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How Does Life Insurance Policy Works?

In this day and age, having a life insurance policy is a must for every individual. It is the best way you can secure the financial future of your loved ones against any eventualities. Nowadays, as there is an extensive range of life insurance products available in the market, choosing an appropriate insurance product as per your requirement and suitability can be a difficult job. Thus, it is very important that you consider various aspects of the life insurance policy before making an informed decision.  Before purchasing a life insurance policy, first, it is important to understand what is a life insurance policy and how does it work. Further in this article, we have elaborately discussed it in detail.

What is Life Insurance Policy?

 A life insurance policy is an agreement between the insurance company and the insurance holder, wherein the insurance company promises to pay a specific amount to the beneficiary/nominee of the policy in the event of the unfortunate demise of the insured person during the tenure of the life insurance plan. In exchange, the insurance holder agrees to pay a predefined amount as premium towards the policy either on a regular, limited or as a single premium.

How does Life Insurance Policy Works?

Firstly, the individual should choose a life insurance policy as per their requirement and suitability. If a person is married or has children and dependents to look after, then a term insurance policy will be an ideal plan to go for as it is a pure protection plan and provides higher insurance coverage at an affordable premium rate. The term insurance policy will ensure financial security to your family and take care of the future liabilities even in your absence. Depending on the tenure of the policy, the insured can pay the premiums on a monthly or yearly basis. 

Under the life insurance policy, if the insured person dies an unfortunate death then a death benefit equal to the total sum assured amount is paid to the beneficiary of the policy. The beneficiary will have to file a claim to receive the benefit. Similarly, a life insurance plan also provides maturity benefit to the policyholder if he/she survives the entire tenure of the policy. To file the claim, the nominee will have to submit the death certificate along with the other required documents to the insurance company. The insurer will verify the claim form and documents submitted by the beneficiary of the policy and after the completion of the verification process, the death benefit will be paid to the nominee of the policy.

How Much Life Insurance Do you Need?

 The amount of life insurance coverage one needs depends on the financial objectives of an individual in the long-term. As per the insurance experts, it is always advised that an individual should choose the coverage amount 10-15 times of the annual income. This is because, with the increase of age, the liabilities and responsibilities of an individual also increase and so does the risk factor. Thus, considering all the aspects related to financial planning one should choose the life cover that will be ample to take care of your family’s financial future even in your absence and also help them to maintain a good lifestyle.

Benefits of Life Insurance Policy

The perk of purchasing a life insurance plan is more than providing financial security to the insured’s family in tough times. Let’s take a look at some of the benefits offered by the life insurance policy.

1. Provides Financial Security

The coverage offered by the life insurance plan can act as a financial cushion for the family and ensures that the family life goals are not affected in case of any emergency. Moreover, the life insurance plans also take care of the financial liabilities of the family even in your absence and help them to maintain a good lifestyle.

2. Wealth Creation

Along with the benefit of financial protection, the life insurance plan also works as an excellent financial instrument for wealth creation.  If your goal is to accumulate funds in the long-term then you can consider investing in an endowment plan or ULIP plan as it offers the benefit of savings and investment along with the benefit of life coverage.  In the ULIP plan, you get the advantage to invest a part of the premium in market-linked securities to gain a high return on investment and create wealth in the long term.

3. Tax Savings

This is another major benefit offered by the life insurance policy.  In the life insurance policy, an individual can claim for tax exemption on the premium paid towards the policy up to the maximum limit of Rs.1.5 lakh in a financial year and on the maturity proceeds U/S 80C and 10(10D) of the Income Tax Act.

4. Prevent Loan Burden

The life insurance policy helps in the repayment of the loan with the risk of your family losing an asset or taking stress about arranging funds.

5. Retirement Planning

The life insurance retirement plan helps you to make a foolproof retirement planning for a secure future. With the annuity based life insurance policy, the insured can assure a monthly flow of income and live their golden days in a stress-free and hassle-free.

Wrapping it Up!

Life insurance policy is a remunerative financial instrument for both protection and helping an individual save in a disciplined so that they can create a  financial cushion in the long-term. As the need for the life insurance policy differs from person to person, make sure that you compare the plans online and choose the best plan as per your requirement.

Written By: PolicyBazaar - Updated: 29 October 2020
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