Life Insurance: Importance of Life Insurance and Types of Life Insurance
Arjun EP
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Meaning of Life Insurance
There are two types of insurance.
One is life insurance and other is non-life insurance.
Under life insurance, a person or group of person pays fixed installment of amount to insurance company to secure his/her future or liabilities.
Insurance company is called insurer. Insurance taker is called policy-holder.
The amount paid to insurance company is called premium.
It is paid in advance. It may be payable in monthly, quarterly, half yearly or yearly.
Period of insurance is known maturity period.
After completing maturity period or death of policy-holder, insurance company pays insurance amount (claim) to policy-holder or his/her nominee.
Importance of Life Insurance
There are many importance of life insurance; out of them, some importances are as follows:
Saving
When a person takes insurance policy, he/she has to pay regular premium to insurance company.
If he does not pay premium within time, he is fined.
That is why, insurance force to regular saving.
Life protection
Generally, family members are depend-on money earner person.
When something bad happens to money earner person, regular income will be stopped.
But, when insurance policy is taken, insurance company pays definite amount to nominee.
Therefore, insurance helps to life protection.
Investment
Insurance premium is paid regularly upto maturity period.
Therefore, it is investment for policy-holder.
Tax saving
According to Nepal Tax Act 2074, there is tax exemption to policy-holder upto certain level each year.
Therefore, it helps to tax saving for policy-holder.
Provides liquidity
Insurance company receipt premium from policy-holders.
It receives regular amount. After receiving money, it invests its receipt amount to different organization.
Insurance company plays important role of financial institution.
Therefore, it provides liquidity facilities to financial institutions.
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Types of Life Insurance
According to nation and insurance company, there are different types of life insurance policy.
According to their nature, they have different advantages; they are as follows:
(A) Endowment Life Insurance
Endowment means policy with specific period.
This period may be 5, 10, 15, 20… upto 65 years.
Policy holder pays specific amount upto specific period.
After completing time period, policy holder will receive insurance amount with bonus.
Bonus is depended on profit of the insurance company.
If insured person (policy holder) dies before specific time, nominee does not need to pay any premium.
In this condition, nominee will receive full insurance amount with bonus.
Endowment policy is very popular because it provides financial security.
This financial security is for family as well as policy holder for livelihood in old age.
Under this policy, there are different types of endowments; some of them are as follows:
· Ordinary endowment policy
· Deferred endowment policy
· Double endowment policy
· Pure endowment policy
(B) Money Back Policy (Anticipated Endowment Life Insurance)
Anticipated endowment life insurance means money back policy.
The policy periods are 15, 20 and 25 years.
Policy holder pays specific amount upto specific period.
If policy holder has taken 15 years policy, he will receive 25% of policy amount after 5 years, again 25% after 10 years and remaining 50% after 15 years with bonus (it is depended on policy and insurance company)
If insured person dies before specific time, nominee does not need to pay any premium.
In this condition, nominee will receive full insurance amount with bonus.
Anticipated endowment policy is very popular because it provides money back.
Keep in Mind (KIM)
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Under Anticipated endowment policy, policy holder has to pay more premium amount than endowment policy. |
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Because, insurance company pays money back after every 1 year to 5 years period to policy holder. |
(C) Whole Life Insurance
Whole life insurance is also called permanent policy and cash value of investment policy.
Under this policy, policy-purchaser pays some fixed installment upto specific time.
After specific time, policy holders need not to pay any premium.
The amount of policy is paid to nominee only after his/her death.
Under this policy, insured person cannot get premium amount during his life.
If insured person dies before specific time, nominee does not need to pay any premium.
In this condition, nominee will receive full insurance amount.
(D) Term Life Insurance
Term life insurance is also called termed renewal policy.
Under this policy, policyholder takes insurance policy for short term i.e. annually.
This policy is taken only for security purpose of person.
This policy provides full financial protection to the insured against the death risk.
The annual insurance premium amount may be increase or decrease than previous policy.
If policyholder dies before maturity period, surrender value is paid to his/her nominee.
But, if policy-holder does not die, premium amount is not returned to him/her.
(E) Children Endowment Life Insurance
Education and marriage of child or children is very costly.
This financial burden can be minimized by taking children education and marriage endowment life policy.
To take this policy, parent pays insurance premium to insurance company (insurer).
Child becomes the nominee of this policy.
Other terms and conditions are same as endowment life policy.
If parent dies before maturity period, surrender value is paid to nominee (child).
Otherwise policy amount will be paid on maturity period.
After receiving policy amount, parents can utilize these amounts for higher education or marriage of child.
(F) Joint Life Insurance
Joint means two or more than two.
Joint life insurance policies are designed to cover couples or partnerships firm.
Surrender value of policy is received in the event of either partner’s death.
Couple depends on each other and partner also depends on other partner.
Couple or partner’s death affects financial income.
Joint life policy helps to recover some funds.
Many families have two breadwinners (family supporter).
With a joint life policy, premium is payout on the first death only.
After this, the other policyholder will no longer to pay insurance premium.
This policy is more expensive than single policy.
(G) Pension Policy
Many persons do jobs in private sector and temporary.
Many persons do small business.
These peoples will not have regular income at the time of old age.
These peoples get pension policy for regular income on their retirement age.
This plan provides a post retirement monthly income to the assured thereby ensuring that the assured does not have to depend on any other person.
Retirement and pension plans provide financial security.
Maturity period may be 10, 15, 20, 25, 30, 35, 40 years.
Premium payment frequency may be annually, half yearly, squarely and monthly.
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