Insurance penetration and insurance density, which reflects the development of the insurance sector in a country, is still very low in India. In FY 2018-19, India had an insurance penetration rate of 3.7% compared to the global average of 6%, and insurance density of just $74 compared to the global average of $682.
Many Indians are yet to fully understand what is life insurance or realise its importance. Most of them buy life insurance late in life when it becomes costly or do not take life insurance seriously, thinking it as a waste of money. Some buy insurance without much thought and have inadequate life cover.
However, life insurance is a legacy that you can leave behind for your loved ones; a financial shield that will not only protect them but also help them reach their life goals irrespective of the circumstances. To understand the importance of life insurance we need to start with the basics, such as: What is life insurance? How does it work? Why is it useful and how to calculate the right life cover for you?
What is life insurance?
A life insurance policy is a formal agreement between an insured and the insurer where the insurer agrees to pay a mutually agreed sum to the beneficiary in the event of the insured’s death or upon maturity of the plan. In return, the insured (also called the policyholder) has to make correct disclosure of information while purchasing the life insurance policy and pay his premium regularly. In India, more than 24 life insurance companies offer multiple types of life insurance products designed for people according to their needs and life goals.
How does a life insurance policy work?
Today, varieties of life insurance plans are available in the market that are designed to meet various needs. For instance, term insurance only provides life coverage at a nominal premium but has no investment component. On the other hand, a unit-linked insurance plan (ULIP) provides death benefit as well as maturity benefit with market-linked returns.
Once you decide an amount to reach your financial goal, you can use a life insurance premium calculator to calculate the premium that you need to pay to achieve your target. Each type of life insurance policy works according to the way it has been designed by the insurance company. Below are a few examples of how it works.
• Term insurance plan
Term insurance is one of the purest forms of life insurance and is the most cost-effective for the policyholder. It provides life protection to the policyholder for a specific term wherein death benefit or sum assured is paid to the nominee in case of the policyholder’s death.
• Unit-linked Insurance Plans (ULIPs)
ULIPs are life insurance plans that provide life cover and investment opportunities to the policyholder to create a corpus in the end to get their life goals done. ULIP plans are an effective long-term investment option and have a minimum lock-in period of 5 years. It provides death benefit, maturity benefit and tax benefits to investors looking to achieve their life goals and secure their loved ones at the same time.
• Participating Endowment Plans
Participating Endowment plans provide life insurance protection and long-term savings to policyholders. It pays sum assured plus bonus as death benefit to the nominee in case of the policyholder’s unfortunate death or at maturity. Participating Endowment plans provide periodic bonuses that are accumulated and paid on maturity or in the event of death of the policyholder.
• Whole Life Insurance Plan
A whole life insurance cover provides life insurance protection to the policyholder during his entire lifetime, up to a maximum of 100 years. If the policyholder dies, the sum assured is paid to the nominee. In case he/she survives the policy term, maturity benefits are paid to the policyholder.
Apart from these, other life insurance products are designed as child plans, savings plans and pension plans.
What are the benefits of life insurance?
Fear should not be your sole motivation to buy a life insurance policy. Life insurance is a tool that paves the way for a secure, peaceful and rewarding life for you and your family. Here are a few ways how life insurance benefits policyholders.
- It helps your loved ones to meet the life goals you have set for them even in your absence.
- Planning a grand wedding for your child? ULIPs may help you fulfil your dreams.
- You can also utilize the investment component of a life insurance product to buy a dream home, invest in real estate and go for a world tour.
- Investing in life insurance can help you live a comfortable retirement life.
- If you buy term life insurance with critical illness riders, you do not have to worry about your hospitalisation expenses out of your pocket.
- Life insurance can ensure regular monthly income (pension) for Indian residents and NRI.
- Allows you to pursue your interests and hobbies post-retirement.
Factors that determine your life cover
A simple way to determine the approximate life cover or sum assured in your life insurance policy is calculating Human Life Value (HLV). HLV could give you an idea of how much insurance cover you would need so that your loved ones can live a comfortable life in your absence. However, one needs to evaluate their needs in detail to be able to decide the cover that would suit them as per their current lifestyle. You need to take note of all the following factors to determine coverage:
- Total monthly household and lifestyle expenses.
- Outstanding liabilities such as loans, credit card debts, etc.
Add both these components and you can reach an approximate amount of life insurance coverage that you need. Do not forget to add the cost of inflation.
Generally speaking, you could have a life cover of at least 10 times your annual income to ensure that your loved ones can meet their life goals without any hindrances. You should take into account inflation, new responsibilities, healthcare costs and increasing expenses as per life stages to arrive at a correct figure. Once you arrive at that figure, you can use a life insurance premium calculator to calculate the premium you may need to pay to achieve your life goals.