Life Insurance is a contract represented by a policy between an individual and the insurance provider. The policyholder pays the premium for a long term and upon maturity, s/he receives a large lump amount of money. Alternatively, it is passed on to the nominee in case of the policy holder’s death due to unfortunate circumstances. It acts as a support for the grieving family. Nominees can be parents, siblings, children, or the spouse. If there is no mention of the nominee, the legal heirs receive the insurance amount. For instance, the dependant spouse or children or even the aging parents, as the case may be.
The type of life insurance coverage plan that a policyholder takes, answers the above question. Two cases are possible. One, the family receives the lump sum only in case of the death of the insured. Two, other than the insured’s death, s/he also receives the insurance amount on the completion of the policy tenure. The arrangement mentioned in the policy decides this. For example, some life insurance schemes, mainly the term insurance covers offer only ‘death benefit’. Death benefit means the family gets the insured amount upon the policyholder’s death. Also, the pre-requisite condition is the insured passes away before the term of the policy ends. If s/he stays alive, the money remains with the insurance company.
Features of Life Insurance
There are specific features of life insurance that make it different from general insurance policies. Below we discuss these attributes:
- It is long-term that may go from 10 to 30 years or even more. You have to pay the life insurance premium for the term that you decide. This is called Premium Payment Term
- The one who buys the policy and pays the premium is the insured. S/he can appoint a nominee or a beneficiary to receive the amount in his/her absence
- Premium can be paid through regular monthly payments, annual payments, or a one-time payment
- A life insurance policy can be a good saving/investment plan for the future or a pension/post-retirement plan. This depends on the type of policy. It can also provide tax benefits
- It comes to aid in case of the untimely or sudden death of the breadwinner of the family. If s/he is insured, then the family has a source of income. It makes them financially stable, independent, and perhaps liability-free
Types of Life Insurance Plans
Various life insurance policies offer different coverages and benefits to the policyholders. Choose the plan which suits you best to match your requirements and financial objectives. The types of life insurance covers are:
1. Term Insurance
Term insurance covers are the most popular ones. It is because they are relatively cheaper than other life insurance schemes and hence, affordable for many. Term insurance carries no benefits or savings for the insured person as there is no maturity period and consequent payment. It only offers a death benefit to the family of the insured. The family receives the insurance money if the policyholder passes away during the term of the insurance. The insurance lapses if the insured person outlives the term of insurance.
2. Endowment Plans
In this life insurance plan, the policyholder is insured throughout the term/tenure of the insurance policy. This means that the family can claim insurance money upon the death of the policyholder. Also, the policyholder shall receive the lump amount upon maturity or completion of the policy term if s/he outlives it. Endowment Life Insurance Plan is a blend of savings and insurance plans. This plan offers both the death benefit and the maturity amount.
3. Pension-cum-Insurance Plans
Similar to endowment insurance plans, the pension plans are a blend of post-retirement savings as well as insurance schemes. The family shall receive compensation of the insured amount if the policyholder passes away before retirement. If not, the premium paid as an employee accumulates as a pension fund that will be paid back after retirement. It may be an annual payout in form of annuities or a one-time lump sum payout.
4. Whole Life Insurance
Whole life insurance coverage is almost equivalent to endowment insurance, but with a longer policy term, sometimes up to 100 years of age. The family gets the insured amount if the policyholder passes away before the term. If not, the policyholder gets the maturity amount after completion of 100 years or the decided term for whole life insurance.
5. Money-back Insurance Plans
Money-back insurance plans have benefits both for the policyholders and their families. The insured money is surely given to the nominee or beneficiary on the death of the insured. It is paid provided the death occurs during the term when the policy is active. It also allocates a portion of the premium amount to the insured person which is paid at regular intervals. This regular partial payment is called ‘survival benefit’. This can help achieve short-term goals.
ULIPs is an investment-cum-insurance plan. It often counts as a type of Mutual Fund. Premiums paid are used for coverage and also to buy market-linked equity, debt, and other instruments’ units. This provides life insurance to the insured person as the family can avail of the death benefit. It gives returns that can lead to creating a corpus amount. ULIPs offer flexibility to choose the type of fund (equity, debt, or balanced). You can also switch from one fund type to another for a minimal charge. It provides liquidity as there is an option for partial withdrawal as well as has tax benefits. Returns depend on the performance of the fund opted by you.
Benefits of Life Insurance Plan
The major benefit of a life insurance plan, irrespective of whichever type, is that it assures the financial security and protection of the dependent family members when the insured person passes away due to untimely death. Many a time, policyholders are the sole breadwinners of the family. In such cases, insurance guarantees the financial stability of the family. Below we discuss all the advantages of a life insurance policy:
1. Income Replacement
Insurance money acts as an income for the dependent family. It replaces the income of the policyholder that passed away due to early demise.
2. Independent Family
Insurance money ensures that the family is not dependent on friends and relatives. Also, it neither faces a financial crisis nor takes unnecessary debts when the earning member dies. It makes them self-reliant and budgeted.
3. Reduces the Burden of Liabilities
The insured person may be bearing certain liabilities. For example, loans, credit card bills, rent, EMIs, etc. This shall be a burden on the dependants. But the insurance money makes sure that these liabilities can be paid off.
4. Achieve Goals
Insurance money also helps in achieving certain short-term goals. For instance, paying off daily expenses or immediate expenses after death, education of children through school fees, and others. Life insurance plans like pension plans, endowment plans, etc. help in achieving long-term objectives. These include higher education of children, children’s marriage, or having a regular source of income after retirement.
5. Savings & Investments
All other types of plans, except term life insurance policy, are a mix of investment or savings. Therefore, these can help acquire a considerable amount of corpus after the term completion.
6. Tax Benefits
Life insurance schemes often come with tax benefits under Section 80C of the Income Tax Act. You are tax-exempt up to Rs. 1.5 lakh (total of all investments and payments under this section). The premium should not exceed 10% of the sum insured.
How to Choose Life Insurance Plans?
Out of several life insurance plans, decide carefully to choose insurance policies. Keep in mind the below-mentioned factors before arriving at a decision to take whichever type of policy:
- Keep in mind the number of dependents in the family. The insured amount can be less if only your spouse is dependent on you. It should be more if there are children or/and parents because the total house expenditure is more. Thereby, you may need a larger amount for the insurance
- Always keep in mind the liabilities and goals. If the insurance money falls short of paying off all liabilities then it is worrisome. Also, the insurance amount should be as per the long-term and short-term goals. You must have clear objectives such as education, marriage, owning a house, etc.
- Decide on the type of lifestyle you want your dependents to live after your death. Insurance covers and hence the premium also depend on that
- It is always tempting to go for a large amount of life insurance money. This is because it ensures the family’s safety. However, the premiums are also high. So take care of what you can afford to pay
- Select which type of insurance plan would suit you. Compare different policies from various insurance companies as well as the amount of coverage offered. Also, evaluate the coverage amount against your liabilities, dependants, and premium amounts
Wrapping it up:
Life insurance takes away the mental stress of the condition of the family if one passes away. What will happen to the family if one loses his/her life in an accident? Who will take care of the expenses if one dies? Such thoughts often linger in the mind. So, a life insurance policy is an answer to those queries. Getting such a policy is always a safe move and also a step ahead in securing the future of the family. Irrespective of the fact whether the insured person lives or not, the family will be secured. Moreover, the plans that payout on maturity can help in the capital generation or retirement corpus along with tax exemptions.