Many types of insurance are available in the market, of which people mostly prefer a policy. It is a simple way of financially securing the future of yourself and your family. But what exactly is the meaning of life insurance? How does it function? What are its types? How is it beneficial? It is likely to have these questions in mind before purchasing life insurance. So let’s sort them out one by one in this article.
Life Insurance: Meaning
A life insurance policy is affordable for securing the family and yourself after any uncertainty in life. For instance, if you are the only breadwinner in the family, have you thought about the family’s income and needs after your retirement or preparing for unfortunate events like demise, injuries, accidents. In such cases, a life insurance policy comes to the rescue! You must mention a nominee during the purchase who will receive the payout after you. However, the policyholder has to pay a predetermined premium throughout life in exchange for this benefit.
Essential Elements Of Life Insurance
There are three components of insurance, without which it won’t be easy to understand it. No matter who the insurer is, these elements are constant to all.
- Premium: You all must have definitely heard of premium. But what exactly is it? To better understand, it is like an EMI you pay while purchasing something. Premiums are paid either monthly, quarterly or annually to the insurer for a fixed time.
- Deductible amount: A sum has to be paid to the insurer prior to the entire claiming process and final payout. A life insurance policy with a higher deductibles have low premiums due to lower amount of claim and vice versa.
- Policy Limit: This is the maximum money that an insurer will have to pay under the life insurance policy. The limit is essential to consider while buying a plan because every company has a different limit to offer.
Types Of Life Insurance And Their Function
As mentioned above, many companies offer varied types of life insurance plans. There is always confusion about which one is better! So, let’s take an in-depth look at five types of life insurance:
- Whole Life Insurance: This insurance plan provides coverage to the policyholder with survival and maturity benefits. It is designed to provide extended coverage for your entire life, up to the age of 99 or 100. Therefore, such exclusive benefits also attract higher premium amounts.
When To Buy: If you want insurance coverage during your survival and wish to enjoy the maturity benefits, then you must consider a whole life insurance policy.
- Term plan: It is a pure life insurance plan with only death benefits. In short, the nominee gets the money after the demise of the policyholder. It is most preferred because it is comparatively reasonable than the rest of the insurance types. The premiums are pretty low, and the plans are flexible with riders.
When To Buy: A term plan is an ideal choice if you want to secure the family financially and fulfill their needs after you, such as your child’s education, your spouse’s old age, basic expenses, etc.
- Unit Linked Insurance Plans (ULIP): ULIP combines life insurance and investment options. It allows one to have insurance and investment at the same time. This life insurance policy comes with a lock-in period of five years, during which one can invest funds in several opportunities. However, there is a risk associated with this plan.
When To Buy: One must prefer this option if investment and insurance are their ultimate goals.
- Endowment Plan: This type of life insurance policy combines insurance cover as well as savings. In short, it gives life cover and helps in saving a regular monthly amount so that you can get a lump sum amount upon maturity. Endowment policies are set for a particular period. So, if you survive during the policy tenure – you are entitled to the maturity amount.
When To Buy: This plan is ideal for early thirty individuals looking for wealth growth and fulfilment of long-term goals such as buying a property, house renovation and so on.
- Money Back Policy: As the name suggests, this plan provides money back during the policy tenure. Unlike other plans that only give money after maturity – this plan includes coverage for a short period of 10-20 years or so. By this, you can produce more income for your loved ones.
When To Buy: A money-back life insurance policy is ideal if you want to generate wealth and enjoy survival benefits.
Benefits Of Buying A Life Insurance Policy
- Helps Plan Retirement: Death benefits are secondary! Before that comes retirement which needs efficient planning so that it is smooth and independent. You can gain maturity benefits during survival that generates income by going with a specific life insurance policy.
- Relief From Tax: Buying a life insurance policy comes with the advantage of tax relief. For instance, As per Section 80C of the Income Tax Act,1961, you can avail a tax deduction on the life insurance premium, up to Rs. 1.5 lakhs in a year.
- Repay Loans: After the policyholder’s death, the burden of loans and debt falls on other family members. For instance, being unable to pay a house loan or car loan will be a liability. Therefore, by purchasing life insurance – you can rest assured as the family can clear the debts with the insurance payout.
- Enables Savings: By choosing a preferred plan, one can increase their savings by having a monthly payback or investing in appropriate funds. It also leads to wealth growth.
- Future Financial Planning: A policy acts as a safety net for the family. It offers peace of mind as the family will not suffer financial difficulties after losing a breadwinner.
A policy is exclusive to all sorts of insurance as it is inexpensive and straightforward, unlike others that are very complicated to understand. However, it is essential to note that choosing a life insurance policy is also dependent on factors such as your age, gender, marital status, occupation and so on. These factors will allow you to decide on the premium and help set financial goals. So, when buying a life insurance policy, you must keenly look at and compare the policies of every insurance company. Also, look at the add-ons, as they can provide more tax and health benefits.