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Good reasons to buy an insurance policy

Monday, November 15, 2010
By Manoj Aswani

I wanted to take an insurance policy for my relative, who is not aware of financial products like insurance and mutual funds, etc. However, the insurance company did not accept the proposal and said that there is no insurable interest and that my relative will have to be the Policy holder and Proposer himself. Why so?
Mahesh Solanki, Nahur West Buying an insurance policy is like a contract between the policy holder and the insurance company. However there are two key considerations which the insurance company checks for –

1)    Utmost good faith
2)    Insurable interest
Insurable interest refers to the matter where if something (like death or disability) were to happen to the insured person, then his/her family would suffer a financial loss. This risk of financial loss will be covered by the insurance company. So to insure a person, there should be a probability of loss and there should be a risk for the family or dependent members. In this case, there is no financial loss to you as a relative and hence there is no insurable interest that you have in your relative. If there is an unfortunate event which leads to the death of that person, then his family should be financially stable. In case your relative wants to protect his family then he should insure himself by being the policy holder. Some of the examples of insurable interest are:
  • Husband and Wife
  • Employer and employee
  • Partners or Directors of the business
  • Creditor and Debtor
Is life insurance really necessary? I have heard mixed views about life insurance policies, companies and agents. What are the good reasons to buy an insurance policy?
Samantha Warrier, Matunga East
Well, life insurance is not compulsory like some of the general insurance policies. But then, it surely is a good protection instrument. There are many advertisements on TV and in newspapers and magazines which share the benefits of life insurance. Very briefly, some of the benefits of life insurance are -
  • It provides protection against economic and financial risks for the family members in case of death or disability of the individual. Their source of income should stay unaffected for a sufficient number of years at least if not life long.
  • It helps in planning future expenses like purchase of new asset like house or car, planning for child’s education, marriage, etc.
  • It helps to provide security to our housing loan and other availed loans whereby in case of death of the individual the family members do not bear the burden of loan repayment
  • It is a good tool to plan the retirement income or receive money at regular intervals in future
  • It also offers good tax benefits on premiums paid and the money received at maturity or end of the policy term. 
Many life insurance policies offer an option to pay the premium for lesser time frame than the actual policy period. What is this feature?
Aaman Sahdev, Juhu – Santacruz West
“Policy term” refers to the period for which the policy will be in force. After the policy term, the insurance plan will be cancelled or terminated and the proceeds will either be given to the policyholder / nominee or will be retained by the insurance company depending on the situation and product opted. At times, the policy term in some insurance policies goes past 25 to 30 years and the policy holder finds it difficult to make any commitment of paying till the end of the policy term. Hence insurance companies provide option of a “Premium payment term” which can be lesser than or equal to the policy term. So for example, if the customer wants to be covered for a period of 25 years but wants to finish off paying the premium sooner, then the insurance company will give him an option of a limited premium paying term. This premium paying term varies from company to company and it could be 10 years, 15 years or 20 years. 
(The author is Vice President at www.MyInsuranceClub.com," target="_blank">http://www.myinsuranceclub.com/">www.MyInsuranceClub.com, insurance comparison website in India. You may write to him at )



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