Life is precious, but alongside it is uncertain too. The family’s breadwinner often bothers to fulfill all his responsibilities towards his family before he leaves the world. But as we discussed, life is uncertain; hence, life insurance is the best way to secure your family so that you will fulfill all your responsibilities while alive or even after your death. So let us analyse, what is life insurance and what is life insurance policy.
What is a life insurance policy?
A life insurance policy is an agreement of a person with the insurance company. In the policy, the insurer pays a regular premium to the insurance company, and in return insurer returns a sum of money either at the time of maturity of the policy or to the holder’s family members in case of the policyholder’s death. A person can choose any of the suitable policy available from the N-number of available options. They all have their varying set of benefits and significance. A person decides the suitable policy by analyzing their financial goals, investment horizon, and requirements.
Benefits of life insurance
Tax benefit: The insurance premium paid by the insurer towards the policy makes them eligible for the tax exemption as per section 80C of the income tax act 1961.
Risk mitigation and coverage: Insurance provide the archetypal risk coverage in terms of monetary compensation in lieu of premium paid.
Guaranteed fixed returns: A life insurance policy comes with a guaranteed sum of returns at a specific time or happening of the event.
Various plans for various purposes: Insurance companies develop numerous plans so that a person can choose the best suitable one according to their needs. However, a person can derive more benefits by paying a large sum as a premium.
Coverage for health expenses: Most life insurance policies cover the health, hospitalization, and treatment expenses when the policyholder falls ill.
Provision for loan: Some policies offer the option for a loan that further allows the policyholder to borrow a sum of money by using an insurance policy as collateral.
Facilitate wealth creation: Investment in saving plans is like creating wealth. The investment company invests your money in profitable ventures and shares the returns.
Types of life insurance policies
There are numerous types of life insurance policies offered by the insurance companies. Some of them are described below.
Term insurance plan: Term insurance is the simplest form of life insurance. They provide life cover with no profit component. It is a death benefit policy payable only in case of the policyholder’s death before the plan’s term. The beneficiary can claim the insurance amount after the demise of the policyholder. Still, if the policyholder survives during the policy term, the policyholder will not get any claim, and the insurance company will cease the amount.
Endowment policy: An endowment plan differs from term life insurance in one critical aspect: maturity benefit. That means the insurer gets a lump-sum amount if they survive till the maturity date. This policy gives a dual advantage of insurance along with savings. However, the endowment policy premium is higher than the term life insurance plan. But the endowment policy guarantees payment of participation profit according to the nature of the policy.
Unit-linked insurance plan (ULIP) – These plans offer dual benefits to the policyholder so that they can build wealth alongside life security. The premium paid by the policyholder towards the policy is bifurcated into two parts, one for the life cover and the other one as a wealth component. In ULIP, the premium paid by the policyholder is invested in market-linked funds giving an opportunity to get the returns on it. It is suitable for those interested in investing in long-term investment plans as it comes with a five-year lock-in period.
Money back policy: Money back policy is different from other policies as it gives payment at regular intervals and gives the remaining corpus, including the bonus, to the policyholder in case the policyholder survives the term. At the same time, the entire sum assured will be returned to the beneficiary in case of the death of the policyholder during the policy term.
Whole life policy: Whole life insurance policy works according to its name. It covers the insured for the entire life because the validity of the policy is not defined in terms of time. This type of policy is convenient for policyholders with dependents.
Annuity plan: Annuity plans are also known as retirement plans or pension plans. These plans guarantee a fixed income, either in regular installments or a lump-sum amount, after the retirement of the policyholder. This plan allows you to build a corpus when you can earn and save for your post-retirement period.
Child insurance plan: Parents want to secure their child’s future and make their plans accordingly, right from the child’s birth. Child insurance plans are available for such cautious parents. Through this plan, parents build a corpus to fulfill the future career goals of their children. It also gives a life cover benefit to the nominee in case of any unfortunate event. Few plans offer payout at various life stages of your child, like higher education, wedding, etc.
Group insurance plan: Employers usually offer such a policy to employees. It is considered a perk given by the employer. Under this plan, the employer pays the premium to provide a life cover to their employee. In case of untimely demise of the employee, their family members get the benefit.
Conclusion
The future is uncertain, everyone thinks and expects positives to happen, but we must prepare ourselves for unforeseen circumstances. A life insurance policy works as a financial cushion that can support us and our families during critical events in our life.
