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What is Life Insurance?
It is a contract between the policyholder and the insurance company according to which the latter agrees to provide a sum assured called the death benefit in the event of an unfortunate demise of the life assured. In case of survival of the life assured throughout the policy tenure, a maturity benefit is paid to the life assured. One can also choose to get compensation in case of a critical illness by opting for the same via a critical illness rider. There are various types of life insurance plans namely term plans, child plans, retirement plans, money-back plans, and Unit-Linked Insurance Plans (ULIPs). Besides the term plans which are pure protection plans, all other types of these plans offer an investment element to help meet the policyholder’s wealth creation requirements.
How Does Life Insurance Work?
Life insurance is a common option considered by many people for financial planning to secure their future. A life insurance policy like term insurance plan can help you ensure financial protection of your family in case of your unforeseen demise. Now, at the time of purchasing a life insurance policy it is essential for you to understand how a life insurance policy works and how your nominees/beneficiary can receive the proceeds of your life insurance policy.
A life insurance policy is a contract between the policyholder and the insurance provider wherein the insurance provider promises to provide life cover to the life assured in exchange of regular premium payments. The life assured is the person who is insured under the life insurance policy and the policyholder may or may not be the life assured but can be the person who purchases the life insurance policy. The policyholder/life assured can choose to pay premiums on an annual, semi-annual, quarterly or monthly basis.
Life insurance is not very complicated to understand, in exchange of regular premiums the insurance companies provide life cover to an individual. Let us understand the same with an example: Mr. Sinha is 35 years old and has a family consisting of wife, a son, and dependant parents. Since he has financial dependents, he chooses a life insurance with higher coverage. Now, the insurance company asks him to pay a specific amount as premium to get life insurance coverage. The life insurance premium needs to pay on regular intervals to get the relevant coverage.
Key Features of Life Insurance Policy
- Death Benefits - Under this policy, death benefit shall be provided to the nominee in case of an untimely death of the life assured during the policy tenure. The death benefit amount can help your financial independents to fulfil their daily financial requirements and goals in your absence. A life insurance policy helps you create financial security for your loved ones even in your absence.
- Investment Component - It also act as an investment component if one chooses to invest in ULIPs, Money Back and Endowment plans as these plans provide dual benefits of life cover and investments, such plans provide returns on investments. Money Back and Endowment plans provide additional bonuses based on the performance of the insurer.
- Tax Exemptions - The benefits under this policy help the family of the life assured build a safe and secured future even in the absence of the life assured. Moreover, under Section 80C and 10(10D) of the Income Tax Act, 1961 one can avail income tax benefits by investing in a life insurance policy. Premiums paid towards this policy qualify for tax exemptions.
- Maturity Benefits - Some life insurance policies provide a maturity benefit at the end of the policy term in case the life assured has survived the entire policy tenure. The maturity benefit helps an individual to fulfill his/her financial goals over a period of time.
- Additional Coverage - You can also choose to increase the scope of coverage of the base policy by opting for an adequate rider which are additional coverages that come in exchange for an additional premium. These additional coverages increase the coverage of the life insurance policy. Some common riders opted with a life insurance policy are Accidental Total and Permanent Disability, Accidental Death Benefit, Critical Illness Rider, Accelerated Terminal Illness Rider etc.
- Collateral for Loan - Some life insurance policies offer loans against the policy feature which can help an individual to fulfill urgent financial requirements such as treatment for medical emergencies or help an individual to fulfil financial obligations which cannot be avoided.
- Flexible Premium Payments - Under this policy premium can be paid on a monthly, quarterly, half-yearly or yearly basis. Life assured is given the flexibility to choose the premium payment mode and frequency.