Life insurance is an important element in financial planning. There are various types of life insurance products and all are useful for various life insurance needs. Term assurance is a great product for a young person as one can get a high-risk cover at a very low premium. But, term assurance provides money under one contingency only — death. Also, term assurance has no savings component. This policy cannot be surrendered and no loan can be raised against it. As it is a very useful product, one must continue to pay the premium for full term. However, our experience is that most people discontinue paying premium under term plans within five years.

Your Money

We need money for various purposes in our life. A lot of people benefit by taking loan against the surrender value of insurance policies. Since term assurance has to surrender value, no loan can be raised from a term assurance policy. A conventional product like endowment or whole life policy can provide loan and, at the same time, cover risk. One can assign a conventional policy for obtaining loan from commercial institutions like banks. This facility is not available in the term assurance plan.

There is a wide array of interesting life insurance products that can provide money when needed. Children’s money back plans give money at the time of higher education. There are plans that make a payment on the date of maturity and also cover the risk of life after maturity. There are plans under which even the people who are 50-plus can take generous life cover without undergoing a medical examination.

Whole life plans enable a person to transfer a significant portion of wealth in a tax-free form to the next generation. In many whole life plans, there is no upper limit in sum assured. Bonuses are much higher than under endowment products. These plans are quite popular in developed markets, including the US.

For majority of Indians, a conventional life insurance product is a tool to build up good savings over a long period of time. Money in mutual funds, fixed deposits or post offices can be easily encashed since the penalty for withdrawal is nominal. People are able to save through life insurance because they know that surrendering a policy means heavy loss. In our country, people still have meager savings and this affects their financial well being. Therefore, life insurance is the best form of contractual savings.

Mutual Funds carry prospects of high returns but also probability of losses. These risks are not easy to foresee. If the financial condition does not change significantly as a result of losses, then one can surely take some risks. But, for the majority, the best suggestion should be to have a diversified portfolio of investments where low-risk decent-return insurance products should be prominently present.

All of us have to reach some financial goals in life. Certain goals are too sensitive to us, like children’s higher education, daughter’s marriage, etc. We must have some lump sum money on such occasions. In order to be free from worries and uncertainties, we should buy appropriate life insurance products that can help us reach our goals.

Insure for sure

For the young
* Term assurance is a great product for a young person as one can get a high-risk cover at a very low premium
* But, term assurance provides money under one contingency only — death — and has no savings component
* Also, since term assurance has to surrender value, no loan can be raised from a term assurance policy

Going Conventional
* A conventional product like endowment or whole life policy can provide loan and, at the same time, cover risk
* Conventional policy can be used to get loan from commercial institutions like banks. This facility is not available in term assurance

The writer is research associate, Zonal Training Centre, Kolkata, LIC of India. All views expressed are author’s personal