Life insurance guides

1. What are ULIPs?
Unit-linked insurance policies or ULIPs are contemporary life insurance policies that offer investment benefits along with life cover. It is similar to traditional life insurance policies such as endowment, money-back and whole-life, but with one major difference. Unlike traditional policies, in ULIPS investment risks are borne by policyholder and not with the [...]

Now that we have examined the importance of life insurance, let’s look at the different types of life insurance policies available.

Life insurance policies can be mainly differentiated on the basis of payment of the sum assured. While in some policies, the sum assured is paid to the beneficiary only in the event of death of the insured, in others the sum assured may be paid either in the event of death or upon maturity of the policy, whichever is earlier. The former are popularly known as Term Insurance policies while the latter are called ‘Endowment’ policies.

Let’s begin by talking about life insurance. Life insurance is essentially an agreement wherein the insurance company agrees to pay a specified amount of money to an individual’s dependants in the event of his/her death.

Why is life insurance important? Many times, the untimely death of an individual causes not just an emotional void but also results in financial loss. This is especially so if the individual is an earning member of the family. Life insurance can’t fill the emotional void in case of death but it can certainly negate the effects of the financial loss. It ensures that the dependants of the deceased are taken care of financially.

A farmer had seven sons. All his sons would give him some money at every crop harvest, which he would keep aside. His reasoning was that if any of his sons died prematurely, he would use the money collected to take care of the son’s family. In essence, the father was playing the role of an insurer/insurance company.

Modern-day insurance works on this principle. Individuals pay an annual premium to insurance companies. When individuals die, a predetermined amount is paid to their dependants as nominated by them.

That said, insurance is now a giant industry, and it is not limited to covering risks pertaining to life but also health, home, vehicle, travel and so on.

You may be wondering how insurance companies make money. Firstly, they collect premiums from a large number of people. Only a few of these people may actually suffer the loss. Also, premiums collected are a little more than the expected risk. Secondly, insurance companies invest the money they collect. And, since the collection is immediate while payments may have to be made to customers at a future date, they end up making money.