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Meaning of life Insurance (Understand the concept of life insurance)
So, you want to understand the meaning of life insurance? This article will talk about its concept, benefits, features, types, and more.
- Meaning of life insurance
- Features of life insurance
- Benefits of life insurance
- Types of life insurance
- Companies that provide life insurance plans
Meaning of life insurance
In simple words, Life insurance is a contractual agreement between the insurance company and the insured, where the insurance company will be liable to pay a sum assured to the nominees or legal heirs of the insured in the event of policyholder’s demise. The insurance company provides this life coverage in exchange for a premium amount.
Features of life insurance
Now, let us talk about the features of a life insurance policy so that you can understand it better
Insured – The individual who is provided life coverage by the insurer is called an insured. After his/her demise, the insurance company will be liable to pay the sum assured to the nominees or legal heirs of the insured person.
Premium – A premium is a fee that the insured pays to the insurance company to obtain the benefit of a life cover. Maturity- Maturity is the period at which the policy term is completed and the life insurance contract concludes.
Sum assured – It is a pre-determined amount that the insurance company will have to pay to the insured’s family in the unfortunate event of his death.
Nominee– A nominee is an individual who is entitled to receive the sum assured. The nominee’s name and details will be mentioned in the policy contract by the insured individual. Usually, spouses, children, parents are taken as nominees in most cases.
Policy term – A policy term is a specified period of time during which the insurance company provides life coverage to the insured. The policy is said to be in force during this period.
Claim– In the unfortunate event of the insured’s demise, the nominees file a claim with the insurance company in order to receive the sum assured.
Benefits of life insurance
The purpose of life insurance is to financially protect your loved ones from the monetary loss that they may have to face in your absence. Let us look at some of the most important benefits of a life insurance policy.
Financial security– A life insurance policy will provide your loved ones financial safety from any kind of monetary loss that they may face in the event of your demise. A good life insurance plan can help your family repay any kind of financial liabilities such as personal loans, auto loans, home loans, etc.
Wealth creation – Certain life insurance policies such as ULIP policies offer the benefit of both life coverage as well as investment.
A certain portion of your premium will be used to provide you a life cover while the rest will be invested in debt and equity markets, depending on your risk appetite. Such plans not only provide you a life cover but also invests your money systematically and grows your corpus to beat inflation.
The sum assured along with the return from your investments will be paid to the loved ones of the policyholder in the event of his death.
Tax benefit – The premium paid towards your life insurance can be claimed for income tax deduction under Section 80C of the Income Tax Act, 1961. The premium paid for your life insurance is eligible to a maximum tax deduction of up to Rs.1.5 lakh. Also, any payouts received from the insurance company are tax-free.
Maturity benefit – Certain life insurance policies also provide you savings benefits. If the policyholder survives the policy period and no claims have been made, the total premium paid will be returned to the insured as savings benefit at the end of the policy term.
Loan facility – You can also avail of a loan against certain life insurance policies.
Types of life insurance plans
There are various types of life insurance policies. Let us discuss them in detail.
Term insurance plans
A Term insurance plan is a traditional and most basic plan. This plan provides a life cover to the insured for a specified policy term. In case of death of the insured during this policy term, the sum assured will be paid to the nominees of the policy.
Some term insurance plans also come with survival benefits. In such a case, if the policyholder survives during the policy term, he will receive a certain sum as a survival benefit.
Features of term insurance
- Provides you a high life cover at an affordable premium
- Provides coverage for a longer duration (up to 30-year policy term)
Whole life insurance
Whole life insurance provides coverage to the insured for the entirety of his life (generally up to 100 years of age).
Features of whole life insurance plans
- Coverage is provided up to 100 years of age.
- Premium under a whole life plan is generally paid for a limited period.
- Whole life insurance plans come with different variants such as endowment assurance plans, money back plans, unit-linked plans, and more.
Unit-linked insurance plans
Unit-linked plans are also known as market-linked plans. It is a hybrid plan that provides you the benefit of life cover as well as investment returns. A part of your premium paid is used to provide you life coverage and the remaining is invested in debt/equity markets. The legal heir/nominee shall receive the assured sum as a death benefit if the policyholder dies during the policy term. On maturity of the policy, you will be paid the fund value which is equal to the premiums invested along with the returns generated by it over the term.
Features of ULIP
- You can choose the type of investment fund to invest in according to your risk appetite.
- You can withdraw your funds after the completion of 5 years of policy in certain plans.
- You can switch from one investment fund to another.
- Higher of the sum assured or fund value shall be paid to the nominee on the death of the policyholder. However, on maturity, the fund value will be paid.
Endowment assurance plans
Endowment assurance plans provide the benefit of a life cover along with guaranteed savings benefits. The policyholder will receive a lump sum amount if he/she survives until the maturity period of the policy, or the nominees shall receive the sum assured on the demise of the policyholder, whichever occurs first.
Features of endowment assurance plans
- The life cover provided is relativ