Understanding What Is Life Insurance: Types And Benefits

We have often heard about life insurance without actually comprehending its full potential and meaning. This article will shed some light on the basics of life insurance, its types, meaning, importance, and benefits.

What is life insurance?

First, we need to understand the meaning of life insurance to know its full utility. Life insurance is a mutual contract between the concerned insurance-providing company and an individual. Here the individual agrees to pay a pre-fixed amount at a regular interval or once in a lump sum, and the concerned insurance provider agrees to offer the necessary benefits and facilities as per the plan terms in exchange for that.

In the case of life insurance, these benefits include the insurance provider’s payout of the sum assured amount to the designated beneficiary(ies) during the policyholder’s disability or death or maturity benefits as per the chosen terms of the policy.

How does life insurance work?

The insured policyholder decides on the sum assured amount for life insurance, considering all the relevant and associated factors. While making a choice, you need to consider that the amount must be sufficient enough to cover all the household expenses of your family members in the long run, despite your absence in the case of any unfortunate event.

The insurance provider decides the premium payable amount depending on the amount of the sum assured. Depending on the insurer’s policy, you can pay this amount either in a lump sum or in instalments at regular intervals.

This premium needs to be paid for a pre-fixed tenure, which is decided during policy purchase and issuance. This period is decided by considering the insurer’s terms or by the policyholder’s choice.

The policy amount of any life insurance or the sum assured amount is only paid by the insurer on the death of the concerned policyholder to the designated beneficiary, as per the plan terms. The maturity amount of the sum assured may also include additional accrued benefits, as stated in the policy documents.

Benefits of life insurance plans

With this much discussion, it can be well understood that life insurance comes with a host of benefits. Some of the most significant benefits of life insurance plans include the following:

1. Financial security:

One of the most crucial benefits of life insurance is that it acts as a safe protective shield for your family members. During any unfortunate event, your family members can use the death benefit proceeds of a life insurance plan to meet the targeted financial goals. In this context, you must note that the death benefits of life insurance are tax-free. Certain life insurance plans also offer maturity benefits, which the family can accordingly utilise to fulfil varied financial targets in the long run.

2. Secured future of children:

A child plan insurance’s primary target is to secure your children’s future despite your absence. It includes completion of education, higher studies, marriage, etc. In the case of any unfortunate event during the plan tenure, most life insurance plans offer premium waiver benefits. They guard the maturity amount by relieving the premium paying stress from the family members.

3. Post-retirement planning:

You can utilise the maturity benefits of a life insurance plan to enjoy a comfortable retirement period. This is especially helpful because of the abolition of pension schemes in most sectors. Considering the market inflation factor, you must ensure that the sum assured amount is enough to sustain you and your family comfortably after your retirement in the long run.

4. Tax benefits:

You must consider your life insurance investment while planning taxes. You are eligible to claim tax deductions for premiums paid towards life insurance and exemptions on the maturity benefits.

5. Assured death benefits:

The chief target and utility of a life insurance plan is to offer financial guidance and protection in the policyholder’s absence. Term plans generally offer a pre-fixed sum assured amount to secure family members after the policyholder’s demise.

6. Coverage and risk mitigation:

A life insurance policy mitigates the financial risk to a certain extent as it secures the financial future of your family members despite your absence.

Types of life insurance

Life insurance plans come in different variants. It is essential to the differences to choose the most suitable plan:

1. Term life insurance plan:

This type of plan offers high financial protection and a high sum assured at an affordable cost. However, you must note here that pure-term plans do not allow any maturity benefit if the policyholder survives the tenure. So, such plans are treated as financial protectors to the designated nominees of the concerned policyholder during his/her death during the plan term.

2. Whole life insurance:

This allows for entire life coverage. It protects you and your family members for an extended tenure. Most of these plans require a single premium payment or continue for a specific limited span. The plan remains active as long as the policyholder pays the premiums punctually.

3. Endowment policies:

Endowment policies offer a lump sum if the policyholder passes away or on maturity. They are unique as they offer double the benefits of savings and insurance.

4. Retirement plans:

As the name suggests, this plan has been particularly curated to ensure a comfortable post-retirement life. This proves to be especially helpful during the absence of any security or social scheme. It ensures a steady income during your retirement phase, essential to meet household and medical expenses for you and your family members.

Conclusion

We have carefully highlighted the essential answers to two basic questions: “What is life insurance?” and “What is its importance? ” The utility and importance of life insurance are immense. It acts as a financial saviour for your family members, especially during your absence.