Open In App

Life Insurance: Its Types & Benefits

Improve
Improve
Like Article
Like
Save
Share
Report

A contract between an insurer and a policyholder is how life insurance is defined. In that agreement, the insurer ensures the policyholder’s financial security and provides a death benefit to the designated beneficiary in the event of the policyholder’s demise. The policyholder must either pay multiple payments over time or a single premium in order for the life insurance policy to remain in effect. According to the agreement, the insurance company will pay the individual or his family a lump sum amount after a specific period of time in the case of the policyholder’s death or if the policy matures. Life insurance is typically only offered for a short time. As a result, life insurance is required to pay a death benefit, also known as the sum assured, if the insurer passes away during this time. Depending on the type of life insurance, the insurer may receive a maturity benefit if they live past the term. 

What does Life Insurance Cover?

The main exception to the general rule that life insurance covers all causes of death is suicide within the first two years of policy ownership. Aside from that exclusion, life insurance covers fatalities brought on by illness, disease, accidents, and homicide. If a life insurance company suspects fraud on the application, it may deny a claim regardless of the cause of death, especially if the death happens within the first few years of owning the policy. If someone lies on the application about their health or other details, the life insurance company may deny a claim from the beneficiaries. A life insurance claim might also be rejected in some exceedingly rare circumstances, such as when the insured person was killed by the beneficiary or when the claim is contested by someone who alleges that the policyholder was forced into changing the beneficiary.

Types of Life Insurance

Term Insurance

Term insurance plans, as suggested by the name, are those that are purchased for a predetermined period of time. The period such as 10, 20, or 30 years. These insurance plans are less expensive than other policies since they have no cash value and, as a result, no maturity benefits. This policy doesn’t truly start to pay off until the event actually happens.

Endowment Policy

The endowment policy comes with the additional benefit that the policyholder will receive a lump sum amount in case he survives until the date of maturity, which is the only distinction between the term insurance plan and the endowment policy. The remaining terms of a term policy are the same and likewise, apply to endowment policies.

Whole Life Insurance

This policy lasts for the entirety of the insured’s life, unlike other policies that cease after a set amount of time. In accordance with this insurance, the covered individual also receives the survival benefit. Under this type of coverage, the policyholder has the option to partially withdraw the money protected. Policyholders can also borrow money using their insurance as collateral.

Plan of Unit-Linked Insurance

These plans not only offer life insurance but also give policyholders the chance to amass wealth. Two sections of the premium are paid for this insurance. The sections, one for life insurance and the other for wealth accumulation. Customers can withdraw a percentage of their money under this arrangement.

Money-Back Guarantee

An endowment policy would be analogous to this insurance. With the exception that it provides a variety of survival benefits that are dispersed proportionately throughout the period of the policy term, this is similar.

Pension or Annuity Plan

According to the terms of this insurance, the money paid in premiums is accumulated as assets and transferred to the policyholder as income via an annuity or lump sum, as directed by the insured.

Benefits of Life Insurance

Accessibility of Funds

Uncertainty and unpredictability are common in life. It is challenging to lower the likelihood of a tragic occurrence like death. In such a case, the family experiences financial difficulties as a result of inconsistent income. The finest life insurance coverage purchased early in life serves as a safety net in such a situation. The insurance company is required to pay the nominee or beneficiary the pre-specified sum assured, in accordance with the definition of life insurance. As a result, the policyholder’s family is safeguarded even when the person is not present.

Promise of Fixed Returns

If the policyholder survives the duration of the policy, they will be eligible for a refund of the premium amounts under a term plan with a return of premium option. Life insurance products ensure that you will get a defined sum of money after a specific period of time. You must examine the structures of various life insurance packages. As it can offer a death benefit that is greater than many people can save in their lifetime.

Assists in Tax Savings

The government has made a number of investment instruments tax-deductible in an effort to encourage saving and investing. One of these tools is life insurance. Under Section 80 C of the Income Tax Act of 1961, the insurer is eligible for a tax deduction of up to Rs 1.5 lakh for the premium he pays annually. Insurers can gain from both tax savings and investments.

Investment Prospects

Investors in life insurance can effectively plan their investments if they comprehend what life insurance means in the context of their finances. Unit-Linked Investment Plans (ULIPs), which are primarily investment instruments with life insurance and market-linked returns, are offered by life insurance companies. This allows obtaining two financial benefits from a single product. These market-linked life insurance products offer significant rewards upon maturity, which qualifies them as ULIPs as trustworthy investment vehicles.

Wealth Distribution & Protection

The safest long-term investing possibilities are life insurance policies. A life insurance policy will therefore allow us to protect our wealth from taxes and inflation for a long time. A life insurance policy is therefore a great tool for retired investors to create long-term pensions due to this feature.

The Bottom Line

People who need to ensure the financial security of a spouse, children, or other family members in the case of their passing benefit most from life insurance. Depending on the policy amount, the death benefits from life insurance can assist the beneficiaries in funding retirement, paying down a mortgage, or covering education expenses. A cash value component of permanent life insurance is also present, and it increases over time.


Last Updated : 28 Dec, 2022
Like Article
Save Article
Previous
Next
Share your thoughts in the comments
Similar Reads