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Life Insurance

When a financial planner suggests you to buy life insurance, it usually means buying a term plan. Any other endowment plans or ULIP plans are to be stayed away from, no matter how much money they offer at the end of the term period. However, why do we consider a term plan to be the right choice for you as opposed to several other plans which offer maturity returns and other attractive features? Even With the recently announced Budget, the laws have been changed to promote term & high risk cover plans.  We at SAMPARK will give you a clear understanding of the same by comparing the several kinds of plans with a term plan.
 
Efficient coverage at low premium - A term plan is the most simple and the most effective way to insure your family against any financial difficulties in the event of an early demise. It provides you a fixed cover for a fixed term for a minimal amount of premium. However in the event of outliving the term, you receive nothing. Since your main aim of purchasing an insurance policy is to provide a cover for your family to replace the lost income, a term plan provides you with adequate cover at a very nominal amount of premium.
 
There are several other complex plans which offer you a fixed cover upon death along with a certain sum of money paid to you at the end of term. This is possible because the premium paid by you is directed towards two ends. A small part goes for the insurance cover. The rest is invested. On the invested amount there are charges as well. That is why these plans like ULIP’s & Endowments charge a very high rate of premium and correspondingly provide inadequate coverage or returns.
 
Simplicity vs Complications – A term plan is simple and easy to understand. A fixed premium, a fixed duration and a fixed coverage! You cannot go wrong.The many other plans available in the market are a mixture of one or more plans put together making them very complex. Avoid complexities because, in finance, simplicity rules!What you can understand, is what you must go for!!
 
Returns – A term plan provides nil returns in the event of an individual surviving the policy term, whereas an endowment plan provides you a maturity value & a ULIP gives you market linked returns.  However, you must not forget the amount of premium you pay each year in order to achieve these returns.
E.g. In order to buy an endowment plan of Rs 2,00,000/- the yearly premium can amount to nearly Rs 16,000/- whereas you can purchase a term plan of Rs 25,00,000/- for just around Rs 8,500/-appx.
 
We believe that insurance and investment must strictly be kept aside. Instead of paying a higher premium, for earning nominal returns, purchasing a term plan for your insurance needs and subsequently investing the remaining amount of money can earn you better returns. Hence, if you purchase a term plan with premium amount of just Rs 8000/- or so, you can avail a cover of Rs 25, 00,000/- and also invest the amount of funds that you have saved by not purchasing an endowment plan, i.e. nearly Rs 8000/- to earn a higher rate of return in the market.
 
Tax Benefit – According to the existing rules, you can avail a tax benefit on the sum assured received, provided the sum assured is 5 times the premium amount. However, with the new Budget the rule changed to ‘the sum assured being 10 times the annual premium paid’. This has made many investment cum insurance plans taxable. Money back policies especially have lost their tax-saving sheen.
 
Ease of purchase – A term plan is very easy to purchase as it is easy to understand. It can now be bought at theclick of a button on the internet.
However, do make sure your family is aware of your online purchase of a plan as it can help save them trouble at an unexpected future date.
 
Ease of functioning – A term plan is easy to operate. You pay your premium amounts each year and you receive coverage for another year. Owing to the nominal amounts of premium payable, it makes it easy to maintain a term plan as opposed to other expensive plans. In the event of an individual losing his source of income, he may still be able to continue paying his premium and avoid losing his insurance coverage.
 
A term plan is also easy to discontinue. In an unexpected turn of event, wherein an individual feels, he does not need life insurance anymore; he can simply stop paying the premium amounts to discontinue his policy,thereby offering complete ease of functioning. A term plan is simple and sticks to the basic purpose of insurance that is providing adequate cover for a nominal amount. Hence we strongly suggest a term plan for all your insurance needs. It simply cannot be replaced!
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Source : fpguru
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Term Life Insurance - The Pros and Cons :

Life insurance is a tool that many people use to provide a healthier or more robust estate for their beneficiaries. There are a number of different types of life policies available but they all work in basically the same way. An individual chooses how much money they want to leave behind to their family or loved ones and then pays monthly premiums on a policy until they pass away. At the time of the policyholders death, the insurance company pays the beneficiaries the amount of death benefits due to them. The vast majority of life insurance works just like this, but there are a few notable exceptions.

Single premium life policies do not require an individual to make a monthly premium payment. These types of policies are paid in full at the outset. An individual can choose to pay just about any amount to open this type of life insurance policy with the caveat being that most insurance companies require a minimum payment of at least $5000. Just because a person has life coverage does not mean that their beneficiaries are guaranteed to get death benefits if that person passes away. In the case of a term life insurance policy, if the individual outlives the term and does not renew the policy there will be no benefits available.

The type of insurance that most financial planners would recommend to their clients is often referred to as permanent life policy. This type of insurance is best suited for individuals that are still fairly young and have the luxury of allowing the policy to mature over time. The typical permanent life coverage takes it least 10 years to fully mature. As long as the policyholder makes their regular premiums, which keeps the account active, they do not need to worry about having their policy expire or seeing their premiums increase.

Not all life insurance policies are designed for the exact same purpose. Certain types of life insurance, like survivorship life coverage, are designed to serve a specific function. A survivorship life policy is purchased by a couple who are usually wealthy as a way of covering any estate taxes that may be due at the time of the final spouses passing. There is no one size fits all approach to life coverage. Each person must carefully consider their finances, budget, and whether or not there are people depending on them in order to determine exactly which type of life insurance is best and how large of a policy to purchase.
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Source : articlebase

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Term Insurance Ka Jawaab Nahi :

Term Insurance policy is one of the most misunderstood products in India. And it is little surprise that Insurance itself is not understood or appreciated enough in India.        

To begin with, lets restrict ourselves to term insurance for the moment. For a typical investor buying an insurance policy primarily for the sake of tax benefit, the term policy appears to be an anathema. This is because the basic characteristic of a term policy is that you pay premiums in return for a benefit to your family in case you die and nothing for you if you survive.

And hence the most common question is..

Why should I pay annually for a product if I am not going to get anything back?

                            

Very few understand that a term policy is insurance at its purest and simplest. You pay premiums because there is a guarantee that if something happens to you, your family will be paid out the pre-decided amount, hence you have the peace of mind that even if you are not there, those loved ones you leave behind will not have to bear a financial loss as well.

                                              

Term insurance is protection against risk to life.

                                           

Value for Money?

Since there is no value of your financial investment or savings element involved, the premium accounts only for the risk cover costs (mortality costs) and hence is very low compared to other insurance products. No other insurance policy will offer you as much value for money as this.

                                               

Lets say you bought a pure term insurance plan for Rs 20 lakhs for 20 years. If you die within that period, your family receives the sum assured of Rs 20 lakhs, which will help meet their needs and goals. However, if you outlive the 20 year period, you get nothing on maturity of the term. Pure term plans do not accumulate cash value, and hence do not have any maturity benefits.

                                                   

Why should I take this plan?

The answer - it provides a safety net for your family and is the cheapest form of insurance available. The premium depends on the mortality charges, which are lower at a younger age. Hence, the earlier in life you take insurance, the longer the term and cheaper the cost.

                          

Term insurance policies cover you for a specific amount of money and for a specific period of time. How do you then decide what is the right amount and right term for you?

                                         

The amount depends on a number of factors like the age of your children, the important goals that you have, the number of years left to your retirement and so on. Likewise the term of the policy is mostly linked to how long you are going to be working.

                                           

Basically, term policy is a replacement of income, hence as long as you are going to generate this income, the term of the policy should be that long – unless you build up enough assets that your family doesnt need to depend on insurance or all your major commitments are fulfilled and it would not matter if you stopped work.

                                               

The amount of the policy or the risk cover, as it is referred to, can be calculated by using two methods – thehuman life value approach and expense protection approach.

                                             

The Human Life Value approach determines what your economic contribution would be over your expected working life. It is the expected life time earnings of an individual expressed in present rupee terms. A rupee today is worth more than a rupee tomorrow and therefore it has to be discounted by an assumed rate to arrive at its present value. This calculates your economic worth today and the amount for which you should be insured.

                                                         

Say youre 30 years old, earning an income of Rs 12 lakhs per annum currently and expected to retire at the age of 60. Assuming an average growth of 2% per annum on your income and a return of 8% on your investments, your economic value today is Rs 1.8 crores.

                                                           

The Expense protection approach, on the other hand, addresses the issues pertaining to liabilities, protection of future goals and family expenses. 

                                                          

If you are an earning member of your family and there are others dependent on your income, you need to protect them and their interests even if youre not around. Income is supplemented by the returns expected to be earned from an invested corpus. The shortfall in this corpus is the Expense protection that needs to be taken care of.

                                                                      

There are different kinds of Term Insurance Plans available in the market today such as Single Premium Term Assurance, Loan Cover Term Assurance and Term Insurance With Return of Premium. In the Single premiumvariant, the premium for the life cover for the full term of the plan is collected in the first year itself, whilst in the Loan Cover Term variant the Sum Assured reduces in sync with the reducing loan amount, annually, clubbed with a limited level premium paying mode. Most home loans are covered by this variant. The Term Insurance With Return of Premium (ROP) Plan works the same way as a pure insurance policy. The only difference is that on maturity, the insurance company returns to the customer all the premiums that he has paid to secure his cover.

                                                                   

The death benefit from a term plan is tax free under Section 10(10D) of the Income Tax Act, 1961. Premiums paid towards the plan can be claimed as a deduction under Section 80C of the IT Act.

                                                       

It is unfortunate that most Indians buy insurance, some even the term plan mainly to avoid tax rather than to seek cover against risk. We hope that after reading this, you will look upon to term insurance as a cheap and sound investment offering tremendous peace of mind and security to your loved ones.                                                                                                                                                     ~

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Source : InvestmentYogi

 

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