Life Insurance is a funny term. Why so? That’s because a life can never be insured. No one knows when a living being will be robbed of its breaths. No amount of money can prevent the inevitable. However, that’s the term we are accustomed to. The actual meaning of the term ‘life insurance’ means securing the financial future of the people who depend on the primary earning member of a family in case of the unexpected death of the earning member. The primary earning member can be a male or a female.
Some may argue that the money from a life insurance policy can be used for funding the medical expenses of the insured person in case of some severe and life-threatening ailment. Well, that partially true because of the following reasons:
- Life insurance policies usually have strict limitations when is comes to funding medical bills. There is a separate type of insurance policy altogether known as health insurance to cover those expenses.
- Life insurance policies do not directly cover medial expenses. Such coverages come in form of riders.
Now that we have learned the core concept of life insurance, it is time that we dive a little deeper in the overall concept of life insurance. However, we need to warn you one thing. In case you are looking for details of a specific type of life insurance policy from a specific company, this article is going to land a big disappointment for you. This article will only provide life insurance overview and will deliberately skip details that are specific to specific policies from different companies. Let us begin…
Life Insurance Overview
Question: What is a life insurance policy?
Answer: A life insurance policy is a written contract. The contract is signed by an individual (known as policy holder) and an insurance company(known as insurer). As per this contract, the individual is obliged to give a small amount of money once every month or once every quarter or once every 6 months or once every year to the insurance company. Against this, the insurance company is obliged to pay out the promised amount of money to the person nominated by the insured in case the insured person dies unexpectedly. The policy remains in effect for a predefined period of time.
Question: What if the insured person doesn’t die within the predefined period of time?
Answer: Initially, the core concept of life insurance was that if the person doesn’t die within the predefined time frame (that is the duration of the policy), the insured person was not entitled to get any money. But, this created some problems:
- The very idea of not getting back the money was not acceptable to people.
- With advances in medical science, the life expectancy of people increased over time. This further augmented the dissatisfaction among people.
Because of these drawbacks, people were not inclined towards purchasing insurance policies. This is when the insurance companies had to rethink their policies and started including variations in life insurance policies they offered. Today there are policies where a person (i.e. the insured) still gets the money paid. Well, that is kind of an understatement for this question in particular. To be more precise, there are policies which will allow insured people to recover the absolute amount paid and most often, more than that.
Question: What exactly is the mechanism of life insurance?
Answer: Good question! The answer is equally interesting. The foundation of life insurance lies in the fact that not everyone will die at the same time. Literally! That cannot happen unless it is Armageddon or unless warmongers decide to wipe out humanity using a global nuclear war because of their petty interests! So, insurance companies literally work with that simple assumption and they will continue to work this way. As far as the mechanism is concerned, the basics boil down to one simple thing: “pool money from many and pay the beneficiaries of the few that die”. It has worked for decades and the insurers will continue with the same modus operandi.
Question: What if the foreign insurance company run away with the collected money?
Answer: No they won’t! In case you have not noticed, all the insurance companies that operate in India (barring Life Insurance Corporation of India) are actually partnership companies. Every foreign company that wants to operate in India has to partner up with an Indian company. A few simple examples will be:
- SBI Life (SBI is an Indian company and Life is a foreign company).
- Bajaj Allianz (Bajaj is an Indian company and Allianz is a foreign company).
- Aviva (it is joint venture between Dabur Group of India and Aviva plc. of Britain).
On top of this, whenever a foreign company comes to operate in India, it is required to deposit hundreds of crores of liquid cash as security. In case the company wants to run away, that security money will be used to pay off the insured people. Additionally, the Indian partner company of the defecting foreign company will also have to pay hundreds of corers to cover the reimbursements.
Question: Do insurance companies harass the policy holders (or better said, the beneficiaries)?
Answer: Generally speaking, they don’t! That’s because every insurance company operational in India needs to follow guidelines of IRDA. IRDA or Insurance Regulatory and Development Authority of India is governing body that sets the rules of the game. Any company that does not comply will have to pay a severe price. Whatever harassment stories we hear are all related to settlement claims. Yes, there are times when some companies refuse to pay legitimate claims but most of the times, the policy holder is the one that is to be blamed. Why so? That’s because many people actually suppress information during policy purchase. This is a direct violation of the policy contract and according to the contract, an insurance company has all rights to deny settlement claim is the suppressed information comes to light. So, make sure that you don’t lie about anything when purchasing an insurance policy.
Question: What are the different types of life insurance policies?
Answer: There are literally several hundreds of policies available with each company that operates in India. However, there are only a few broad classifications and all policies can be grouped under those broad heads. It is just that all policies in a particular group have minor variations that suit someone or the others’ needs. In total, there are 5 broad types of insurance policies:
- Money Back: When you hear ‘money back’, isn’t that the sweetest music you hear? That’s the reason why we have put this one on top. In this type, the insured keeps paying throughout the whole time frame of the policy. In return, the insurer pays back a certain amount of money at predefined regular intervals from the total sum assured. In case the insured person outlives the total term of the policy, the balance amount from the sum assured (difference between the total sum assured and sum of all payments than have been made by the company) to the person. In case the person dies before the policy term ends, the total sum assured is paid out to the beneficiary of the insured person in addition to all the payments that had been made by the insurer to the insured when the insured person was alive.
- Endowment: In insurance plans that fall under this category, the insured person gets to enjoy both sum assured and profit earnings even if he lives longer that total policy term. In case of the death of the insured, the sum assured and profit earnings are paid out to the nominee of the insured person. Profit earnings come by investing the premium money in debt and equity markets.
- Term Insurance: It is a trimmed down version of endowment. In term insurance, nothing is paid if the policy holder lives longer than the insurance policy term. In case the policy holder meets the ultimate fate before the policy becomes mature, the sum assured and profits are paid out to the nominee.
- Whole Life: In this group, there is no such thing for policy maturity period. This means, the policy holds as long as the insured person lives. This means that if the insured person lives for 115 years (just an example), the policy will continue for 115 years. If the insured person lives only till 45 years, the policy will continue only for 45 years. So, the date of death of the policy holder becomes the date of maturity of the policy that falls under this category. However, the policy holder has to keep paying premiums for as long as he or she lives. Once the policy holder dies, the sum total of all the premiums paid goes to the nominee.
- ULIP or Unit Linked Insurance Plans: ULIPs are actually endowment plans with some twist. In endowment plans, the sum assured and the profits are paid. In ULIPs, either pay out the sum assured and the profits or the investment value and the profits either when the insured person dies or when the policy matures. If sum assured in less than investment value then investment value is paid and is sum assured is more than investment value then sum assured is paid. There should be no doubts that all premiums paid are actually invested in debt and stock markets and the total value of the investment is determined by Net Asset Value of NAV of the portfolio. So, basically, ULIPs are very much similar to mutual funds as well except that there is an insurance aspect to ULIPs which is otherwise not present in mutual funds.
Well, that’s pretty much the basic concept of insurance. We do not claim that this life insurance overview is complete. Honestly, it is far from being complete. We only attempted to give you a basic idea and we hope that we just did that. What do you say?