Term life insurance is the most affordable type of life insurance available. It is designed to meet temporary life insurance needs; providing protection for a specified period of time, the term. For example, a term of 10, 20 or 30 years. This type of life insurance makes sense if you have financial needs that will diminish over time, such as a home mortgage or a child’s tuition. Each year, a premium is paid to cover the risk of death during that year. Term life insurance has no cash value. The only way to collect anything is to die before the term life insurance expires.
If death occurs, the life insurance beneficiary generally collects the death benefit of the life insurance policy, free of income tax. *Death benefit The amount of money paid or due to be paid when a person insured under a life insurance policy dies. This amount does not include adjustments for outstanding policy loans, dividends, paid-up additions, or late premium payments. Term Insurance Policy| * A term insurance policy is a pure risk cover policy that protects the person insured for a specific period of time.
In such type of a life insurance policy, a fixed sum of money called the Sum Assured is paid to the beneficiaries (family) if the policyholder expires within the policy term. For instance, if a person buys a Rs 2 lakh policy for 15 years, his family is entitled to the sum of Rs 2 Lakh if he dies within that 15-year period. * If the policy holder survives the 15-year period, the premiums paid are not returned back. The advantage, apart from the financial security for an individual’s family is that the premiums paid are exempt from tax.
* These insurance policies are designed to provide 100 per cent risk cover and hence they do not have any additional charges other than the basic ones. This makes premiums paid under such life insurance policies the lowest in the life insurance category. Term life insurance covers the insured for what is usually a relatively short period of time. All of the money from the premium is used to pay for the insurance itself. Therefore, at the end of each term, the policy must be renewed. The policy does not accrue equity for the insured.
There is no penalty for not renewing a term life policy because the insurance company is not in possession of an asset. If the insured dies during the term of the policy, the policy pays off at its face value. Term life policies are generally tax-free and may even allow for a partial payout upon diagnosis of a terminal disease. For young people, term life insurance is often the cheapest option. However, the price will increase as you age because health problems show up over time, and, for the simple reason that the older you are, the higher the chance that the insurance company will have to pay a settlement.
Another downside is that if health problems materialize and your policy is non-renewable, your premiums may increase or you may no longer qualify for insurance. This problem can sometimes be avoided by paying higher rates for renewable term life, allowing you to renew the same policy without re-qualifying. A policy may also be designated convertible, which means that the insured can convert the policy to permanent life at a later time. Another choice related to term life is the option for level or decreasing term. Level term pays the same amount of money upon death at any point during the policy.
Decreasing term pays less and less as the term progresses. The latter is most effective for protection against a mortgage or any other steadily decreasing financial obligation. Level term life is not to be confused with level premium term life, which specifies that premiums will not increase over the course of the term in exchange for slightly higher premiums early in the term. People choose term life when they need insurance for only a short period of time, or they need insurance, but cannot afford the premiums associated with permanent insurance.
Some people choose term life and then invest the difference between the premium and a permanent life premium on their own. These people are confident that their investments will outperform those of the insurance company. Whole Life InsuranceWhole life insurance is a type of permanent life insurance, and is designed to remain in effect throughout one’s lifetime. It is well suited to needs that do not diminish over time, such as paying estate settlement costs and taxes. Generally, the life insurance rate (or premium) for this type of policy remains the same throughout the life of the insured.
During the early years of the life insurance policy, premiums are much higher than those of a term life insurance policy. As a result, and by design, these life insurance policies develop cash values which can be accessed by the owner of the policy through surrenders or policy loans. Cash values in whole life insurance policies typically include two components: 1. Each life insurance policy has a guaranteed cash value, which typically grows based on a pre-determined schedule during the life of the policy and which “endows” or equals the death benefit upon maturity of the policy (typically at age 100).
2. In addition, most whole life insurance policies have a non-guaranteed cash value element, typically made up of “dividends” or “excess interest” which can enhance the value of the life insurance policy over time * * * Cash Value (also called Permanent Life) Cash value insurance is an umbrella term for a variety of plans that combine a death benefit similar to a term life plan with tax-sheltered savings arrangements. Permanent life policies, as their name implies, are meant to be held and paid into for the duration of the insured’s life.
Because of this, there are significant fees associated with setting up the policy. Despite these fees, the tax advantages can make permanent life a valuable investment over a long period of time. The policy is always renewable and premiums are fixed and calculated based on the age of the insured when the policy is initiated. If the death benefit is paid early in the policy, the money will come mostly from the insurance policy, and, if the death benefit is paid late in the policy most of the money will come from the savings account.
As the savings become more and more significant, less insurance is needed to hold down the cost of insurance as the holder ages. The cash value portion of the policy is invested in a savings account. Accordingly, value accrues in the policy over time. This portion of the money paid by the insured was originally intended to pay insurance premiums in retirement. Because the account is an asset belonging to the policy holder, however, it is assignable, meaning that it can be transferred to another person or used as collateral for a loan.
Policies may even be converted to an annuity to provide income during retirement. Any balance remaining in the account when a settlement is paid is passed on to the beneficiary of the policy. Removing money from the account before settlement for expenses other than the insurance premium is not recommended because taxes and fees will be incurred. Despite potential benefits, cash value plans must be carefully investigated because their value to insurance companies exceeds term life, and unscrupulous agents may attempt to push them on customers more suited to term life.
* Whole Life Whole life is the most basic form of cash value life insurance. The insurance company essentially makes all of the decisions regarding the policy. Regular premiums both pay insurance costs and cause equity to accrue in a savings account. A fixed death benefit is paid to the beneficiary along with the balance of the savings account. Premiums are fixed throughout the life of the policy even though the breakdown between insurance and savings swings toward the former over time. Management fees also eat up a portion of the premiums.
The insurance company will invest your money primarily in fixed-income securities, meaning that your savings investment will be subject to interest rate and inflation risk. Whole Life Policy| * A whole life policy covers a policyholder against death, throughout his life term. The advantage that an individual gets when he / she opts for a whole life policy is that the validity of this life insurance policy is not defined and hence the individual enjoys the life cover throughout his or her life. * Under this life insurance policy, the policyholder pays regular premiums until his death, upon which the corpus is paid to the family.
The policy does not expire till the time any unfortunate event occurs with the individual. * Increasingly, whole life policies are being combined with other insurance products to address a variety of needs such as retirement planning, etc. * Premiums paid under the whole life policies are tax exempt. Endowment PolicyAn endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its ‘maturity’) or on death. Typical maturities are ten, fifteen or twenty years up to a certain age limit.
Some policies also pay out in the case of critical illness. Policies are typically traditional with-profits or unit-linked (including those with unitised with-profits funds). Endowments can be cashed in early (or surrendered) and the holder then receives the surrender value which is determined by the insurance company depending on how long the policy has been running and how much has been paid in to it. Endowment Policy| * Combining risk cover with financial savings, endowment policies are among the popular life insurance policies.
* Policy holders benefit in two ways from a pure endowment insurance policy. In case of death during the tenure, the beneficiary gets the sum assured. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses. * In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/ education endowment plans. * In recent times, the concept of providing the customers with better returns has been gaining importance.
Hence, insurance companies have been coming out with new and better ULIP versions of endowment policies. Under such life insurance policies the customers are also provided with an option of investing their premiums into the markets, depending on their risk appetite, using various fund options provided by the insurer, these life insurance policies help the customer profit from rising markets. * The premiums paid and the returns accumulated through pure endowment policies and their ULIP variants are tax exempt.