the insured person were to pass away today. It is usually calculated by taking into account a number of factors, including, but not limited to, the insured individual's age, planned retirement age, occupation, annual wage, employment benefits, as well as the personal and financial information of the spouse and/or dependent children.
Income Replacement or Needs approach
The needs approach is a function of two variables: (1) How much will be needed at death to meet obligations? (2) How much future income is needed to sustain the household. When calculating your expenses, it is best to overestimate your needs a little. If you underestimate, you might realize your mistake until it's too late.