Introduction: What is life insurance?
A life insurance plan is a financial instrument designed to offer financial assistance to an individual’s family in the event of the said person’s untimely death. In return for this financial assistance, the policyholder is required to make periodic payments, known as premiums, to an insurance company. And in the case of the individual’s death during the plan’s tenure, the insurance company would pay an agreed-upon sum of money to the nominees of the deceased.
How does life insurance work?
Now that you know the answer to the question ‘what is life insurance?’ Let’s now take a look at an example to understand how it works.
Say that an individual who goes by the name of Amit wishes to purchase a life insurance policy. He approaches an insurance company and purchases a life insurance plan. He opts for a death benefit sum assured amount of Rs. 50 lakhs for a tenure of 30 years.
Now, if Amit were to die within the 30-year tenure, the insurance company would be obligated to pay the death benefit sum assured amount of Rs. 50 lakhs to his nominees. Amit’s nominees can then use this payout to further their life goals.
10 facts about life insurance plans
There are plenty of interesting facts about life insurance plans that you may not be aware of. We’ve picked out 10 of the most important ones for you. Here’s a quick look.
1. There are different types of life insurance plans
With respect to life insurance in India, there are as many as 6 different types currently available for you to choose from. And each of these plans offers varying levels of benefits. Let’s see what the different types of life insurance plans are.
- Term insurance plans
- Endowment plans
- Unit-Linked Insurance Plans (ULIPs)
- Whole life insurance plans
- Child insurance plans
- Pension plans
2. Life insurance premiums increase, or mortality charges change as you age
Your age is one of the primary factors that come into play when determining life insurance premiums. The younger you are, the lower the premiums tend to be. This is simply because younger individuals are at a much lesser risk of contracting illnesses or diseases than older individuals.
Therefore, they are offered lower premiums. However, as you age, the risk factor increases and consequently the premiums that you would have to pay would also increase. Alternatively, in the case of ULIPs, your mortality charges might change as you age while premiums will likely remain the same.
3. You need to assign a nominee
One of the many benefits of life insurance is that it provides beneficiaries financial assistance in the event of the policyholder’s death. However, to make it easier for the beneficiary to be able to claim the death benefit under a life insurance policy, they are made as the nominee in the policy. Also, you can choose to change your nominee at any point during the plan’s tenure too.
4. Some life insurance plans also feature an element of investment
Not all life insurance plans provide just the death benefit. There are a few types that also have an investment component to them in addition to the death benefit. ULIPs and endowment plans, for instance, invest the premiums that you pay towards the plans. And the returns that they generate are then paid out to you upon maturity of the policy.
5. You can enhance the coverage using riders
Riders are essentially add-ons that you can opt for over and above the base life insurance plan. These addons basically serve to enhance the coverage of the base policy by paying a nominal additional premium over and above the base insurance premium. Some of the riders that you can opt for include critical illness riders, accidental death benefit riders, and waiver of premium riders.
The critical illness rider, for instance, provides the policyholder with a payout on the first diagnosis of a specified critical illness. This payout from the rider is in addition to any other benefits that the base policy may provide.
6. Life insurance has many customizable elements
Another benefits of life insurance is that it can be customized according to your needs and requirements. Right from the death benefit sum assured to the policy term, several elements of a life insurance policy can be customized depending upon the policy terms and conditions. As a matter of fact, you can also choose the premium payment term and the premium payment frequency as well.
7. Life insurance covers deaths due to COVID-19
In view of the COVID-19 pandemic that swept across the world, many individuals were unsure whether life insurance would cover deaths due to the disease. Fortunately, all life insurance policies do cover deaths as a result of COVID-19. And this not only applies to new policies being issued, but to older policies as well. So, if you already have a life insurance policy, you can rest assured that it will cover deaths due to COVID-19.
8. The premiums that you pay can be claimed as tax deductions
This is arguably one of the important benefits of life insurance policies. As per section 80C of the Income Tax Act, 1961, the premiums that you pay towards a life insurance policy can be claimed as deductions from your total taxable income. You are allowed to claim up to Rs. 1.5 lakhs in a financial year subject to the provisions stated in the Act, which can reduce your tax liability significantly. In addition to providing your family with a financial safety net, life insurance plans also help you save tax.
9. Life insurance payouts are tax-free
If you thought that was the end of tax benefits of life insurance plans, you’re in for a surprise. According to section 10(10D) of the Income Tax Act, 1961, the death benefit payout from a life insurance policy is also tax-free in the hands of the policyholder’s nominees subject to the provisions stated therein. That’s not all. Any payouts that you receive upon maturity of the policy are tax-free in your hands as well, although this will depend on the product type and its terms and conditions.
10. You can purchase life insurance online
Thanks to the advent of technology and digitization, purchasing life insurance plans is now easier than ever. You don’t have to visit any physical branches to buy life insurance anymore. The entire purchasing process is now online and can be done from the comfort of your own home within a matter of a few minutes.
Conclusion
And there you have it. These are 10 of the most important facts about life insurance that you have to know. Now that you know the benefits of life insurance, consider investing in one right away and ensure that your family stays financially protected throughout all of life’s uncertainties.
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