Life Insurance - Notes

What is a Life Insurance?

Life Insurance is a contract between you and a life insurance company, which provides your beneficiary with a pre-determined amount in case of your death during the contract term.

Roles of Life Insurance

Role 1: Life insurance as "Investment"

Now, let us compare insurance as an investment options. If you invest Rs. 10,000 in PPF (Public Provident Fund) in India, your money grows to Rs. 10,800 at 8 percent (rate gets realigned to market rates every quarter) interest over a year. But in this case, the access to your funds will be limited. One can withdraw 50 per cent of the initial deposit only after 5 years. However, the Insurance Product (with the Dynamic Floor Fund option) can provide you the exposure of equity market (historical return of Indian Equity Markets is around 13-14.5% annually compounding) and limit your downside risk.

Role 2: Life insurance as "Risk cover"

First and foremost, insurance is about risk cover and protection - financial protection, to be more precise - to help outlast life's unpredictable losses. Designed to safeguard against losses suffered on account of any unforeseen event, insurance provides you with that unique sense of security that no other form of investment provides. By buying life insurance, you buy peace of mind and are prepared to face any financial demand that would hit the family in case of an untimely demise.

Role 3: Life insurance as "Tax planning"

Tax rebates can be availed u/s 80C and the capital gains during the maturity of the product is tax-free u/s 10(10D).

Types of Life Insurance

Term Policy

 A term insurance policy is a pure risk cover for a specified period of time. What this means is that the sum assured is payable only if the policyholder dies within the policy term. For instance, if a person buys Rs 2 lakh policy for 15-years, his family is entitled to the money if he dies within that 15-year period. A term policy is useful during the following circumstances:

· You are looking for a low cost life cover without any savings benefits attached. Or

· You are at that stage in life where insurance cover is vital but you cannot afford high premium payment due to low income.

· You have taken a loan and do not want to put the burden of repayment to your family members in case of your demise

Perhaps the best and the most rational form of Insurance. You can get high cover paying very less cost. 

Endowment Policy

Combining risk cover with financial savings, endowment policies offers you the sum assured on demise or even if the insured survives the policy term.


Unit Linked Policy (ULIPs)
Again this is a combination of Risk Cover and Investments. In case of the policy holder’s demise during the term, his beneficiary will be paid the higher of the Sum Assured or the Fund Value (according to the terms in the contract). The maturity benefit includes the total of the Fund Value plus survival bonuses.

Benefits of ULIPs:

Flexibility - Flexibility to choose Sum Assured. Flexibility to choose premium amount. Option to change level of Premium /Sum Assured even after the plan has started.Flexibility to change asset allocation by switching between funds.

Transparency - Charges in the plan & net amount invested are known to the customer.Convenience of tracking one’s investment performance on a daily basis.

Liquidity - Option to withdraw money after few years (comfort required in case of exigency).Low minimum tenure.Partial / Systematic withdrawal allowed

Fund Options - A choice of funds (ranging from dynamic floor fund, equity, debt, cash or a combination). Option to choose your fund mix based on desired asset allocation. 

However, kindly note that ULIPs are subject to market fluctuations and have pretty high charges (as compared to Mutual Funds) associated with them, so it might not be a great idea to mix your investment and insurance.

How much should be your life cover?

Thumb rules says that one must insure one’s life for at least 12 times your current annual income. Insuring yourself for 12 times your current annual income with a ULIP or an endowment plan is likely to cost you a bomb. That gives you another reason to go for the low cost Pure Risk Cover Term Life Insurance.


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