Life Insurance: Back to Basics

Life Insurance: A Slice of History

The modern insurance contracts that we have today such as life insurance, originated from the practice of merchants in the 14th century. It has also been acknowledged that different strains of security arrangements have already been in place since time immemorial and somehow, they are akin to insurance contracts in its embryonic form.

The phenomenal growth of life insurance from almost nothing a hundred years ago to its present gigantic proportion is not of the outstanding marvels of present-day business life. Essentially, life insurance became one of the felt necessities of human kind due to the unrelenting demand for economic security, the growing need for social stability, and the clamor for protection against the hazards of cruel-crippling calamities and sudden economic shocks. Insurance is no longer a rich man’s monopoly. Gone are the days when only the social elite are afforded its protection because in this modern era, insurance contracts are riddled with the assured hopes of many families of modest means. It is woven, as it were, into the very nook and cranny of national economy. It touches upon the holiest and most sacred ties in the life of man. The love of parents. The love of wives. The love of children. And even the love of business.

Life Insurance as Financial Protection

A life insurance policy pays out an agreed amount generally referred to as the sum assured under certain circumstances. The sum assured in a life insurance policy is intended to answer for your financial needs as well as your dependents in the event of your death or disability. Hence, life insurance offers financial coverage or protection against these risks.

Life Insurance: General Concepts

Insurance is a risk-spreading device. Basically, the insurer or the insurance company pools the premiums paid by all of its clients. Theoretically speaking, the pool of premiums answers for the losses of each insured.

Life insurance is a contract whereby one party insures a person against loss by the death of another. An insurance on life is a contract by which the insurer (the insurance company) for a stipulated sum, engages to pay a certain amount of money if another dies within the time limited by the policy. The payment of the insurance money hinges upon the loss of life and in its broader sense, life insurance includes accident insurance, since life is insured under either contract.

Therefore, the life insurance policy contract is between the policy holder (the assured) and the life insurance company (the insurer). In return for this protection or coverage, the policy holder pays a premium for an agreed period of time, dependent upon the type of policy purchased.

In the same vein, it is important to note that life insurance is a valued policy. This means that it is not a contract of indemnity. The interest of the person insured in hi or another person’s life is generally not susceptible of an exact pecuniary measurement. You simply cannot put a price tag on a person’s life. Thus, the measure of indemnity is whatever is fixed in the policy. However, the interest of a person insured becomes susceptible of exact pecuniary measurement if it is a case involving a creditor who insures the life of a debtor. In this particular scenario, the interest of the insured creditor is measurable because it is based on the value of the indebtedness.

Common Life Insurance Policies

Generally, life insurance policies are often marketed to cater to retirement planning, savings and investment purposes apart from the ones mentioned above. For instance, an annuity can very well provide an income during your retirement years.

Whole life and endowment participating policies or investment linked plans (ILPs) in life insurance policies bundle together a savings and investment aspect along with insurance protection. Hence, for the same amount of insurance coverage, the premiums will cost you more than purchasing a pure insurance product like term insurance.

The upside of these bundled products is that they tend to build up cash over time and they are eventually paid out once the policy matures. Thus, if your death benefit is coupled with cash values, the latter is paid out once the insured dies. With term insurance however, no cash value build up can be had.

The common practice in most countries is the marketing of bundled products as savings products. This is one unique facet of modern insurance practice whereby part of the premiums paid by the assured is invested to build up cash values. The drawback of this practice though is the premiums invested become subjected to investment risks and unlike savings deposits, the guaranteed cash value may be less than the total amount of premiums paid.

Essentially, as a future policy holder, you need to have a thorough assessment of your needs and goals. It is only after this step where you can carefully choose the life insurance product that best suits your needs and goals. If your target is to protect your family’s future, ensure that the product you have chosen meets your protection needs first.

Real World Application

It is imperative to make the most out of your money. Splitting your life insurance on multiple policies can save you more money. If you die while your kids are 3 & 5, you will need a lot more life insurance protection than if your kids are 35 & 40. Let’s say your kids are 3 & 5 now and if you die, they will need at least $2,000,000 to live, to go to college, etc. Instead of getting $2,000,000 in permanent life insurance, which will be outrageously expensive, just go for term life insurance: $100,000 for permanent life insurance, $1,000,000 for a 10-year term insurance, $500,000 for a 20-year term insurance, and $400,000 of 30 years term. Now this is very practical as it covers all that’s necessary. If you die and the kids are 13 & 15 or younger, they will get $2M; if the age is between 13-23, they get $1M; if between 23-33, they get $500,000; if after that, they still get $100,000 for final expenses and funeral costs. This is perfect for insurance needs that changes over time because as the children grow, your financial responsibility also lessens. As the 10, 20, and 30 years term expires, payment of premiums also expires thus you can choose to use that money to invest in stocks and take risks with it.

In a world run by the dictates of money, everyone wants financial freedom. Who doesn’t? But we all NEED financial SECURITY. Most people lose sight of this important facet of financial literacy. They invest everything and risk everything to make more and yet they end up losing most of it, if not all- this is a fatal formula. The best approach is to take a portion of your money and invest in financial security and then take the rest of it and invest in financial freedom.

Ultimately, your financial plan is constantly evolving because you are constantly evolving. You can’t set a plan and then forget it. You need to keep an open eye on your money to make sure it is working hard because that money needs to feed you for the next 20-30+ years that you will be in retirement. You have to know how to feed your money now so that it can feed you later.

Convertible Term Life Insurance Rates

Considering purchasing convertible term life insurance? How exactly does a convertible term life insurance policy work? Is it possible to find a cheap convertible term life insurance policy? These are all important questions to ask and to understand the answers to before you decide to make the important decision of which type of life insurance coverage to buy.

At the time of deciding what type of life insurance to buy, a person must know every single type offered in the market in order to truly make the best choice for their specific coverage needs. It is true that perhaps many companies simply refer to their policies as term or permanent life insurance, but a person must know that there is much more to that and such is the case of convertible term life insurance. In this article you will be able to know what convertible term is and the many things associated with this type of life insurance.

What Exactly Is Convertible Term Life Insurance?

Life insurance is perhaps easily understood because it simply is a contract between a person and an insurance company. The contract simply states that the person must pay monthly premiums for a certain period of time in exchange for a death benefit paid to the beneficiary in case of the insured’s death.

A term life insurance policy is simply a policy that will cover for a specific period of time, but with a convertible term life insurance policy you will have the ability to transform your policy from a temporary one to a permanent one.

What this means is that if you have a policy for 25 years and you have a convertible term life insurance policy, then you will be able to change the term policy into a whole, universal of variable life insurance policy (depending on the company).

Things To Know At The Time Of Purchasing Your Policy

Like any other product, there are a few things that a customer must know in order to make the convertible life insurance experience a successful one.

Health and Family History: At the time of applying for a policy, whether you are doing it online or in person at a local agency; make sure to have some general information about your medical history. Although companies have the right to access your files when you apply for a policy (with your permission that is), most of the times they will ask you questions about your health and family history. The more prepared you are to answer these questions, the easier the quoting process will be.

Amount and Duration of the Policy: You must also have an idea of how much life insurance you wish to buy at the particular time. The reason for this is that with term life insurance policies a person must choose an amount at the time of getting the policy. There are tools online or that the company has that will help you get the amount you will more than likely need. It is also important to understand that the particular amounts change from company to company. Also, make sure that you know the amount of time you want the policy to last. Some common ones include 15, 20, 25 and even 30 years.

The Beneficiary: Last but not least it is important to be completely certain of whom you want your beneficiary to be. The reason for this is that many people actually don’t know at the time of signing the policy and just put the first person in mind. However, many insurance companies are actually very strict when it comes to beneficiaries and they wont let a person make a change unless they fill out the appropriate paperwork. Nevertheless, it is important for a customer to know the company and their stand when it comes to particular beneficiary changes.

Lower Premiums Compared To Other Types Of Policies

Compared to many of the other types of policies, the convertible term life insurance policies give the customer a better choice. The reason for this is that a person will have the main option of converting the term life insurance to a permanent one or of simply letting the policy expire in their own hands. Having a term life insurance first also helps a lot, simply because term life insurance has lower premiums than a permanent life insurance policy.

The difference for these cheaper premiums is simply that with a term life insurance policy, the death benefit is not guaranteed to the beneficiary (particularly because the insured can still be alive at the end of the policy). Because of this reason, a person that chooses the option of having a convertible life insurance policy will have the great option of paying low premiums at first.

Medical Examinations

Another good thing about convertible term life insurance policies is that they allow a person to convert regardless of the medical condition and health of the insured. If the person in the policy chose the option of having a convertible term life insurance policy and they have paid premiums at the right time, then they have by law the right to extend their coverage if they choose to.

It is also important to highlight that this change in coverage must be made without the insured being forced to take a medical examination. The freedom of continuing the coverage regardless of everything and not having the chance of being denied might be the reasons why this insurance option is so popular nowadays.

No Premium Increases For Medical Problems

The last thing worth talking about when it comes to convertible life insurance policies is that at the time of changing your policy you cannot be charged any additional premium for any medical problems that you may have. It is important to highlight that I’m not referring to the fact that your premiums will not go up in value, because when converting from term to permanent there is always a chance of that. What I’m referring to is that at the time of converting your term life insurance to a permanent one by law you are protected against a raise in premium based on a medical condition.

No One Policy Is Right For Everyone

It is important to note that this type of plan is not for everyone, because some people just rather have a permanent policy right away or some others just want to be covered until they get retired. However, this might be exactly what some people are looking for simply because it starts as perhaps the low cost choice.

Compare Quotes To Find The Best Value

Compare the prices of regular life insurance quotes against the prices of convertible term life insurance quotes to find the best value. If you want the freedom of having a term policy and being able to convert it in the near future to a permanent life insurance plan that covers you for life then go ahead and start shopping around for your convertible life insurance plan!

Avoid These Six Common Life Insurance Mistakes

Life insurance is one of the most important components of any individual’s financial plan. However there is lot of misunderstanding about life insurance, mainly due to the way life insurance products have been sold over the years in India. We have discussed some common mistakes insurance buyers should avoid when buying insurance policies.

1. Underestimating insurance requirement: Many life insurance buyers choose their insurance covers or sum assured, based on the plans their agents want to sell and how much premium they can afford. This a wrong approach. Your insurance requirement is a function of your financial situation, and has nothing do with what products are available. Many insurance buyers use thumb rules like 10 times annual income for cover. Some financial advisers say that a cover of 10 times your annual income is adequate because it gives your family 10 years worth of income, when you are gone. But this is not always correct. Suppose, you have 20 year mortgage or home loan. How will your family pay the EMIs after 10 years, when most of the loan is still outstanding? Suppose you have very young children. Your family will run out of income, when your children need it the most, e.g. for their higher education. Insurance buyers need to consider several factors in deciding how much insurance cover is adequate for them.

· Repayment of the entire outstanding debt (e.g. home loan, car loan etc.) of the policy holder

· After debt repayment, the cover or sum assured should have surplus funds to generate enough monthly income to cover all the living expenses of the dependents of the policy holder, factoring in inflation

· After debt repayment and generating monthly income, the sum assured should also be adequate to meet future obligations of the policy holder, like children’s education, marriage etc.

2. Choosing the cheapest policy: Many insurance buyers like to buy policies that are cheaper. This is another serious mistake. A cheap policy is no good, if the insurance company for some reason or another cannot fulfil the claim in the event of an untimely death. Even if the insurer fulfils the claim, if it takes a very long time to fulfil the claim it is certainly not a desirable situation for family of the insured to be in. You should look at metrics like Claims Settlement Ratio and Duration wise settlement of death claims of different life insurance companies, to select an insurer, that will honour its obligation in fulfilling your claim in a timely manner, should such an unfortunate situation arise. Data on these metrics for all the insurance companies in India is available in the IRDA annual report (on the IRDA website). You should also check claim settlement reviews online and only then choose a company that has a good track record of settling claims.

3. Treating life insurance as an investment and buying the wrong plan: The common misconception about life insurance is that, it is also as a good investment or retirement planning solution. This misconception is largely due to some insurance agents who like to sell expensive policies to earn high commissions. If you compare returns from life insurance to other investment options, it simply does not make sense as an investment. If you are a young investor with a long time horizon, equity is the best wealth creation instrument. Over a 20 year time horizon, investment in equity funds through SIP will result in a corpus that is at least three or four times the maturity amount of life insurance plan with a 20 year term, with the same investment. Life insurance should always been seen as protection for your family, in the event of an untimely death. Investment should be a completely separate consideration. Even though insurance companies sell Unit Linked Insurance Plans (ULIPs) as attractive investment products, for your own evaluation you should separate the insurance component and investment component and pay careful attention to what portion of your premium actually gets allocated to investments. In the early years of a ULIP policy, only a small amount goes to buying units.

A good financial planner will always advise you to buy term insurance plan. A term plan is the purest form of insurance and is a straightforward protection policy. The premium of term insurance plans is much less than other types of insurance plans, and it leaves the policy holders with a much larger investible surplus that they can invest in investment products like mutual funds that give much higher returns in the long term, compared to endowment or money back plans. If you are a term insurance policy holder, under some specific situations, you may opt for other types of insurance (e.g. ULIP, endowment or money back plans), in addition to your term policy, for your specific financial needs.

4. Buying insurance for the purpose of tax planning: For many years agents have inveigled their clients into buying insurance plans to save tax under Section 80C of the Income Tax Act. Investors should realize that insurance is probably the worst tax saving investment. Return from insurance plans is in the range of 5 – 6%, whereas Public Provident Fund, another 80C investment, gives close to 9% risk free and tax free returns. Equity Linked Saving Schemes, another 80C investment, gives much higher tax free returns over the long term. Further, returns from insurance plans may not be entirely tax free. If the premiums exceed 20% of sum assured, then to that extent the maturity proceeds are taxable. As discussed earlier, the most important thing to note about life insurance is that objective is to provide life cover, not to generate the best investment return.

5. Surrendering life insurance policy or withdrawing from it before maturity: This is a serious mistake and compromises the financial security of your family in the event of an unfortunate incident. Life Insurance should not be touched until the unfortunate death of the insured occurs. Some policy holders surrender their policy to meet an urgent financial need, with the hope of buying a new policy when their financial situation improves. Such policy holders need to remember two things. First, mortality is not in anyone’s control. That is why we buy life insurance in the first place. Second, life insurance gets very expensive as the insurance buyer gets older. Your financial plan should provide for contingency funds to meet any unexpected urgent expense or provide liquidity for a period of time in the event of a financial distress.

6. Insurance is a one-time exercise: I am reminded of an old motorcycle advertisement on television, which had the punch line, “Fill it, shut it, forget it”. Some insurance buyers have the same philosophy towards life insurance. Once they buy adequate cover in a good life insurance plan from a reputed company, they assume that their life insurance needs are taken care of forever. This is a mistake. Financial situation of insurance buyers change with time. Compare your current income with your income ten years back. Hasn’t your income grown several times? Your lifestyle would also have improved significantly. If you bought a life insurance plan ten years ago based on your income back then, the sum assured will not be enough to meet your family’s current lifestyle and needs, in the unfortunate event of your untimely death. Therefore you should buy an additional term plan to cover that risk. Life Insurance needs have to be re-evaluated at a regular frequency and any additional sum assured if required, should be bought.