Life insurance is a contract/agreement between an individual/client and an Insurance Company. This contract guarantees the insurer pays a sum of money to the beneficiaries of the insured person or legal entity in case of death. The insurance company provides financial protection or payment in exchange for the premiums paid by the policyholder during their lifetime.
The beneficiaries can use that money for whatever purpose they choose. This often includes paying everyday bills, paying rent, or putting a child through college. Having the safety net of life insurance ensures that your loved ones can stay in their home and afford their needs.
A person can also buy a life insurance policy on someone else’s behalf, such as their children.
How Life Insurance works
Based on its duration, life insurance plans in Pakistan can be classified into two distinct types: Term Life Policy and Permanent Life Policy.
Both policies have two main components—a death benefit and a premium. However, Permanent policies also have a cash value.
The death benefit or face value is the amount of money the insurer or the life insurance company guarantees to give to the beneficiaries identified in the policy when the insured person dies. The policyholder will choose the death benefit amount, while the insurer will decide if there is an insurable interest; and if the proposed insured person qualifies for the coverage based on the insurance company’s underwriting requirements related to age, health, and any hazardous activities in which the proposed insured participates.
Premium is the money the policyholder pays for insurance. Suppose the policyholder pays the premiums as required. In that case, the insurer must pay the death benefit in case of the insured’s death. Premiums are determined by how likely the insurer will have to pay the policy’s death benefit based on the insured’s life expectancy. Factors influencing life expectancy include the insured’s age, gender, medical history, occupational hazards, and bad habits. Part of the premium goes toward the insurer’s operating/company expenses as well. Premiums are higher on policies with more extensive death benefits, individuals at higher risk, and permanent policies that accumulate cash value.
The cash value of permanent life insurance has two purposes. It is an account that the policyholder can save money in and use when he needs it. Some policies may have restrictions depending on how the funds will be used. For example, the policyholder may take out a loan against the policy’s cash value. Then they will have to pay interest based on the loan principal. The policyholder can also use it to pay premiums or purchase additional insurance. The cash value is a living benefit the insurer keeps when the insured dies. Bigger loans against the cash value will reduce the policy’s death benefit.
Types of Life Insurance and How it works
Once the policyholder signs the contract, they must pay a certain amount to the insurance company either monthly, quarterly, or yearly.
Term Life Insurance
Term Life Insurance policies expire after a certain amount of time, and the premium payments stay the same amount for the duration of the policy. You can choose the period when you take out the policy. It can be anything like 10, 20, or 30 years. The assured sum is paid to the insurer/policyholder once the policy has matured.
Term life insurance differs from permanent life insurance in several ways. Still, people often prefer Term life insurance as it best meets their needs.
Permanent Life Insurance
Permanent life insurance policies remain active until the policyholder dies, surrenders the policy, or stops paying premiums. Depending on the insurance plan, the insurance company will pay out the policy’s face value and death benefit to the family or/and beneficiaries following the policyholder’s demise.
Permanent life is generally much more expensive than term life because it involves building a cash value.
Meanwhile, Insurance companies in Pakistan offer a wide range of life insurance plans based on coverage, the most common ones are Education Plans, Marriage Plans, Retirement Plans, etc.
This is one of the trendiest life insurances in Pakistan among young parents who want to secure their child’s future. The kid receives the assured sum or cash value, whichever is higher after the policyholder’s death.
Some companies in Pakistan also offer education continuation plans where the assured sum is paid monthly for a certain period to cover the tuition fee of the deceased’s children.
The marriage plan ensures that your child will get the wedding of their dreams without worrying about how they’ll afford the bill. Most companies offer this plan in confluence with the education plan.
The marriage coverage plan allows parents to save money for their children’s weddings by paying a premium for a certain period. They will receive a large sum once the term ends.
One needs to be thoughtful about their retirement plan since it means loss of regular income and an increased risk of health problems.
If you want to spend your post-retirement without worrying about financial responsibilities, you must plan ahead. This type of life insurance covers accidental hospitalization as well most of the times.
HOW TO CHOOSE THE RIGHT LIFE INSURANCE PLAN
Many factors can affect the price of a life insurance plan. Certain things among them may be beyond your control, but other criteria can be managed to bring down the price before applying. When choosing between different life insurance policies in Pakistan, one should always choose a plan that suits their budget and future goals.
Suppose you are purchasing life insurance for your child’s education. In that case, you must ensure the payout will be sufficient for their tuition and other objectives. The same goes for marriage and retirement plans, as you need to ensure that the assured sum your beneficiaries receive would be enough to support them.
HOW TO BUY AN INSURANCE IN PAKISTAN
Once you choose an insurance service provider, contact them on the phone or browse through their website to familiarize yourself with their coverage plans. Many leading companies in Pakistan provide customers with the option to sign up for a policy online. Moreover, the premiums can also be paid online if you have an account in a bank that has partnered with a specific insurance company. You can allow a yearly premium deduction, which is convenient and hassle-free. Life insurance applications generally require beneficiary information and personal and family medical history. You might also need to submit for a medical exam. You must disclose any preexisting medical conditions, history of moving violations, and dangerous hobbies such as auto skydiving or racing.
Standard forms of personal identification will also be needed before a policy can be written, such as your CNIC, driver’s license, or passport.