A layman’s guide to the basics of life insurance

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A layman’s guide to the basics of life insurance
Life insurance is a bond that offers protection to the human life by assuring the nominees would receive a fixed sum of money if the insured person dies. The money received in the form of life insurance is meant to be seen as an income substitute for the beneficiaries of the life insured if he or she dies unexpectedly. There are various kinds of life insurance policies available and each caters to a particular section of society - a young working professional, a retired person, children, etc. Listed below are the different kinds of life insurance policies available and how they function to make life simpler for you.

Terms associated with life insurance

Before we take a detailed look at the kinds of life insurance policies, let us get acquainted with the terms commonly associated with life insurance.

1. Premium - The premium is the price you pay for having your life insured. In return for the premium (which can be paid monthly, quarterly, semi-annually or annually) you pay, the insurance company undertakes the risk of covering your life. If you happen to die, the insurance company pays the sum assured to your nominee. In some cases, if you outlive the policy period, the premium is returned to you.

2. Policyholder - The policyholder is the person whose life is insured. The insurance contract is drawn between the policyholder and the insurance company.

3. Sum assured - The sum assured or the death benefit is the amount the nominee or the beneficiary of the deceased policyholder receives in the event of his or her death. This amount is usually fixed and irrespective of the amount of premium already paid.

4. Policy period - The policy period is the term for which the insurance contract is purchased. It can range for a few years, say 5 years, or for the entire duration of the person's life. If the policyholder dies within the policy period, his nominee will receive the sum assured.

5. Nominee/ beneficiary - The nominee or the beneficiary is the person the policyholder names to receive the sum assured if he dies within the policy period.

Kinds of Life Insurance

1. Term Life Insurance - Term life insurance is one of the most common kinds of life insurance. Here, the life of the policyholder is insured for a specific term, say 10, 20 or 30 years. It is an inexpensive form of life insurance. If the policyholder dies within the term of the policy, his beneficiaries will receive the sum assured. If he outlives the policy, he will not get his premiums back.

2. Whole Life Insurance - Whole life insurance is a kind of life insurance where the person is insured till the last day of his life. As a result, irrespective of when he dies, his nominee receives the sum assured. This kind of a policy is more expensive that a term life insurance policy as the risk is higher.

3. Endowment Plan - Endowment plans, also known as traditional life insurance plans, are a kind of life insurance where the policyholder stays covered for a particular span of time. If he outlives the policy, he gets the premium amount back. This kind of life insurance combines the elements of insurance and investment.

4. Money Back Plans - A money back plan is a kind of life insurance where the sum assured is broken up in a number of parts and paid to the policyholder or his nominee in pre-decided installments. This kind of insurance is commonly seen in child plans and retirement plans.

Life insurance is a great tool available to us. Everyone must make use of life insurance and stay protected. However, before you buy a policy, make sure you analyze your own needs and see what kind of policy you require. If you are not confident yourself, ask a qualified insurance agent to guide you. Buying the right kind of life insurance is just as important as having insurance in the first place.

Written By: Deepak Yohannan
The author is the CEO of MyInsuranceClub.com, an online insurance price & features comparison portal

For more articles by Deepak Yohannan, please visit MyInsuranceClub.com
You may contact him directly on Twitter: @dyohannan

Story first published: Wednesday, April 9, 2014, 8:41 [IST]
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