Life insurance is a type of contract between an insurance company and insurance policy holder, in which the insurer promises to pay a sum of money in exchange for a premium on the death of an insured person or after a decided tenure.
A Policy holder pays specific premiums for a specific term and in return an insurance company provides you with a Life Cover. This Life Cover gives a monetary protection to the loved ones of the policy holder in case of an unfortunate event.
Let us understand some useful terms in Life Insurance:
- Life Assured: Insured is the person whose life is covered in the insurance contract.
- Proposer: Proposer is the person who pays the premium of the policy. For example if Mr. Ashok Verma has bought the policy for himself, then Mr. Verma is both the “Life Assured” as well as the “Proposer”. And if he purchases a policy for his family member, then he is only a proposer and the family member is the Life Assured.
- Beneficiary: Beneficiary also known as Nominee. It is the person you appoint at the time of buying the policy to receive the benefits of your insurance policy, in your absence.
- Insurer: the insurance company that sells the life insurance policy.
- Life Cover: it is the amount that a insurance company pay to the holder’s nominee at the time of unfortunate event.
- Maturity Benefit: in case of protection and saving policies, the insurer pays a certain lump sum of money on completion of the policy term. This amount is known as the Maturity Amount.
- Free look Provision: Insurance Company provides a certain time period (usually 10 to 30 days) to an insured in order to examine the insurance policy and if the insured is not satisfied, the insured can return it to the company for a full refund.
- Policy Term: the number of years for which the Life Cover continues.
- Premium Payment Term: The number of years for which you pay the premiums is known as the premium payment term.
Types of Insurance Policies:
There are basically two types of Insurance Policies: Traditional Whole Life and Term Life Insurance. A whole life policy is a policy you pay until the death of the policy holder.
And “Term Life” is a policy is a policy holder pays the premium till the fixed tenor.
- Term Insurance Plan:
Term Insurance is the most basic form of life insurance. They provide life cover with no profit components and savings. The premium of term insurance is cheaper as compared to other life insurance plans.
Term insurance plans provide pure risk cover. And a fixed sum of money is paid to the beneficiaries if the policyholder expires over the policy term.
Endowment plan is different from the term plan from the Maturity Benefit aspect. Endowment plan pays the assured sum under both scenarios death as well as survival. Endowment plans charge higher fees for paying out sum assured, along with profits in either scenario – Death or Maturity. The profits are an outcome of premiums being invested in asset markets.
Unit Linked Insurance Plans (ULIP):
ULIPs are variants of the traditional endowment plan. But ULIPs are different from traditional endowment plans in certain areas. Performance of ULIP is linked to the markets. The policy holder can choose the allocation for investments in debt market.
There are many similarities between ULIPs and Mutual Funds. ULIPs are the combination of investment and insurance, while mutual funds are a pure investment avenue.
Whole Life policy:
A whole life policy covers a policyholder over his life. The main feature of a whole life policy is that the validity of the policy is not defined so the policyholder enjoys the life cover throughout his life. The policyholder pays regular premiums until his death.
- Money Back Policy:
A money back policy is a variant of the endowment plan. It gives periodic payments over the policy term. This plan provides periodic payments over the policy term and a portion of the sum assured is paid out at a regular intervals.
If the policy holder survives the term, he gets the balance sum assured. In case of death, the beneficiary gets the full sum assured.