Functions and Importance of Life Insurance

Functions of Life Insurance

As discussed, life insurance plans are divided into two types: Term insurance and Investment plans. Let us take a look at all the functions of life insurance policies.

1. Term Insurance Plans

   Term insurance plans are pure risk protection plans that offer a large life cover at low premium rates. These are the most simple and easy to understand as you will receive a life cover for as long as you pay your regular premiums and in case of your unfortunate death the insurer will provide your family with the death benefit selected by you at the policy inception. These plans are ideal for working-class individuals with dependants or the breadwinner of the family.

2. Term Return of Premium

   A traditional term plan offers a death benefit in case of your death but no maturity benefit in case you outlive the policy term. Term return of premium is a variant of term insurance where you can receive all of the premiums you paid, throughout the policy term, at the end of the policy tenure. The returned premiums are subject to some nominal deductions like GST.

3. Zero Cost Term Insurance

   Similar to term return of premiums, a zero-cost term insurance plan also returns all the premiums paid towards the plan minus the GST. The only difference is that the zero-cost term plan can be exited at a specific stage and get all the premiums paid back, within the time frame provided by the insurer.

4. Whole Life Term Insurance

   Whole life insurance is a type of life insurance that financially covers you for your entire life i.e., till 100 years of age. It is also called permanent life insurance as it provides the combined benefits of life cover and bonuses. In this, you only have to pay the premiums for a limited period and get life coverage for your whole life.

5. Unit Linked Investment Plans

   Ulip plans offer the dual benefits of long-life cover and investment in market-linked funds. You can choose to invest in funds with various risk levels as per your risk appetite and grow your corpus in the long run.

6. Endowment Plans (Guaranteed Return Plans)

   An endowment plan offers a combined benefit of insurance and savings plans. It provides a fixed lump sum amount that is guaranteed at the time of policy purchase, as a maturity benefit on survival of the policy term or death benefit in the event of the policyholder’s untimely death. These plans are low-risk as they do not directly invest in stocks or equity funds.

7. Retirement Plans (Pension Plan)

   Retirement plans are designed to specifically secure your post-retirement life. By investing in this plan for a limited period of time you can accumulate your savings and receive it at regular intervals after retirement. They offer a regular pension for you to maintain your financial independence and meet any unexpected medical expenses.

8. Child Plans

   With child plans, you can ensure your child’s financial security in the long run. These plans are a mix of investment and insurance and essentially provide financial aid in case of the parents’ unforeseen death. The investment part of the plan also creates wealth over time which takes care of the child’s dreams and aspirations.

Importance of Life Insurance

Here we have a list of all the ways in which life insurance can benefit you:

1. Create Corpus Over Time

   Various life insurance policies allow you to create wealth by investing over a long period of time. Life insurance plans like Unit Linked Insurance Plans offer higher returns as they have investments in the market funds. This collected wealth can be returned to the policyholder at the end of the policy term in the form of maturity or survival benefit. In case you suffer an unfortunate death then the accrued benefit will be given to your appointed nominee.

2. Pay off Remaining Debts

   You can use the funds received from the life insurance plan to pay off any remaining debts from loans such as house loans or car loans. In case of your unfortunate death, it may be difficult for your family to pay off loans and take care of any financial liabilities. Thus life insurance is a wise option to invest in.

3. Secure Retirement

   Life insurance plans can help you secure your and your spouse’s post-retirement life by providing survival and maturity benefits if you outlive the policy term. You can use these funds to maintain your financial independence after the loss of regular monthly income. The payout from these plans can be used to fulfill your post-retirement dreams and live your life comfortably in retirement.

4. Tax Benefits

   Life insurance plans provide you with tax benefits under sections 80C and 10(10D) of the Income Tax Act.

5. Child’s Higher Education and Future

   Life insurance plans can help you secure your child’s future by providing emergency funds to pay for their higher education or marriage. Your child can also use this money to realize their lifelong dreams.

6. Fulfill Long-term Dreams

   The money received from the life insurance policies can fulfill your life’s biggest dreams and aspirations of going on an extended vacation or buying a new house. The payout received from life insurance can be used to live a peaceful life as you won't have to worry about having enough money to cover any unexpected expenses like medical emergencies.

Wrapping It Up!

Life insurance plans are the most important investment in everyone's life. They can not only financially secure your life but also create corpus in the long run. You can go through the list of life insurance plans offered, their functions, and the importance of life insurance for a better understanding.