Do you want to purchase a life insurance plan but are perplexed about what is it and how can it provide benefits to your life?
Then you are at the right place.
Here in this article, we are going to discuss all the necessary things about life insurance.
Then let’s dive into the article below and learn what life insurance is.
What is life insurance?
Life Insurance referred to the contract between an insurance policy holder and an insurance company, in which the insurer promises to pay some amount of money that has been discussed earlier in exchange for a premium, upon the death of an insured person or after a set period.
At any life Insurance company, an insurance holder should pay premiums for a specific term and in return, the life insurance company will provide you with a Life Cover.
This Life Cover money secures the future of your loved one by paying a lump sum amount in case of any kind of unfortunate event. In some policies, you are also paid some amount which is called a Maturity Benefit at the end of the policy term.
Types of Life Insurance
There are different types of life insurance plans are available to meet all sorts of needs and preferences of the customers.
Depending on the short- or long-term needs of the person who is going to be insured, the important choice of whether to select temporary or permanent life insurance is important to consider.
Below are some of the important life insurance.
Term life insurance
Term life insurance is designed in such a way that lasts a certain number of years, then ends. You can choose the term when you want to take out the policy.
Some of the common terms are 10, 20, or 30 years. The best term life insurance policies are considered as those policies that balance affordability with long-term financial strength.
Decreasing term life insurance is renewable term life insurance with coverage which is decreasing over the life of the policy at a predetermined rate. However, convertible term life insurance allows different policyholders to convert a term policy for permanent insurance.
Renewable term life insurance gives a quote for the year when the policy is purchased. Then, premiums increase annually which are usually the least expensive term insurance at the beginning.
Most term life insurance policies allow you to renew the contract on an annual basis once the term is over. This is one major way to extend your coverage of life insurance but since the renewal rate is based on your current age, premiums can rise exponentially year.
However, a better solution for permanent life insurance coverage is to convert your term life insurance policy into a permanent policy. This is not an option on all term life policies. So you should look for a convertible term policy if this is important to you.
Permanent Life Insurance
Permanent life insurance is another life insurance that stays in force for the entire life of the insured unless the policyholder stops paying the premiums or surrenders the policy. This is very expensive than the term.
Whole life insurance
The whole life insurance is a type of permanent life insurance that accumulates a cash value to last the lifetime of the insured person.
Cash-value life insurance
Cash value insurance allows the policyholder to use the cash value for some major purposes, like a source of loans or cash or to pay policy premiums.
Universal life (UL) insurance
Universal life insurance is another type of permanent life insurance that comes with a cash value component that provides interest. Universal life insurance features flexible premiums.
Unlike other terms and whole life, the premiums of this life insurance can be adjusted over time and are designed along with a level death benefit or an increasing death benefit.
Indexed universal life (IUL)
Indexed universal life is a type of universal life insurance that let the policyholder earn a fixed or equity-indexed rate of return on any cash value component.
Variable universal life (VUL)
Variable universal life insurance allows the policyholder to invest the cash value of a policy in an available separate account. This life insurance also has flexible premiums which can be designed with a level death benefit or an increasing death benefit.
How does a Life Insurance Policy Work?
As we discussed earlier that life insurance is a legal contract between the insurer and policyholder, you need to pay a small sum as a premium to ensure a large protective sum.
In this life insurance policy, the insurer will make a large sum available to your family and dependents in the case of your death.
Usually, insurance is available for a limited period of time. So, if your death occurs within that period of time the life insurer is bound to pay a death benefit, which is also referred to as the sum assured.
However, in case you are surviving in those terms, you may receive a maturity benefit that depends on the type of life insurance.
However, the whole life insurance is more likely to pay the death benefit than the maturity benefit.
Benefits of Life Insurance Plans
Generally, Life insurance plans are long-term investment and protection plans that comes with several benefits. Some of the most prominent benefits of life insurance plans are given below
One of the major benefits of having a life insurance plan is that it provides financial security and stability to your family members in case of your death.
As life insurance policies include a death benefit, If you die during the period of the policy, then a predefined amount, which is known as the sum will be provided to your family members.
It ensures that your family members are financially stable even if you are not present with them.
Builds Saving Habit
When you are buying life insurance you are required to pay regular amounts known as premiums to keep your life insurance policy active.
If you fail the payment of premiums, your policy may get canceled. Thus, by investing on a regular basis, you can easily inculcate a habit of savings that will benefit you in the long run.
Helps in Tax-Savings
For the promotion of savings and investment, the government has made a lot of investment instruments which is eligible for tax savings. Life insurance is one such instrument that helps in tax savings.
As per the income tax act 1961, you can avail of a tax deduction of up to Rs 1.5 lakh towards the premium you pay in a year. Thus, you can have the benefit of investment along with tax savings.
Achieve your Big Financial Goals
Some life insurance policies are made for a cash value over time. Different life insurance policies like ULIP, have an investment component as well.
The premium of the insurance is invested in marketable securities and earns a return. With gradual completion of time, they will build into a large corpus that can be used to achieve goals like your child’s education, child marriage, etc.
Wealth Protection & Distribution
Life insurance plans are generally the safest long-term investment option. So, life insurance may mean you preserve your wealth for a long time against tax and inflation. It means that a life insurance plan is a great instrument for retired investors for the generation of long-term pensions.
Some commonly used terms in Life Insurance
Life Assured is the person who is covered under the insurance policy.
Proposer refers to the person who pays the premiums of the policy. If you have bought a life insurance policy for yourself, then you are referred to as both the Life Assured as well as the Proposer.
Similarly, if you have purchased an insurance policy for one of your members, then you are the proposer and the family member is the Life Assured.
Nominee or Beneficiary
Nominee or Beneficiary refers to the person that you appoint at the time of buying the policy to receive the benefits of your insurance policy, in case of your absence.
The insurance company which sells the life insurance policy is referred to as the Insurer.
Life Cover is the amount of money that the Insurer will pay to your Nominee in case of any unfortunate event.
The Insurer pays a certain lump sum of money on completion of the policy term for protection and saving purposes. This amount of money is known as the Maturity Amount.
A premium refers to the amount of money that you pay to the insurer to receive the benefits of the insurance policy.
These payments are generally made on a regular basis throughout the duration of the policy for a limited number of years or just once, as per the options that are available under the policy that you choose.
Premium Payment Term
The number of years for which you have to pay your premiums is known as the Premium Payment Term.
Policy term refers to the number of years for which the Life Cover continues.
As you read the article this far, you might have come up with the idea of life insurance and its benefits.
Looking at the benefits, buy life insurance for yourself and provide your family a lifetime security.
*image source from Google
Check More News on World Economy: