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What is Life Insurance? – Definition, Types, and Benefits

Last Updated : 22 Sep, 2023
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Earlier, Insurance looks very very different than what it looks like today. From the time of ancient Rome, there is some practice that, there was a ‘burial club’ that covers the cost of members’ funeral expenses. The earliest known life insurance policy was made in London where a company insured ‘William Gybbons’ by the contract of 400 pounds if he dies within one year. The sale of Life Insurance began in 1760 in the US where the poor and distressed widows were insured. Later it started in different countries.

What is Life Insurance Policy?

In life insurance, there are two parties insurer and the insured, the insurer is the company and the insured is the policyholder. The legal contract between these two is termed Life Insurance. Firstly, the policyholder, it becomes his responsibility from time to time would give ‘Legal Consideration Pay’ or ‘Premium’ to the insurer. This premium can be monthly or can be annual. But the one who is the insurer when he takes the premium it becomes his responsibility to return the money (which is pre-decided before the premium starts) in case of insurance period expires or in case of death of the insurer to his family. It is important for the policyholder that he must disclose his current health condition and high-risk activities in advance to initiate the contract.

Life Insurance: How Premium is Decided?

It is decided based on various factors: 

  • Age: Life insurance is lower for younger people and increases with age.
  • Gender: Generally premium for women is lower compared to men.
  • Personal Habits: Habits including consumption of alcohol/ tobacco affects the premium of the policy. These types of people come under the high-risk category. Therefore their premium is higher than others.
  • Family Health History: In case of hereditary illness running in your family you have to pay a higher premium
  • Occupation: If the work is very risky the premium will be higher than others.
  • Amount of Coverage: If you want a higher assured sum then your premium will be higher.
  • Type of Coverage: If you are a rider this would increase the plan, if you choose a longer policy then it would result in a higher premium.
  • Obesity: Your obesity can result in higher payment of the premium as it may lead to different diseases such as Coronary heart disease.

Types of Life Insurance:

Term Life Insurance: The premium of this type of life insurance is lesser than any other life cover with no saving or profit-making element. In absence of family income, you can use the cover to pay daily expenses. It is often suggested that you should start term insurance as you start earning.

Unit-linked Investment Plan: In this type, the premium paid is partially used as insurance and partially invested in different funds. Since every individual is different, the investment done in this type is based on the risk-taking capacity of the policyholder. 

Retirement Plan: This type supports making a stable financial source of income for retirement years. This life insurance pays a lump sum amount or can give a monthly payout after the policy expires. They help you in providing financial independence in your nonworking days.

Child Plan: This plan is specially dedicated to building the future development of the child. This typically helps in funding child marriage or child education. It is a vital financial planning tool for parents. It gives a one-time payment when the child turns 18.

Endowment Plan: It is a blend of insurance and savings. After maturity insurance company provides maturity benefits to the policyholder. This plan is for those who want guaranteed returns along with the life insurance 

Whole Life Insurance: This type covers for a lifetime or some up to the age of 100 years. In this case, if the insurer lives for more than 100 years then all the benefits will be given to him otherwise the other nominee of the family. Most people do not live for 100 years. Therefore, It is simply meant of leaving a legacy to the children.

Benefits of Life Insurance:

Financial Security: It reduces the financial constraints that arise from lack of money due to the unfortunate death of a family member.

Long-Term Savings: It can help in making corpus for a new home, schooling of a child, and child’s marriage expenses.

Tax Benefit: You need to pay a premium to keep the policy activated, hence you can get a tax benefit as per the income slab.

Tax-free Payout: Income from Life insurance is tax-deductible you don’t have to report your money while filing your tax returns.

Final Expenses: Your beneficiaries can use that money for burial expenses without having to dip their savings.

Retirement Savings: After the policy period expires, then you can pay your bills, rent, and other expenses with the money you get from the company.

With the final note, don’t buy a policy from any source always take it from a trusted source, and most importantly, don’t go for equity investment or any other investment first took life insurance with the money you have then if the balance permit goes for other investment.

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