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Understanding the Basics Of Life Insurance
- DetailsWritten by PolicyBazaar -
- Hits : 1200 -
Modified 05 December 2016
Life insurance promises financial protection to the individual taking the policy, called the ‘policyholder’, and his/her family and dependants after they are gone. In the event that something untoward happens to the policyholder, the insurance company pays out a lump sum, referred to as the ‘sum assured, to the ‘nominee’ specified in the policy. The policy is kept active by paying an amount in the form of a ‘premium’ at regular intervals (monthly, quarterly, bi-annually, or annually) for a specified tenure.
A nominee is the person specified by the policyholder in the life insurance policy , who would be entitled to receive the benefits in case of the life insured’s demise. This gives a valid discharge to the insurance company as far as claim settlement under the life insurance policy is concerned. In a way, a life insurance policy represents an agreement between the insured and the insurer.
Life insurance plans
Whole Life Insurance
A whole life insurance plan covers the policyholder for life. Therefore, he/she will need to continue paying premiums regularly throughout life. The stated nominee gets the full sum assured in case of the policyholder’s demise.
Term insurance is the most common and affordable type of life insurance plan. It offers a high-risk cover at a relatively lower premium. In case of the policyholder’s death, the insurance company pays out the pre-decided sum assured to the nominee or beneficiary stated in the policy.
An endowment plan offers a dual benefit - it pays the sum assured along with additional profits for death and survival both. Endowment plans charge higher premiums – these premiums are invested in the asset market, in debt and equity.
Money Back Plan
A money back plan is a variant of an endowment plan. Here, a part of the sum assured is paid out at regular intervals. If the policyholder passes away, the nominee gets the full sum assured; if the policyholder survives until the end of the term, he/she receives the balance sum assured (after deducting the regular payouts).
These plans are a medium for parents to plan for and provide substantial financial coverage to secure their child's future financial needs like education and marriage. Various riders can be added to a child plan to increase and enhance the benefits it offers.
A retirement plan assists an individual in financially securing his/her post retirement life. Multiple retirement plan options are available in the insurance market.
An investment plan offers two advantages – along with offering insurance coverage, it also promotes investment, thus helping to enhance savings and accumulate wealth as well.
Unit-Linked Plan (ULIP)
ULIPs too offer the advantage of both insurance and investments. However, the performance of these plans is linked to the market. The policyholder is free to choose the allocation of investments in the financial market. Like other life insurance policies, here too the full sum assured is paid out to the nominee/beneficiary in case of the policyholder’s death.
Benefits of Life Insurance
- A life insurance policy offers financial security to the policyholder and his/her family. It serves as a promise for financial support for every crucial aspect of life – providing for retirement, for children’s education and marriage, and also ensuring financial security for the family after the policyholder is no more.
- Some life insurance policies allow policyholders to raise loans against them.
- Most life insurance policies offer tax benefits – under Section 80C and 10 (10) D of the Income Tax Act, the policyholder can get tax exemption on the premium paid as well as on the sum assured, respectively.
- Life insurance policies such as ULIPs offer the dual advantage of insurance and investment.
- Life insurance offers a range of options to choose from - investments under a unit-linked plan, funds for child’s education/marriage under a child plan, regular income under a pension plan, death benefits under a term plan, etc.
Before zeroing in on a life insurance plan, it is important to check the various policies available from different insurance companies and compare them, to ensure you get the best deal. Online insurance purchase is a good option – it is relatively cheaper, less cumbersome, and very convenient.
Analyse all the available options and select a policy most suited to your exact needs. It is also wise to analyse the potential needs of your beneficiary to help decide how much insurance to buy.
The earlier you purchase a life insurance policy the better it is, as it helps get adequate risk cover and build a sizable corpus.
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