Insurance is a contract between the insurance company and the client, wherein the company agrees to indemnify the client against any loss or damages that arise in event of a mishap, for a premium. Premium is the price the client pays to the company for its promise to indemnify. It is the consideration that the company gets from client’s side.Life insurance is a financial product of great significance when it comes to protecting one’s family from the financial crisis that may arise because of loss of income due to one’s death. Death is the ultimate truth and no one can predict when the bad time would strike. It is wise to be prepared for such uncertainties now rather than subjecting your loved ones to unsound financial conditions later.
It does sound harsh, but no one would like to admit that they can die untimely. However, the non-admittance of the fact is the beginning of the process of fooling oneself. This process can wreck havoc for the family when one dies and no provisions were ever made to secure the family when he/she would not be around. Thus, life insurance is a vital element that must not be ignored.
There are two basic and most popular forms of life insurance, viz. the whole life insurance and the term life insurance. As the name suggests, the whole life insurance policy provides risk cover for the life-time of the insured. It also has an attached element of investment. The death benefit is paid out in case of the event of the demise of the insured. Premiums may be paid monthly, quarterly, half yearly or annually.
On the contrary, term life insurance provides risk cover for a specific number of years, say 10 years or 15 years. Starting from 1 year, term life insurance coverage may last for as long as 30 years. You may pay the premium monthly, quarterly, half yearly or annually. Only death benefits are payable in case of event of death of the insured as it is in case of whole life insurance.
Whole life insurance is an expensive affair since the period for which premium is to be paid is longer and amount of premium is 10 to 12 times higher as compared to the premium paid for term insurance. You will see that term life insurance is actually a fantastic insurance product when you understand how its features triumph over those of whole life insurance.
- The premium of term life insurance is 10 to 12 times lower than that of a whole life insurance. This is because of the fact that only around 1% of people insured under the term insurance policy die during the policy period. Whole life insurance policies are to be paid out someday or the other. So it is obvious that the premiums will be high, in order for the insurance company to run its business profitably.
- Since we cannot predict the future, it is wise to make provisions for just as long as we need. For example, if a couple has 10 year old kid and they decide to buy a life insurance policy for themselves, it is advisable to go for a term insurance policy of 10-12 years. By the time the kid will have completed his/ her education, get employment and start earning an income.
- Whole life insurance has an investment element, i.e., it builds cash value. But such policies invite hefty fees and commissions. In case the insured wishes to terminate the contract of insurance, he/she has to pay high surrender charges. This ultimately eats into your hard-earned money and the benefits tend to diminish.
- Instead of paying hefty premiums, one can deploy the funds into more productive activities, say investment in equities, mutual fund SIPs or retirement planning. Make the best out of your hard-earned money. Do not fall prey to agents who may tempt you into buying whole life insurance policy or a policy of a higher value than what you actually need. They are simply interested making you part from your cash and earn huge commissions.
Benefit amount is yet another important factor. Evaluate your needs carefully. Take into consideration your current income and expenditure, future expectations, your debts, provisions for other contingencies and the rate of inflation.
It is easy to make decisions when you are well informed. Try to evaluate your need and the features of the insurance policy. Make sure they both match and then choose your pick wisely.
Disclaimer- Information presented on 'And my life goes on...' Blog is intended for informational purposes only and should not be mistaken for financial advice. While all attempts are made to present accurate information, it may not be appropriate for your specific circumstances.
