Life is full of uncertainties, and you never know what tomorrow has in store for you. The COVID-19 pandemic has been a rough phase in everyone's life, but it has also been full of lessons on relationships, self-care, and financial security.
So, if you are the sole breadwinner of the family, make sure you must have optimal life insurance cover for the financial security of your spouse, children, or other family members in the event of your death. Life insurance death benefits, depending on the policy amount, can help beneficiaries pay off a mortgage, cover college or tuition fees, or help fund retirement.
What Is Life Insurance?
Purchasing life insurance allows you to provide a safety net for your loved ones in case you pass away. Life insurance is a contract between a life insurance company and a policy owner. A life insurance policy guarantees the insurer pays a sum of money to one or more named beneficiaries when the insured person dies in exchange for premiums paid by the policyholder during their lifetime. For a life insurance policy to remain in force, the policyholder must pay a single premium upfront or pay regular premiums over time.
Types of Life Insurance
Many different types of life insurance are available to meet all sorts of needs and preferences, depending on the short or long-term needs of the person to be insured. Some of these are:
- Term Life: Term Insurance plans provide a death benefit for a fixed tenure. This is the most basic and also the most important type of life insurance policy available in the market. It is the cheapest plan and covers only the death risk with no maturity benefit.
- Endowment Plans: These are savings-oriented life insurance plans having both death benefit and maturity benefit. Death Benefit is paid to the nominee if the life insured dies within the policy tenure, and Maturity Benefit is paid to the policyholder if he survives the entire policy tenure.
- ULIPs: Unit Linked Insurance Plans are investment-oriented insurance plans. Under these plans, the premiums paid are invested in the capital market.
- Child Insurance Plans: Child Plans are life insurance plans created specifically for providing financial stability to the child. The parent or the child is the life insured under the plan.
- Whole Life Plan: Whole Life Plans are unlimited Term Plans. These plans cover individuals till 99 or 100 years of age.
- Pension Plans: Pension plans are retirement-oriented life insurance plans. Under these plans, the policyholder creates a corpus from which regular annuity payouts are given till the insured is alive. Pension plans come in two variants - Deferred pension plans and Immediate annuity plans.
Key Things to Know About Life Insurance
Life Insurance or Protection should be one's primary importance. Theoretically, everyone knows about it, but rarely do we understand the real importance of the same. Life insurance is a safeguard against financial deficiency at the time of the insured Individual's death. Practically, life insurance grants you and your family financial security and provides assurance to deal with any unforeseen events. Life insurance is preferred according to the needs and goals of the insured. So, buying a life insurance policy is important.
However, before you invest in a life insurance plan, here are things that you absolutely need to know:
- Insurance is NOT an investment: This is the first thing you need to acknowledge and accept that insurance should never be considered as an investment. Insurance is a vital part of financial planning. But a lot of people consider it as an investment. You need to keep in mind the coverage amount you wish to purchase for your family. Insurance is synonymous with protection, and that is the primary and most important objective. They should not be evaluated based on their return, bonus, etc.
- Required Coverage Amount: The required coverage amount for your insurance policy is the most important aspect of choosing a plan. It depends on your lifestyle and priorities. Consider your standard of living, inflation, needs, liabilities, etc., to decide your coverage amount, which should be sufficient for your family. Ensure that your coverage amount is sufficient to meet the monthly expenses of your family in your absence.
- Policy Tenure: The tenure of life insurance policies depends on the type of plan you opt for. You can choose any tenure that you think is necessary for you and your family.
- Type of Life Insurance Best Suited for You: There are varieties of plans offered and available in the market. It all depends on your needs as to which plan you opt for. Some of the insurance plans are: Term Insurance, Whole Life Insurance Plans, Endowment Assurance Plans, Money-Back Plans, Child Plans, Pension Plans, Unit Linked Insurance Plans.
- Claim Procedure: You and your nominee should be completely aware of the claim procedure to expedite the claim as and when the requirement occurs.
Benefits Offered: Death and Maturity Benefit
There are two types of benefits in life insurance plans:
- Death Benefit: The beneficiaries will receive a lump-sum amount if the life insured dies within the policy tenure.
- Maturity Benefit: The claim arises when the policy matures. It is paid only when all premiums are paid on time. Maturity Benefit is payable to all life insurance policies except Term Plans. Endowment Plans are a type of life insurance with a maturity benefit. Even ULIPs have maturity benefits. These kinds of policies are relatively quite expensive compared to term insurance, but they protect your family with a coverage amount if the insured dies within the policy tenure. Alongside, these policies have a maturity benefit payable to the policyholder if you outlive the entire tenure.
Tax Advantages
Life insurance plans, apart from providing funds, also save taxes. Under Section 80C of the Income Tax Act, 1961, the premium amount contributed to life insurance plans is eligible for tax rebate, with a limit of up to ₹1,50,000. Also, under Section 10(10D) of the Income Tax Act, 1961, the amount of sum insured paid on maturity, death, or surrender of the policy is completely tax-free. So, life insurance is preferred by many as it protects your family and is also tax-efficient.
Know these important aspects of life insurance and then choose the right plan for the financial security of your family.