Financial protection is critical for this segment where the loss of a breadwinner can lead to financial catastrophe. Insurers need to use technology and innovation to provide sustainable solutions for these customers.
Life insurance plans are financial instruments that primarily provide protection against financial risks. There are two types of financial risks that need to be protected against – untimely death and old age. The untimely death of a breadwinner places a family at a risk for future livelihood expenses and during retirement years the income-generating capacity of an individual reduces. Thus protecting future income is very critical.
Insurance companies also provide bundled products as a combination of protection and savings. These products help customers create a corpus for expected future needs.
Investing in a life insurance product also comes with lucrative tax advantages. Premium paid towards life insurance plans can qualify for tax exemption under Section 80C of the Income Tax Act. In most plans, the maturity benefits received also qualify for tax exemption under section 10(10)D. These policies come with the attractive EEE tax exemption benefits.
The various types of life insurance policies that can help the various needs of the customers are as follows:
Pure Term Plans: Term insurance helps in protection against loss of income from the breadwinner, there are no savings involved. These plans provide a higher risk cover for the family in return for a comparatively lower premium. Return of premium plans are a special kind of term plans where the premiums paid are returned on maturity and it also provides a surrender value. For some customers, this may offer better value. Adding riders to the plan also adds benefits to cover additional risk events at a very low cost.
Traditional Endowment plans: Provide returns after a fixed duration. These plans come with a low risk of investment. There are several plans under this category that can help an individual plan for future needs like child education, marriage, retirement, etc. The risk component of the plan helps secure the savings for the future need in case of an unforeseeable event. Another variation is the money-back plans which pay survival benefits at a set time frame during the term of the plan; providing additional liquidity to the customers.
ULIP plans: These plans are more suited for customers with higher risk-taking ability. Here the savings are invested in equity markets similar to the mutual funds.
Annuity/Pension Plans: Pension planning helps the customers develop a corpus of funds that can be used for retired life. Annuity plans help provide customers a fixed return on the pension corpus for life. These plans are very useful to provide a regular fixed stream of income during the retirement years.
There are several factors to be considered before a customer decides which policy to buy, such as personal needs, income level, risk appetite, current life stage, future needs, etc. Life Insurance policies can seem very daunting and confusing to understand, which is why one must be very clear on its terms and conditions and all the benefits it is offering.
Insurance plans are crucial for all segments of the society including the mass market with lower income ranges. Financial protection is critical for this segment where the loss of a breadwinner can lead to financial catastrophe. Insurers need to use technology and innovation to provide sustainable solutions for these customers.
by, Casparus Kromhout, MD and CEO, Shriram Life Insurance