Know about life insurance for beginners: Think of insurance as a parachute on an airplane – Hope you do not need it, but you fly safer knowing it’s there. So even in the worst-case scenario when the airplane might crash, you have a backup plan to rely on.

While the event of death is certain for everyone, its exact details are unpredictable. Whether sudden or gradual, nobody can predict death but we all like to be prepared for it, especially for our loved ones and family. Dear Finvestors, welcome to FinGrad, and now let’s discuss Life Insurance for Beginners in this article.

What is an Insurance?

Life Insurance For Beginners

By Definition, Insurance is a contract between a policyholder and issuer to pay a certain beneficiary amount of money upon the death of the policyholder or maturity of the insurance. The amount is either paid in a single lump sum amount or as premium overtime. 

You should also know what are the investment instruments that everyone must have, including investments in themselves.

Types of Life Insurance

Let’s understand what are the different types of life insurance that exists:

1. Permanent Life Insurance – Permanent life insurance lasts the entirety of the policyholder’s lifespan. The maturity is either through the insured’s death or termination of the policy itself. It is much more expensive than term life insurance. 

2. Term Insurance – Term Insurance provides longer life cover with lesser premiums and no maturity. For example – you hold a policy of 1 CR over 25 Years, with regular monthly payments to the Insurance company.

If you come across a life-threatening incident, then your insurance company will cover the premium to the nominee of your insurance. If your life is not affected throughout the term, then the entire sum amount goes to the life insurance company. 

3. Unit Linked Insurance Plan (ULIP) – Your Insurance company receives monthly payments towards your insurance plan. Through the ULIP plan, the policy issuer invests your money into the stock market.

4. Endowment Plan – These are life insurances with profitable maturity. This can be viewed as insurance as well as an investment.

5. Money Back Plan – The policyholder receives a fixed amount across regular intervals that provide a passive income. 

6. Whole Life Insurance – This is a life insurance plan that lasts a duration of 100 years. Policyholders get a cover of up to 100 years of age. 

7. Group Life Insurance – This is commonly bought by employers for their employees. This insurance is usually purchased by an employer and the premium is also paid by them. If you’re working as an employee at a company, then you too would have an insurance policy on behalf of your employer/firm. 

8. Retirement Plan – A retirement insurance plan is a policy that invests into funds that can be offset for your retirement years. There are multiple retirement plans available to you at the start of your career that you can use to save and accumulate wealth.

Life Insurance for Beginners from Investopedia on FinGrad
Source: Investopedia

How To Pick The Right Life Insurance

To pick a Life Insurance for beginners plan, which one is right for you, consider the below factors and also the reason for taking insurance. As we’ve seen above, there are different types of insurance that cover everything from investments to retirement and death.

  1. Your goals and purpose for insurance should be very clear from the start as it decides the type of insurance you need.
  2. Secondly –  picking the best insurance company. For each of the few top insurance companies, there are hundreds more that are fraudulent. 

Life Insurance for Beginners: Risks Involved

Before opting for any insurance, one should know the risks associated with it. Let’s understand what are the risks involved in life insurance –

1. High Return Trap

The High return trap is where Insurance salesmen pitch a policy to customers by showing higher-than-real returns from their policy. In the excitement and glee of this information, a majority of customers sign onto the policy. After a period of twenty to thirty years, the actual returns may be extremely different from what was promised at the time of purchasing the policy.

2. Misleading Information

Insurance companies and their sales representatives often misrepresent data to new and existing customers. For example, Low Claim Ratio where insurance companies show inflated numbers of claims based on the number of claims settled versus the actual value of the claims. Advertising also provides claims of paying maturity sums that go up to a few crores which again, is more misleading that the actual reality. 

3. Terms and Conditions

The documentation for life insurance is a lengthy ordeal. Higher the term value, the longer the bureaucracy. While the process is quite tedious, you as a policyholder have to read through every document you’re signing. Life Insurance is a long-term agreement spanning decades. It benefits you the most when you’re made aware of exactly how your agreement will pan out with your insurer. 

Also, every insurance agreement has certain clauses which allow your nominee to not receive the payout upon maturity. When you end up eventually signing such agreements, insurers take advantage and do not pay the lump sum to the nominees. 

Takeaway

Insurance can be the difference between safety and bankruptcy, especially in life-threatening situations. However, a bad policy can cause much more trouble to you and your family, as they are fraudulent to an extent.

Realistically, any insurance company cannot pay the promised lump sum on maturity or death due to the sheer scale of claims as the maturity. To learn more about the topic, do check out the Life Insurance for beginners webinar on our website. Till then, Happy Investing.

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