Life Insurance: Protection for the Value You Create
Human life is equally precious for the rich and the poor. The value a person creates is not just about the financial wealth that he accumulates, but also about what he puts into his relationships and in himself. The value of a person lives on forever in our hearts even when he passes away. However, financial value may be lost if our loved one who died was the prime earner of the household. How do we protect that financial value? By taking life insurance.
What is Life Insurance?
Life insurance is a product designed, in its pure form, to protect the beneficiary against the risk of the untimely death of the insured. Thus, the insured pays a premium for the duration of the policy, and the beneficiary gets a pre-specified sum assured on the death of the insured. This kind of pure protection policy is known as term life insurance. There are also other varieties of life insurance policies, which are investment cum protection products. In addition to the pre-specified sum assured for the beneficiary in case of the death of the insured, the policy also gives a maturity benefit at the end of the policy term. One specific kind of protection cum investment plan is the unit-linked insurance policy, or ULIP. These are akin to mutual funds in that they invest the insured’s money in equities and bonds, and provide the insured a choice regarding the risk profile of his or her portfolio. Unlike a mutual fund, ULIPs also provide a guaranteed sum on the death of the insured.
When buying a life insurance policy, the insured must calculate how much is needed to assure the financial security of his or her family in the years to come. According to an article on insurance.birlasunlife.com, the way to calculate how much insurance is required is to do the following:
a) Calculate the annual living expenses of the family
b) Multiply this number by the number of years the protection will be needed, usually fifteen to twenty years. Also, multiply by an inflation factor.
c) To this number, add any liabilities of the insured, such as a home or a car loan, and subtract the value of any assets, such as gold, fixed deposits, real estate etc
The result of this exercise gives a rough idea of how much life insurance will be needed.
Factors to Keep in Mind While Buying Life Insurance
One important factor while looking at the different life insurance companies in India is to look at the claims ratio. This shows the percentage of claims paid out by the company to the total number of claims the company received. According to an article on livemint.com, the insurance companies’ claims settlement record has improved slightly in FY 2015 as compared to the previous year. LIC’s claims settlement ratio improved to 98.19% from the previous year’s 98.14%. In contrast, life insurance players in the private sector settled 89.4% of the claims received in FY 2015, as opposed to 88% in the previous year.
The Life Insurance Market in India
There are 24 life insurance companies in India; Life Insurance Corporation (LIC) is the only public sector company in the Indian life insurance segment. According to the Insurance Regulatory and Development Authority of India’s (IRDA) Handbook on Indian Insurance Statistics 2014-15, the number of new policies issued in 2014-15 was 259 lakhs, sharply down from the 409 lakh policies issued in 2013-14. Total premium collected in 2014-15 Rs 328,101 crores, up slightly from the Rs 314,301 crores collected in 2013-14. Individual policy holders submitted 877,828 claims in 2014-15, down slightly from the 885,361 claims submitted in 2013-14. The total net benefit paid out by insurance companies, on individual as well as group policies, was Rs 21,107,289 lakhs in 2014-15, down from the Rs 21,631,191 lakhs paid out in 2013-14.
India's life insurance sector is the biggest in the world, with about 360 million policies, according to an article on ibef.org. The number of life insurance policies is expected to grow at a compound annual growth rate (CAGR) of 12-15% over the next five years. However, insurance penetration in India, calculated as the ratio of premiums collected to GDP, was a low 3.3% of GDP in 2014-15. Clearly, the industry has a large potential for growth.