Overview of Life Insurance
There’s an ‘if’ in the middle of ‘life’. This ‘if’ depicts the challenges and uncertainties that life may throw your way. You might not be able to avoid the uncertainties of life but if you plan for them, they become manageable. This is one of the advantages of life insurance. One of the major uncertainties in life is premature demise. If the breadwinner of a family passes away untimely, the family incurs an emotional as well as considerable financial loss, . To manage the financial loss, a life insurance policy comes in handy.
A life insurance policy provides financial security in the event of premature demise. The policy helps you create an emergency corpus for your family if life throws an unforeseen challenge your way.
Commonly Used Terms in Life Insurance
Here’s a look at some of the commonly used terms in life assured –
| Term | Meaning |
| Insurance Proposal Form | The form that you fill to apply for a life insurance policy |
| Policy term/tenure | The period for which insurance coverage is provided |
| Life assured | The individual whose life is assured under the plan. The death benefit is paid if the life assured passes away during the policy tenure |
| Policyholder | The individual who owns the policy and also pays the premium for the same |
| Premium | The amount payable to buy a life insurance policy and keep it active |
| Sum assured | The amount for which insurance coverage is granted. It also represents the coverage amount which is usually payable on premature demise. |
| Death benefit | Benefit paid by the insurance company if the life assured passes away during the policy tenure |
| Maturity benefit | Benefit paid by the insurance company if the life assured survives the chosen policy tenure |
Advantages of Life Insurance
A life insurance policy provides a range of benefits to individuals. Some of the advantages of life insurance are as follows –
1. Financial security/death benefit
One of the main advantages of a life insurance policy is the death benefit provided in case of premature demise. If the life assured passes away, the life insurance policy pays a financial benefit. This benefit can help the family take care of their financial needs even when the breadwinner is not around.
The death benefit offered by a life insurance policy provides a sense of financial security to the policyholder. The policyholders can ensure sufficient financial assistance to their family even in their absence through the policy.
2. Saving for financial goals
Savings-oriented life insurance plans are also available that not only provide a death benefit but also help you save up for your financial goals. In case the policy tenure expires, such plans pay a maturity benefit. This maturity benefit can help you meet your financial goals like child financial planning, wedding, retirement, buying a home or a car, etc.
3. Loan option
Life insurance plans are considered assets. As such, you can avail of a loan against your policy subject to terms and conditions of your policy. There are two ways of doing so. One, you can pledge the policy and get a loan against it from a financial institution. Two, you can get a loan from the policy itself if you have a savings-oriented life insurance plan.
The loan is easily available and provides you with the funds needed to meet your obligations.
4. Tax benefits
Lastly, let’s not forget the tax benefits that a life insurance plans provide which add to the advantages of life insurance. The premium paid qualifies for a tax deduction under Section 80C1 subject to specified terms and conditions. The death benefit is always tax-free and you can enjoy tax benefits on the maturity benefit too2 subject to satisfaction of conditions as mentioned in Section 10(10D) of Income Tax Act 1961.
These tax benefits help you save taxes on your investments and also create a tax-efficient corpus.
How Does Life Insurance Work?
There are different types of life insurance plans. You choose the type of policy that you want and you can plan to avail the advantages of life insurance as per your choice. Then, you need to opt for:
1. The sum assured
2. The policy tenure
3. The premium paying tenure and frequency
4. Optional riders, if any
Based on these factors, the premium is calculated. In some plans, you can also choose the premium that you want to pay and the plan benefits are calculated based on the premium amount and the other plan details selected. You have to fill out a proposal form stating your personal, financial and medical details and pay the premium to apply for a life insurance plan. Based on the information provided in the proposal form, the insurance company issues the policy. Once the policy is issued, you get covered over the chosen tenure. In the case of premature demise during the policy tenure, a death benefit is usually paid. However, if the life assured survives the policy tenure, a maturity benefit is paid for other than pure term insurance plan, provided all premiums are paid.
In the case of a rider, if you select a rider and if the contingency covered under the rider occurs during the policy tenure, the rider benefit is paid.
Reasons Why a Life Insurance Policy Is Important for Financial Security
A life insurance policy covers the risk of premature demise. It pays a financial benefit if the life assured passes away during the policy tenure. If the life assured is the breadwinner of the family, the family depends on the individual to provide for their financial needs. Moreover, the individual has different financial goals that he has to fulfil over his lifetime.
In the case of a premature demise, the individual’s financial planning takes a backseat. The family loses their source of income and might suffer a financial crisis. Moreover, the financial goals remain unfulfilled since the individual cannot earn and save for them. In these cases, life insurance comes in handy. By paying a death benefit, the policy provides financial assistance to the bereaved family. Moreover, if the sum assured is optimal, the family can also fulfil their financial goals even in the absence of the breadwinner. This is one of the advantages of life insurance plans.
Moreover, in the case of savings-oriented life insurance plans, there is a maturity benefit payable if the assured survives the policy tenure. This maturity benefit gives a corpus to the policyholder to meet the financial goals that he might have. This is surely another advantage of life insurance.
This is why, whether the life assured is alive or not, life insurance plans provide a sense of financial security through the benefits that they pay.
Advantages of Life Insurance
While there are different advantages of life insurance plans and they offer financial security, they can also be put to some creative use. Have a look at how –
1. Taking care of your loved ones’ expenses
One of the main reasons why we work hard is to make sure that our family is well taken care of. However, if something untoward were to happen to you, your family may find it hard to meet their expenses and their life goals.
Here’s where a life insurance policy comes into the picture. The death benefit payout from a life insurance plan goes to the nominee listed under the plan and can be used by them to take care of their expenses and to further their life goals.
2. Inheritance
Any individual, after their demise, would want to leave behind a sizable inheritance for their children and future generations. However, considering the ever-growing cost of living, not everyone may be able to build a sizable inheritance to leave behind by investing alone. In such cases, the life cover of a life insurance plan can help. Here’s how.
An individual can take out a whole life insurance plan with a sizable life cover, which will cover them till the age of 99. And in the event of their demise, the death benefit payout that the nominees will receive can act as a kind of inheritance. The payout can then be used by the nominees as they see fit. So, with a life insurance plan, you can fulfil your dream of leaving behind an inheritance for your family without taking on too much risk.
3. Create an alternative source of income
One of the many benefits of life insurance is that it can be customised according to your needs and requirements. The death benefit (or the maturity benefits) from a typical life insurance plan is usually paid out as a lump sum amount. However, in some policies, the policyholder may choose an instalment-payout option as well, where the sum assured, or the maturity benefits are paid out in instalments as per the chosen frequency.
Opting for this method of payout allows you to create an alternative source of income for yourself or your loved ones. And it can also be very useful for those families that may not be financially competent enough to manage lump sum payouts effectively. When the death benefit is paid out in instalments, families may find it easier to manage their regular monthly expenses.
4. Reduce the tax burden
You also get to enjoy several tax benefits by simply purchasing a life insurance plan and paying the premiums due. According to section 80C of the Income Tax Act, 1961, you can claim the premiums that you pay for a life cover as deductions from your total taxable income subject to provisions stated therein. The maximum amount that you can claim each financial year is Rs. 1.5 lakhs under old tax regime.
The tax benefits don’t stop there though. The death benefit payout that nominees receive is also completely tax-free in their hands under section 10(10D) of the Income Tax Act, 1961. Similarly, the maturity benefits that you receive at the end of the tenure of the insurance plan are also exempt from tax subject to the satisfaction of the conditions mentioned in section 10(10D).
5. Debt Repayment
This is one of the most creative uses of a life insurance policy. If you’ve taken out any large loans for purposes like purchasing or constructing your dream home or paying for your children’s education, the repayment period for the same can extend for years. Meanwhile, if something were to happen to you, your loved ones may find it hard to repay the loan and other debt obligations that you’ve left behind.
But, with life insurance in your portfolio, you may prevent all of that from happening. The lump sum death benefit payout that they receive can be used to pay off all outstanding loans and other obligations that you may have left behind, leaving them debt-free.
Types of Life Insurance Policies
The different types of life insurance policies that are usually available in the market and the various advantages of life insurance can be summarised as follows3 & 4 –
| Type of plan | Brief description |
| Term insurance plan | This is a protection-oriented plan that covers the risk of premature demise. If the life assured passes away during the policy tenure, the sum assured is usually paid. Most pure-term plans do not have a maturity benefit. However, under the return of premium plans, the premium paid is refunded back on maturity subject to certain deductions. |
| Endowment insurance plans | These are savings-oriented plans that pay a death benefit if the assured passes away during the policy tenure. However, if the assured survives the tenure and the policy matures, a maturity benefit is usually paid at the end of the policy tenure . Additionally, some plans also pay a survival benefit incase life assured survives for a specific period, as per policy terms and conditions. This is usually a % of sum assured under the plan. |
| Whole life insurance plans | These plans cover an individual for his entire lifetime since the maximum coverage age is 99 or 100 years. During the tenure, if the assured passes away, a death benefit is paid to the nominee. On the other hand, under some plans, if the assured survives till 99 or 100 years of age and the plan matures, a maturity benefit is paid . |
| Money-back insurance plans | These plans are like endowment plans but they pay a specific % of the sum assured as regular income at specified intervals during the policy tenure, known as survival benefits. That is why they are called money-back plans. However, in the case of the death of the life assured during the tenure, a death benefit is paid, under some plans, irrespective of the money-back benefits already paid . |
| Child plans | Child plans are designed specifically to secure the financial future of a child and are usually offered to individuals having children. There might be a premium waiver benefit built into the policy structure. The benefit waives the premium if the parent passes away during the policy tenure. The plan runs unaffected and the insurance company pays the premium on behalf of the deceased parent. On maturity, the maturity benefit is paid which can be used to fulfil the child’s higher education, marriage or any other financial need. |
| Unit Linked Insurance Plans (ULIPs) | ULIPs are investment-oriented life insurance plans that invest your premium in market-linked securities. These plans offer market-linked returns as well as insurance protection. Moreover, there are flexible benefits of switching, premium redirection, partial withdrawal, top-up, etc. that help you manage your investments effectively |
| Annuity plans | Annuity plans are retirement-oriented plans that help you create a corpus for your retirement or secure monthly pensions. There are two types of annuity plans – a deferred and an immediate annuity plan. Deferred annuity plans provide policyholders with annuity payments after a certain time frame. Immediate annuity plans provide policyholders with monthly or annual annuity payouts, immediately after purchase of the annuity plan |
How to Choose the Right Type of Life Insurance Policy?
Among the different types of life insurance plans, how do you choose the right one? Here are some tips that can help5 you understand the advantages of life insurance plans:
1. Assess your financial goals
The choice of the policy depends solely on your financial goals. Here’s how –
- If you want to plan for your child’s secured future, a child insurance plan would be a suitable choice
- If you want to create a corpus for buying a home, a car or any other financial goal and want secured returns, an endowment policy would be suitable
- For regular incomes, a money-back policy would be helpful
- A term plan is important as it provides financial security by replacing the lost income
- For planning your retirement, you can opt for pension plans.
So, assess your goals and choose one or more life insurance plans that would help you create a corpus for the identified goal.
2. Choose an optimal sum assured
Once the choice of the policy is done, you need to choose an optimal sum assured. This would ensure that the plan benefits are sufficient enough to provide for your financial needs.
3. Opt for riders
Optional riders are available with many life insurance plans. These riders provide added coverage and can be selected for a comprehensive scope of protection. Check the available riders and assess their suitability. Choose the relevant ones for inclusive coverage.
4. Check the affordability of the premium
Lastly, check whether the policy’s premium is affordable or not. Affordable premiums would help you continue the premium payment without any financial hiccups so that you can enjoy the full benefits of your policy. If the premium is not affordable, you can choose a suitable premium payment frequency to ensure affordability.
If you keep all these factors in mind, you will be able to reap the benefits and the advantages of life insurance plans to its optimal.
Why Do You, As A Youth, need to Be Financially Literate?
You are youthful, wild, and free in your twenties. Your entire life unfolds before you as a memorable, thrilling ride. However, as with any adventurous endeavor, you must be prepared for potential road bumps, delays, and catastrophes. For starters, people's sedentary lifestyles make them more prone to illness than ever before. Heart disease, neck difficulties, and diabetes, among others, may attack millennials in their late twenties as a result of sitting hunched over laptops and ignoring their fitness.
You've only just begun your life, and to protect yourself financially from such probability, you can obtain a health care plan that covers catastrophic illnesses. Some of these policies cover both you and your spouse/family members. After ensuring your healthcare security, you can begin to envisage your life with the family you plan to have one day. You'll want your children to have a great future. That's going to cost a lot of money. Are you going to fund it from your paycheck? That is how primary and secondary education can function. But what about a higher education for a professional degree? You must consider developing a corpus as soon as possible. Child Education insurance policies will be your buddies in this situation.
Further, what if an unexpected event occurred and you were no longer able to care for your family? How do you intend to keep children safe after your death and compensate for the lost income? Term insurance and life insurance policies can benefit you in this situation. Your family will have a source of income as they adjust to your death and rebuild their lives. The same sum can be used to pay off EMIs, loans, and other financial stumbling blocks. The cherry on top of all these plans? The sooner you begin, the better. The premium amounts for young persons are lower than those outside of this age group.
Benefits of Buying Life Insurance Products Online
Thanks to the advent of technology, you can now buy life insurance plans online. There are benefits of online purchases too making them a popular choice among many. Some of the advantages of life insurance that can be availed by buying online 6&7 –
1. Easy to compare
Different types of life insurance plans are available in the market offered by different insurers. When you buy online, you can compare the available plans and choose one that best matches your requirements.
2. Lower premiums
With the online mode, the administrative costs of the insurance company are reduced. As such, insurers might offer lower premiums. Moreover, when you compare, you can find a policy that offers the best possible coverage at the most competitive premium rates. Both these factors lower the premium outgo giving you a cost-effective policy.
3. Quick issuance
Online plans are processed quickly since there might be no delay in documentation and underwriting. As such, you can get quicker coverage.
4. Transparent Process
The online process of buying a life insurance policy is quite transparent. You can read the features, benefits and advantages of the life insurance plan, check the details and the premium payable and then buy the policy knowing the terms and conditions beforehand.
5. Easy to buy
It is very easy to buy life insurance online. You can do so from the comfort of your home or office. You just need a computer or a Smartphone and an active internet connection to buy the policy in some simple steps.
How to Buy Life Insurance Online?
If you want to buy a life insurance policy online, here are some simple steps and tips that you might use –
1. First, assess your goals to find the type of policy that you need.
2. Go online and search for the available policies under the type of coverage that you have shortlisted. For instance, if you are looking for term insurance plans, look for the available term plans in the market.
3. Compare the coverage features of the available plans to choose one that offers the most suitable and relevant coverage.
4. Compare the premium rates. Choose a policy that offers competitive premium rates without compromising on coverage.
5. Once the plan is selected, select the policy details like the sum assured, policy tenure, premium paying tenure and frequency.
6. Opt for the available riders if needed.
7. Fill up the online proposal form and attach the relevant documents.
8. Pay the premium online and submit your application. The insurance company would underwrite your proposal and issue the policy basis the same.
Factors to Be Considered Before Buying a Life Insurance Policy
When buying a life insurance policy, here are some factors that you should consider –
o Does the policy meet your financial goal?
If it doesn’t, choose a policy that does. Understand the different types of life insurance plans and choose one that aligns with your needs.
o Is the sum assured optimal?
Your coverage amount should be sufficient to provide the desired financial protection to your loved ones in your absence. So, make sure that the coverage is optimal. You can use life insurance calculators that help in finding an optimal sum assured based on your goals.
o Is the policy tenure suitable?
As you buy the policy with a particular financial goal in mind, you need to choose a tenure after which the policy can give you the funds needed to fulfil the goal.
For instance, if you want to make a down payment for a home after 10 years, it is better to choose a tenure of 10 years so that when the policy matures, you get a lump sum maturity benefit that pays for the down payment.
o Is the premium affordable?
Affordable premiums are a must to ensure that the policy does not hurt your pockets. So, check the affordability of the premium over the premium payment tenure. Make the premium affordable by choosing a suitable frequency and premium payment term.
o Do you need riders?
Check whether you need the additional coverage offered by life insurance riders available with many plans. If you do, opt for the rider for better protection.
Which Financial Goals Can You Secure with Life Insurance?
One of the advantages of life insurance plans is that they can help you secure funds for many financial goals that you might have. Here’s how –
| Goal | How life insurance helps |
| Income protection | Term life insurance plans help protect the lost income if the breadwinner passes away. These plans provide financial security and can replace the income the household loses when the breadwinner passes away. |
| Saving | Endowment, money back and ULIPs help you create a corpus for your financial goals since these are savings-oriented plans. You can choose these plans and save up for multiple goals like a home, car, gadgets, etc. |
| Child’s future | Child insurance plans help secure the financial future of your child |
| Retirement planning | Pension plans are designed to help you plan for a comfortable financial life after retirement. |
Factors That Affect Life Insurance Premium
The premium of a life insurance policy depends on various factors. Some of these factors and why and how they affect the premium are given below 8 and 9 -
| Factors | Effect on life insurance premiums |
| Age | Age is the primary factor that affects life insurance premiums as it determines your mortality risk (chances of death). The higher the age, the higher the premium and vice versa |
| Gender | Women are found to have lower mortality risks compared to men. That is why premiums are lower for females than for males. |
| Health conditions | Since your past and current medical history affect your mortality risk, premiums depend on your health condition. If you have any illness or disease, premiums tend to be higher |
| Family health history | Some medical conditions are hereditary. That is why if there’s a history of illness or disease in the family, it increases your chances of having the same ailment. In such cases, premiums are higher |
| Type of Coverage | Premiums also depend on the type of policy selected. For instance, term insurance plans have lower premiums compared to endowment or money-back plans. |
| Occupation | Occupational hazards also affect your mortality risk. That is why if you are engaged in a dangerous occupation like defence, aviation, mining, etc., the premiums would be higher. |
| Lifestyle habits | Premiums are higher for smokers and alcohol users since these habits affect the quality of their health. |
Conclusion
A life insurance policy is a financial protection tool that provides financial security in the case of unforeseen emergencies. Plus, there are multiple advantages of life insurance that you can avail of. Given the different types of life insurance plans available in the market, you can find relevant plans for your financial needs and insure yourself. Choose a policy that aligns with your goals and give your family the gift of financial security.
FAQs
1. How does life insurance provide financial protection?
A life insurance policy covers the risk of premature demise. It pays a death benefit if the assured passes away during the policy tenure. As such, in the case of the untimely death of the assured, the death benefit provided under the policy helps the family navigate the financial challenge that they face. They can meet their financial needs and fulfil their goals even when the breadwinner is not around. This is how life insurance plans provide financial protection and are one of the prevalent advantages of life insurance that you can get.
2. Can life insurance replace lost income?
Yes, if you choose a suitable life insurance plan, you can replace the income lost due to untimely demise. For instance, term insurance plans pay a financial benefit on untimely demise. You can choose an adequate sum that matches the income that your family would lose in case of your premature demise. If the contingency happens, the term plan would compensate your family for the income lost thereby replacing it.
3. Are there any tax benefits associated with life insurance?
Yes, life insurance plans offer multiple tax benefits. These are as follows –
- Premiums paid for life insurance plans are allowed as a deduction under Section 80C, under old tax regime. The deduction limit is ₹1.5 lakhs for premiums up to 10% of the capital sum assured if the policy is issued on or after 1st April 2012. For policies issued before this date, the premium should be up to 20% of the capital sum assured. In the case of individuals suffering from a disease or a disability defined under Section 80U or 80DDB, the premium should be up to 15% of the capital sum assured for policies issued on or after 1st April 20131.
- The death benefit is always tax-free10.
- The maturity benefit enjoys tax exemptions under Section 10(10D) subject to the fulfilment of specified terms and conditions10.
Reference:
1. https://incometaxindia.gov.in/Tutorials/20.%20Tax%20benefits%20due%20to%20health%20insurance.pdf
2. https://cleartax.in/s/life-insurance-taxability
3. https://www.etmoney.com/learn/insurance/5-different-types-of-life-insurance-policies/
4. https://www.forbes.com/advisor/in/life-insurance/types-of-life-insurance-in-india/
5. https://www.forbes.com/advisor/in/life-insurance/how-to-select-a-life-insurance-policy-to-protect-yourself/
6. https://m.economictimes.com/five-reasons-to-buy-an-insurance-policy-online/investarticleshow/47231166.cms
7. https://www.bajajallianzlife.com/life-insurance-guide/life/why-should-you-consider-buying-life-insurance-online.html
8. https://www.investopedia.com/articles/investing/102914/7-factors-affect-your-life-insurance-quote.asp
9. https://www.fbfs.com/learning-center/8-factors-that-can-affect-life-insurance-premiums
10. https://economictimes.indiatimes.com/what-you-must-know-about-taxability-of-life-insurance-policy-payouts/tomorrowmakersshow/69425598.cms
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