When it comes to financial planning, there are several aspects to consider other than choosing the right investment avenue. You also need to create a protection plan for your family. A life insurance policy is the right way to go about this. Life insurance plans provide a financial safety net to the dependents of the policyholder in the event of an unfortunate demise. Thus, the dependents need to not worry about meeting their financial needs even in the absence of the insured family member. It is even more useful in situations where the policyholder is the sole bead-winner of the family. Future financial needs like higher education, marriage and even routine requirements can be met using the payout offered by the insurance policy.
While there are various insurance plans to choose from, the right life insurance plan is the one that checks all the right boxes for you. Moreover, insurance is a no one-size-fits-all product. Hence, the requirements of different individuals may vary.
When buying a life cover, apart from having a plethora of alternatives to choose from, certain terms may confuse a first-time buyer. Once you are familiar with them, buying a suitable insurance plan can be a breeze. Here are some of those terminologies that can help you understand your life insurance policy better and make a rational choice of plan –
1. Sum assured
Sum assured is located at the core of your life insurance plan. Many policybuyers often decide extensively based on one single factor, which is the policy’s sum assured. It is that amount of money which the insurance company agrees to pay to the nominees of the policyholder in the event of death or other agreed policy terms.
Financial experts, as a general rule of thumb, recommend opting for a plan that has its sum assured 10 to 15 times the current annual income. This estimation can help provide a substantial financial cover in the future accounting for inflation and other factors.
2. The premium of the policy
Premium is the cost you pay to acquire the life cover. Since insurance is a contract where the insurer agrees to compensate the nominees, the premium is the consideration paid by the policyholder to obtain such coverage.
The premium of a life insurance policy can differ for every individual. Factors like age, pre-existing illnesses, lifestyle, working conditions, and more can be instrumental in deciding the premium of a policy. Since the premium is the cost paid to acquire the life cover, it is necessary to consistently pay for a timely renewal, which can be monthly, quarterly, half-yearly, or even annually. Failure to pay the premium on time can lead to a policy lapse after accounting for any grace duration offered by the insurance company.
Maturity of your policy refers to the end of the policy period. In certain types of life insurance plans, like an endowment plan, a money-back plan, or a unit-linked insurance plan (ULIP), the insurer pays a maturity amount at the end of the policy tenure. This amount can either be a lumpsum payment or several staggered payments, and is termed as the policy’s maturity benefit. In the event the policyholder outlives the term of the life cover, the insurance policy’s terms specify such maturity proceeds.
4. Death benefit
As the name suggests, it is the amount which the insurance company pays to the nominees in the event of the demise of the policyholder. Since protection for life is the fundamental principle of an insurance plan, the death benefit is, generally, the sum assured of the policy along with any accrued bonus or other amounts as specified in the policy terms.
A nominee is an individual or a group of individuals that the policyholder appoints to receive the death benefits of the life insurance plan. Generally, people appoint their parents, spouse, or children as the nominee. However, you can also appoint people that aren’t blood relatives as a nominee.
Life insurance plans provide limited coverage as mentioned in its policy terms. But, if you want to enhance your coverage, you can choose the optional policy features offered by the insurance company known as riders. Instead of opting for separate insurance plans, life insurance riders allow you to enhance the policy coverage. Accidental death benefit, accidental total and permanent disability benefit, critical illness cover, child support benefit and waiver of premiums are some of the common riders available with leading insurance companies. When buying a rider to your insurance cover, make use of a life insurance premium calculator to determine its impact on the total premium of your policy.
7. Surrender value
The amount which the insurance company pays in the event the policy is discontinued after a specified duration is called the surrender value. The surrender value of every insurance plan is based on the policy terms and how much premiums are paid.
With some of the critical life insurance terms explained above, you can make an informed choice of buying a life insurance policy.