Have you ever experienced this? You wake up suddenly in a cold sweat. You had a nightmare in which you’re no longer around. Your family is suffering. They are helpless without money and a home. As you start to drown in your worry, you suddenly remember – you have a life insurance policy. Immediately, you feel a rush of relief. It was just a dream, and most importantly, your family is financially secure. This is the power and peace of mind that life insurance offers.
In today’s unpredictable world, life insurance is not just a ‘nice to have’, it’s a ‘must-have’. Yet, to many, life insurance seems like a tough nut to crack. It comes with its own language. This language is full of industry terminologies that could baffle even the best of us. Not to mention, there is a plethora of policy types to choose from.
That’s where this article comes in. Today, I will guide you through the intriguing world of life insurance in the simplest of terms. We will delve into everything – from its basic definition to its extensive importance, and how it operates. I hope to demystify life insurance for you by the end of this. This will help you make informed decisions. These decisions are important for securing your family’s future.
Let’s dive into the world of life insurance in simple terms with this article.
Do you know the significance of life insurance? Every individual needs to have life insurance in their lifetime, but not everyone knows what it really means and what its importance is.
Life insurance has been known to provide financial support for a surviving family member after the death of the insured. The right amount of money can ensure that family members do not have to go through difficult times after the death of their loved ones.
Life insurance companies offer life insurance policies to individuals of different ages. It is important for the insured person to understand what type of policy they are buying and why it is needed.
Life Insurance: What Does It Mean?
The meaning of life insurance is different for everyone. Some people believe that life insurance is a way to protect the family financially after the death of the insured person. Others use life insurance as a form of financial security and peace of mind.
Life insurance is the type of insurance that provides financial protection in case of the loss of a person’s life.it is a contract between the insurance provider and the insurance policyholder.
It is also known as Perennial Insurance, as it covers your death for a long period of time.
Life insurance policies are offered by life insurance companies. They provide financial support to family members of insured people in the event of death. Life insurance policies can be used for different types of benefits, depending on the type and amount the insured person has purchased a policy with a life insurer.
Let us understand how Life Insurance works:
When you buy life insurance, the insurer agrees to pay two types of benefits:
Death benefit:
This is the money the insurer will pay to your family if you die and they are the beneficiaries of your policy. The death benefit can be a lump-sum payment or it can be paid overtime, depending on the type of policy you have purchased.
Maturity benefit or survival benefit:
This is the money the insurer will pay you and your family if you remain alive and continue to premiums for the policy term. The maturity benefit can be a lump-sum payment or it can be paid overtime, depending on the type of policy you have purchased.
A nominee is appointed who receives the death benefits of the policy.
Benefits of Life Insurance:
There are many benefits of life insurance, and the list is growing every day. Here are just a few of the benefits:
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Financial Security
Many people use life insurance as a way to protect their families financially. If you die and the policyholder is the insured person, your beneficiaries will receive a death benefit payment. This money can help support your loved ones during difficult times.
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Peace of Mind
Having life insurance can provide peace of mind. It can help you plan for the future and give you peace of mind that your family will be protected financially if something happens to you.
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Income Replacement
If you are the insured person and die, your beneficiaries will receive life insurance benefits. This money can help replace income for your family members.
- Education and other expenses for dependents
If you have children and they are not able to support themselves, life insurance can help cover their education and other expenses.
Helping the family of the insured person
If you are the family member of an insured person and something happens to that person, life insurance can help provide financial stability for the family of the insured person.
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Long-Term Savings
In the case of other investment instruments which are generally short-term, the maturity amount gets spent and your financial objective for a particular goal is compromised. But life insurance generally serves as the option of a long-term savings instrument. Since you can’t take out the money before maturity( except for certain conditions like surrendering the policy) the money is used for a particular goal like an admission of your child into higher education or your daughter’s marriage. You can also use it to fund your housing loans as banks don’t give 100% of the housing loan amount.
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Investment Options:
The current charges structure implemented by IRDAI has made ULIPS a lucrative investment option along with Life insurance coverage.
You can also invest in money-back plans or endowment plans to avail of the maturity benefit which either is a lumpsum amount or a fixed amount for a period as per the policy norms
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Tax Benefits:
The income tax benefits of life insurance in India are significant. This is beneficial because it reduces your taxable income.
- life insurance policies can provide tax benefits of income tax of up to Rs. 1.50 lakh under Section 80C of the Income Tax Act, 1961.
- Additionally, under Section 10(10D) of the Income Tax Act of 1961, tax-free payouts for death claims or maturity claims are made. This means that you don’t have to pay any taxes on the money that is paid out in a death claim! or maturity.
These benefits make life insurance an important part of financial planning for many people in India.
However, there are certain exceptions to section 10(10D) for Ulips which we will cover later in this article.
Types of life insurance – Traditional and Market linked:
There are two types of life insurance policies that are available in the market.
Traditional life insurance policies and Market-linked life insurance policies.
Both have got their unique benefits for the customers.
Traditional Life Insurance:
Traditional life insurance policies are the oldest and most popular type of life insurance policy in the market. They offer a lump sum payout if the insured person dies, and they also offer maturity benefits.
let’s discuss some of the traditional life insurance products in the Indian market:
Term Life Insurance Plans:
I recently bought a term life insurance plan for 65 lakhs with a premium of 36,000. The policy ensures that my family will receive the full amount in case of my death during the term period. Do you think it’s a good investment?
Term life insurance policies are the most common type of life insurance policy in the Indian market. They offer a payout if you die, and they also offer maturity benefits in case of ROP(return of premium)
The term insurance plan usually has a long duration like 10-25 years. nowadays companies in India are offering coverage for up to 85 years of age.
term plans offer a huge coverage which is actually the income replacement cover. For example, a term insurance policyholder can opt for a sum assured of Rs 1 crore to Rs 5 crore based on his annual income and age.
You can take it by paying a reasonable premium compared to other types of policies.
Whole Life Insurance:
Whole life insurance policies are the most expensive type of life insurance policy and offer a payout if you die.
The whole life insurance policy usually has a long duration like 25 to 65 years.
The policy term is usually 25-65 years and the insurance premium will be much higher than term life insurance policies.
Child Plan:
If you’re planning to support your child’s dream of becoming a doctor, it will require around 50 lakh rupees. You can make arrangements and investments while you’re alive. However, if you were to suddenly pass away, who would ensure your child’s dream and your dream are fulfilled? This is where child plans come into play.
A child plan is a life insurance policy that offers coverage for the children of the insured person. The coverage amount and term of the policy will be based on the age of the child and the income of the insured person.
The premium for a child plan may appear higher than term life insurance policies but it solves the objective of higher education for the child.
It generally has 3 benefits attached to it. The maturity benefit ensures that the child receives a lump sum every year for his higher studies.
Generally in case of the death of the Life insured death benefit is paid to the nominee and future premiums are waived.
The maturity amount is again paid to the child at maturity.
Retirement Plan:
Annuity plans are a popular choice among people who want a steady income and who want to enjoy the golden period of their lives without financial stress or burden. After making a lump sum investment, an annuity is a plan that allows you to receive payments for life, usually for the life of the insured person.
generally, three types of payouts are available in the Indian market
1. Immediate annuity where the customer starts receiving regular payouts but the payout stops once the customer dies.
2. Immediate annuity with return of purchase price where the policyholder or holders( in case of joint life cases). When they die the purchase price goes to the nominee.
3. Deferred annuity where the payment starts after a certain period of time as per the policy norms.
Endowment Plan
Endowment plans are a popular way to provide life insurance and savings benefits in one package.
They offer the peace of mind that comes with knowing that your insurance is going to take care of your loved ones in the event of your death.
There is also the potential for long-term growth through regular contributions.
The plan benefits of endowment plans include both death benefits and lump sum payments.
The policyholder contributes money to the plan over time in order to accumulate a corpus that he can use for withdrawals at retirement or other life events.
The payout amount depends on how much the policyholder has contributed to the plan.
Money-Back Insurance policies:
Money-back insurance policies are an option for people who Instead of receiving the lump sum amount at the end of the term, want a percentage of the sum assured at regular intervals.
The money-back policy also allows customers to get a regular return on their investment or as a lump sum amount at a defined point during the policy period.
A money-back policy can offer a guaranteed return or the return may depend on investment performance, or a combination of the two.
The bonus paid under a money-back policy is based on the insurance company’s performance and can vary depending on the insurer.
Benefits typically include a death benefit, and maturity benefit, and may contain bonus payment if the policy provides for that.
Money-back policies provide peace of mind for individuals by providing them with certainty regarding their financial future even in the event of their death.
Market Linked Plans or ULIPs:
Market-linked plans or ULIPs are policies that offer wealth creation, tax benefits, and insurance coverage to the policyholder.
Unit-linked insurance plan (ULIP):
ULIPs are a type of life insurance solution from insurance companies. The ULIP is more suited for investors to build a corpus.
They provide growth opportunities, protection options, and even savings plans.
ULIPs allow you to get the best of both worlds. The regular premium payments build up your investment and can cover both life insurance and return on investment.
The insurance coverage provided by these policies can be in the form of life insurance, accidental death, and medical expenses coverage( critical illness cover).
An insurance Policyholder can enjoy tax-free benefits under Section 80C of the Income Tax Act of 1961 depending on the sum assured they choose. they can receive no tax deductions benefit under Section 10(10D) of the Income Tax Act.
The company invests the money in market-linked funds, such as equity funds, debt funds, and balanced funds, according to the risk tolerance of the investor.
Generally, they lock in a period of five years, after which you can go for partial withdrawal, or surrender as per your need.
Questions:
Q: What types of policies are available and what does each cover?
There are different types of life insurance policies and each one has different coverages. There are different kinds of life insurance. Some of them are called term policies and some are called whole life policies. There are other kinds too like ULIP.
Some policies provide coverage for death, income protection, and survival benefits. Others like a term plan offer just life insurance and no other benefits.
Still, others may include medical expenses, especially for Heart disease and cancer as well.
Q: How much does life insurance cost?
Life insurance rates vary depending on a variety of factors, including your age, health history, and occupation.
However, the average cost of life insurance varies from around 15,000 to 10,0000 per year.
Blog Conclusion:
Life insurance is one of the most important financial tools you can use to prepare for your future. It is a very efficient tool to protect your family in case something happens to you.
Life insurance policies are a great financial tool. It can be of benefit if the policyholder has the right knowledge of how it works.
If you’re still not sure what life insurance is, don’t worry. This blog post has covered the details of your queries.
What role does a life insurance policy play in your finances & planning, and are there any favorable features you should be aware of before enrolling? Let us know in the comments below!
