Life Insurance Features, Meaning, Importance & How to Choose the Policy
A life insurance plan is a product you may consider when you plan your finances. A life insurance policy may help you in ensuring that your family has the financial support to rely on in case you lose your life. Before buying any financial product, it is essential to note the features it has. Read further to know the common features of life insurance.
Important Features of Life Insurance
You may find the characteristics of life insurance plans very simple to understand. Here are its prominent features:
1. Issued in the name of the policyholder
A policyholder may be considered an individual or an entity that purchases a life insurance plan. A policyholder may be an individual, a family, or even a business, depending on the type of policy purchased.
2. Premium Payment Options
One of the main components of life insurance plan is the premium payable to the insurer. You may choose the premium cycle and payment method from the available options, based on your convenience. You can choose from several payment options to pay premiums to your insurance provider.
3. Selecting the Suitable Sum Assured
A sum assured can be considered to be the amount the nominee receives in case the life assured loses their life during the policy term. The life insurance company pays the sum assured to the nominee in the event of the passing away of the life assured during the policy term, as per the terms and conditions of the plan. The sum assured needs to be selected carefully, since it is one of the important factors of life insurance. You may need to consider the financial needs of your loved ones and any liabilities that they may have while choosing the amount of sum assured.
4. Option of Choosing the Tenure
The policy term is the duration for which the policy remains active. The policy term may range from a few years to several decades. You may choose your plan’s duration based on your financial goals and family needs. The policy term needs to be selected suitably, since it may be directly linked to your family's financial security. You may consider your remaining employment years, debts or liabilities, if any, the financial status of dependents, etc. while determining the tenure.
5. Selecting a Nominee of Choice
A nominee is a person who may receive the policy benefits in case the life assured loses their life during the policy tenure. The policyholder may nominate one or more nominees, in accordance with Section 39 of the Insurance Act, 1938 to receive the underlying benefits of the life insurance policy, in the event of your untimely demise within the policy tenure. Hence, it is one of the essential features of life insurance that needs to be selected carefully.
6. Maturity Benefits
The maturity benefit is the amount the policyholder draws at the time of policy maturity. This amount may be predetermined at the time of purchasing the life insurance plan (as per the product type) or it may vary based on the investment value (in case of ULIPs). Also depending on the type of the policy, it may consist of bonus (if any) declared by the insurer.
7. Claim settlement
The nominee can initiate the claim settlement process to receive the sum assured from the life insurance provider if the life assured loses their life during the policy term. The claim process requires the nominee to submit all the required documents to receive the benefit under the policy.
8. Optional Riders
Some life insurance plans come with add-on riders that offer financial benefits over and above those offered under the base plan. These riders can be opted for by paying a nominal additional premium.
Why Having a Life Insurance Policy Is Important?
Once you are aware of some important features of life insurance, you may wonder whether you need to buy one.
Read on to understand why life insurance may be important for you:
1. Financial Security of Your Loved Ones
Having a life insurance plan may ensure that, in your absence, your family may not have to struggle financially. In case of your sudden demise, your dependents may find themselves in a vulnerable place. During this time, the death benefit that they receive may be crucial in ensuring that they are financially covered.
2. Protection Against Critical Illnesses
As healthcare costs may continue to skyrocket, it may be important to have a plan in place to cover critical illnesses such as heart attacks, cancer, etc. These types of illnesses may cause a significant financial burden and may prevent you from earning income while you recover. Life insurance with a critical illness rider may help you during such difficult times.
3. Achievement of Your Child's Goals
As a parent, you may want to plan ahead for your child’s future needs, including providing for their education, marriage or other goals. In case you lose your life, your life insurance plan may help in offering a sufficient corpus to take care of your child's financial needs.
4. Secure Retirement
Retirement might be a major milestone for some and may require careful financial planning to ensure a comfortable and stress-free life post-retirement. After you stop working, it might be crucial to accumulate enough funds to support your lifestyle. Having a life insurance plan with an investment or saving component may allow you to build a retirement corpus while securing your family financially.
Factors to consider before buying a Life Insurance Policy
When buying a life insurance policy, you should consider all relevant features to know which type of policy would suit your needs. These factors include the following –
1. Financial goals
Firstly, consider your financial goals for which you are buying the policy. Your goals would help you pick the suitable type of plan. For instance,
- If you need to create a corpus for your children’s future, a child insurance plan may be considered
- If you want financial security for your family in your absence, a term plan may be suitable
- For creating a retirement corpus, pension plans may be a suitable choice
- For investment-oriented market-linked returns, you may consider Unit Linked Insurance Plans (ULIPs)
So, assess your needs, and coverage requirements and then pick the suitable plan.
2. Investment horizon
Next, consider your investment horizon, i.e., for how long you can invest for your goals. This helps in choosing the suitable policy tenure. For instance, if you want to create an education corpus for your child who is just a year old, you may choose a policy tenure of 15 to 20 years.
3. Risk appetite
Risk appetite means your ability to take risks. Life insurance plans are available both as traditional plans which offer guaranteed* returns, some like ULIPs where the returns are linked to the market performance, etc. Depending on your risk appetite, you can choose a suitable policy. For instance, if you don’t want to take risks, endowment or money-back plans would be a better choice but if you don’t mind risks, you may consider buying ULIPs.
4. Corpus needed
Assess the corpus needed for the financial goal for which you are buying the life insurance policy. This would help you choose a suitable sum assured or the premium payable (in the case of ULIPs). Choose a plan that will help you create an optimal corpus so that your financial goals can be met.
5. Benefit structure
Understand the benefit structure of the policy that you are buying to know what to expect from the policy. For instance, know the death benefit, maturity benefit, money-back benefit, bonus, guaranteed additions, etc. which the plan might offer.
6. Coverage and exclusions
Lastly, understand what is covered under the life insurance plan and what is not. This would inform you about the claims that the policy would pay and the ones it would not.
Assess these factors and then choose the most suitable life insurance policy for your coverage needs.
How to Buy the suitable Life Insurance Plan?
Buying life insurance may be an important decision that requires careful consideration. Here is a step-by-step guide that may help you purchase the suitable life insurance policy:
1. Assess your Needs
You may start by assessing your financial goals and needs. You may consider factors such as your age, income, liabilities, and dependents. Being aware of your needs may help you determine life cover you require. You may also use tools like a life insurance calculator to get a better estimate of your coverage needs.
2. Research Thoroughly
Since there are several types of life insurance plans catering to different needs, you may want to explore different options before narrowing down your choice. You may also consider the premium amount, policy features, riders, and the insurance company’s goodwill before going ahead with the purchase.
3. Compare Different Plans
After doing your research, you may have shortlisted a few plans that you are considering buying. You can compare different aspects of these plans to find the suitable one for you. You may use online comparison tools or consult an insurance advisor to help you make an informed decision.
4. Apply for The Policy
Once you've selected a policy, you may fill out the application form, also known as proposal form and submit the necessary documents, online or offline. Choose the suitable premium payment term and frequency. The insurance provider will evaluate your application and may ask for additional information, if required.
5. Make premium Payment
The premium amount may be paid annually, bi-annually, quarterly or monthly, depending on the policy type and the insurer.
Choosing a life insurance plan that suits your financial goals and requirements may be important. Ensure that you read the fine print and are aware of the terms and conditions of your life insurance plan before going ahead with the purchase.
Frequently Asked Questions about Life Insurance and its features
1. What are some of the common types of life insurance?
Term insurance, whole life insurance, money-back insurance, Unit Linked Insurance Plan (ULIP), endowment plan, retirement plan, and child insurance plan are some of the common types of life insurance plans.
2. Can I buy life insurance riders without buying a base policy?
Riders are the additional benefits that you may be able to add to your base life insurance plan by paying an additional nominal premium. Thus, you may need to purchase a basic life insurance policy in the first place to add a rider. After you purchase a life insurance policy, you may get to choose the riders you wish to purchase. They may be considered add-on benefits to your base plan.
3. Will I get a return when my life insurance policy matures?
The benefits received on maturity of a life insurance policy if the life assured survives the policy term, are considered as maturity benefits. The feature of maturity benefit may depend on the type of policy you have purchased. For example, a pure term insurance plan may not have maturity benefits, while ULIP may have them.
4. How long does my life insurance plan last?
A life insurance plan lasts for the tenure you select while buying the plan. The policy will stay in force, as long as you pay all due premiums on time.
5. How many riders can I add to my life insurance policy?
You may add one or all the riders from those offered by your life insurance provider under the particular product. However, note that for each rider that you add to your plan, you may have to pay an additional nominal premium.
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