Life insurance is a contract between an individual (the policyholder) and life insurance companies in Sri Lanka, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. This sum is known as the death benefit. In exchange for this promise, the policyholder agrees to pay premiums either regularly or as a lump sum.
Types of Life Insurance
There are several types of life insurance in Sri Lanka, but the most common ones are:
- Term Life Insurance:
- Provides coverage for a specific period (e.g., 10, 20, or 30 years).
- Pays a death benefit if the insured dies within the term.
- Usually has lower premiums compared to permanent life insurance.
- No cash value component; the policy expires if the insured outlives the term.
- Whole Life Insurance:
- Provides coverage for the insured's entire life as long as premiums are paid.
- Includes a cash value component that grows over time and can be borrowed against or withdrawn.
- Higher premiums compared to term life insurance.
- Universal Life Insurance:
- Offers flexible premiums and death benefits.
- Includes a cash value component that earns interest.
- Policyholders can adjust the premiums and death benefits according to their needs and financial situation.
- Variable Life Insurance:
- Allows policyholders to invest the cash value in various investment options like stocks, bonds, and mutual funds.
- Death benefit and cash value depend on the performance of the investments.
- Higher risk due to market fluctuations but potential for higher returns.
How Life Insurance Works
- Application and Underwriting:
- The policyholder applies for a policy by filling out an application and undergoing a medical exam, if required.
- The insurance company evaluates the application and assesses the risk (underwriting process) to determine the premium.
- Premium Payments:
- The policyholder pays premiums as agreed (monthly, quarterly, annually, or as a lump sum).
- Premiums depend on factors like age, health, lifestyle, policy type, and coverage amount. Some life insurance policies also couple in retirement plans in Sri Lanka, which can be helpful in preparing the way for your future retirement.
- Policy Issuance:
- Once approved, the policy is issued, and coverage begins.
- The policyholder receives a policy document detailing the terms and conditions.
- Death Benefit Payout:
- Upon the insured’s death, the beneficiary files a claim with the insurance company.
- The insurer reviews the claim, and if everything is in order, pays the death benefit to the beneficiary.
- Living Benefits (for some policies):
- Certain policies offer living benefits, allowing the policyholder to access a portion of the death benefit in cases of terminal illness or critical illness.
Benefits of Life Insurance
- Financial Protection: Provides financial security to the insured's beneficiaries.
- Debt Coverage: Helps cover outstanding debts and obligations.
- Income Replacement: Replaces lost income for dependents.
- Estate Planning: Can be used to pay estate taxes and leave an inheritance.
- Cash Value: Certain policies accumulate cash value that can be used for loans or withdrawals.
Considerations
- Affordability: Choose a policy that fits your budget.
- Coverage Needs: Assess the amount of coverage needed based on your financial situation and goals.
- Policy Terms: Understand the terms, conditions, and exclusions of the policy.
- Beneficiary Designation: Clearly designate and update beneficiaries as needed.
Life insurance is a crucial part of financial planning, offering peace of mind and financial security for loved ones in the event of the policyholder’s death.
Eight Critical Times in Life That You Need Life Insurance
Here are eight critical times in life when having life insurance can be particularly important:
- Getting Married: When you get married, you often take on shared financial responsibilities and commitments with your spouse. Life insurance can help ensure that your spouse is financially protected if something were to happen to you.
- Starting a Family: When you have children, your financial responsibilities increase significantly. Life insurance can provide a safety net to ensure that your children are taken care of financially, covering expenses such as childcare, education, and daily living costs.
- Buying a Home: Taking on a mortgage is a significant financial commitment. Life insurance can help cover the remaining mortgage payments, ensuring your family can stay in their home if you were no longer around.
- Changing Jobs or Starting a Business: A new job or starting your own business often comes with changes in your financial situation and benefits package. Life insurance can provide a safety net for your family during these transitions, particularly if you lose employer-provided life insurance coverage.
- Planning for College Education: As your children approach college age, the financial burden of higher education becomes more imminent. Life insurance can ensure that funds are available for your children's education even if you are not there to provide for them.
- Caring for Ageing Parents: If you are responsible for the care of ageing parents, life insurance can help cover the costs of their care and support, ensuring they are taken care of even if you can no longer provide for them.
- Approaching Retirement: As you near retirement, your life insurance needs may change. While some debts may be paid off and your children may be financially independent, life insurance can still be important for covering final expenses, leaving a legacy, or providing for a spouse's continued financial security.
- Experiencing Major Health Changes: If you experience a significant health change or diagnosis, obtaining life insurance might become more challenging and expensive. Having a policy in place before such changes occur can ensure you have coverage when you need it most.
Each of these life events brings new financial responsibilities and potential risks. Having life insurance during these times helps protect your loved ones from financial hardship in case of your untimely death.