Money is the most important commodity needed for the survival of humanity. Without these resources, we would end up on the streets. Along with monetary resources, our lives are also precious. Some may be the sole breadwinners of their family. If that person ceases to exist, then the family members depending on him will be in turmoil. A sudden accident or financial crisis creates a void in our financial resources. Thereby creates many liabilities for the dependent family members like pending bills, EMIs, rent, and other expenses. To prevent such besetting circumstances, the Life Insurance Policy comes to your rescue. The insurance policy ensures the financial security of the insurers family in his absence.
Most of us are already mindful of this policy. As the name suggests, it is a financial protection cover for your family. The life insurance policy is an agreement with the insurance company that assures returns after the premium payment. Thus, the policyholder has to pay the premium amount for a fixed duration of time. Upon the policy’s maturity or when the insured person dies, the sum of money on the surviving policy term is made to the family. The money from the insurance policy is disbursed to the family members of the insurer for their sustenance.
Types Of Life Insurance Policies
Life insurance policies are divided into different categories. These categories are designed to meet the various needs of every individual. The various types of insurance schemes are given as follows.
1. Term Insurance
This is the most basic insurance plan that offers financial security to your family. The term insurance plans can be availed at affordable rates as the premium are cheap. They do not include any savings or profit component that can enable the benefits of getting higher returns. These insurance schemes cover the financial necessities of your family during your absence.
2. Unit Linked Insurance Plans (ULIP)
The ULIP merges the life insurance plan with financial investment. The applicants of this scheme can choose from a variety of options and portfolio strategies. They provide additional liquidity of withdrawing the funds after a lock-in period of 5 years. They disburse the assured sum upon the maturity of the term or in case of the sudden death of the insurer.
3. Endowment Plan
These are traditional insurance schemes that provide risk-free investment opportunities that act as an armour of safekeeping. These plans have low risks as they are not linked to the stock market. The endowment plan is accompanied by several bonuses that enhance the insurance sum upon attaining maturity. There are two types of bonuses offered on the plan. They are reversionary and terminal bonuses.
4. Savings Plan
The savings plans run dual functions. They provide the life insurance cover, thereby ensuring the applicant and also offer a means of investing their money. So, the corpus generated can be utilised to secure the financial needs of an individual and his family and meet other financial goals at different stages in life. The returns earned from any protection and savings plans are usually fixed. But some plans facilitate creating a regular source of income throughout the term of the insurance policy.
5. Whole Life Insurance Plan
This insurance plan provides coverage till the individual attains 99 years of age. These plans differ from other regular insurance schemes, which have a limited term of 10, 20, or 30 years. Such a plan has immense importance in the life of those individuals whose financial dependence on the scheme exceeds a long time.
6. Retirement And Pension Plan
The life insurance plan also has provisions for generating a retirement pension. There are various ways through which the insurer can generate his retirement corpus through the life insurance scheme. They could either invest a lump sum and earn huge returns after the term. The other way is to accumulate the funds according to the risk appetite.
7. Money back policy
The money-back policy is a form of the endowment plan. According to this policy, the company pays the insurance amount periodically over the entire policy term. Thus, a regular sum is paid out to the insurer during a period. At the end of the term, if the policyholder continues to live, he gets the balance amount assured. But if the policyholder dies during the policy term, his nominee will get the full amount that was assured.
Why Is The Policy Necessary?
1. Illness Protection
Health is wealth. But once a person ages towards retirement, his health deteriorates, and the life insurance policies become significant. Thus, the insurance policies that cover critical illnesses are of paramount importance. Some insurance scheme provides cover for various ailments like heart attacks, and other chronic diseases. Therefore, investing in insurance policies that offer such benefits is highly beneficial.
2. Family Support
If you are the sole breadwinner of the family, make sure you build a security net for your family. This safety net should ensure financial support to your family in your absence. If the family’s sole breadwinner passes away, then the sum from the insurance company will enable your family to lighten the hardships in your absence.
3. Savings Growth
Investing early in the insurance plans will help the insurer to fortify his savings. It can be achieved only when the individual has invested in an investment cum insurance scheme. The ULIP (Unit Linked Life Insurance Policy) is the best insurance scheme to enhance savings. They allow the policyholders to invest in both equity and debt-based markets. Besides, the insurer is also assured of tax deductions under the income tax act.
Many individuals avail of loans to meet various financial goals. Sometimes they may avail large loans to purchase houses, cars, and so on. If the person dies without paying off the debt, this will cause a serious financial burden to his family. In such circumstances, the corpus disbursed from the life insurance policy can be employed to pay off the insurer’s existing debt. Thus, the life insurance policy has various benefits associated with it.
How Do Insurance Policies Fulfill The Needs Of The Insurer?
Life insurance is a vitality of our lives that bridges the financial gaps. It nullifies the void created by crises, emergencies, and unexpected circumstances. The insurance policy assists the insurer during different walks of his life. Thus, the insurer should contemplate his needs and choose the right insurance plan for himself. Some of the circumstances are given as follows.
1. These Savings Can Fund The Education Of Every Child
In India, on average, parents spend approximately Rs.12 lakhs funding their education. Times are changing, and education is no longer available free of cost. The rise of top-tier schools, colleges, universities, tuition centres, and other college expenses has put pressure on the parent’s pockets. Thus, parents need to give the highest priority to the educational goals of their children. This means that they have to save for their educational aspirations. Child Insurance facilitates the parents to fulfil their need for educational savings. These policies are available in the form of Unit Linked Insurance Plans. Thus, the future of the children will be secure, and their educational needs will be fulfilled.
Let us look into an example. Consider a parent aged 40 years starts to save money for the education of his 15-year-old son. He invests Rs.1 lakh on an annual basis towards the children’s insurance plan. The insurance schemes guarantee an assured corpus return worth Rs.10 lakh. Due to unforeseen circumstances, the parent expires 5 years after starting the plan. Then the corpus of Rs.10 lakh will be disbursed to the child to meet his immediate educational requirements.
2. Financial Protection During Major Health Illnesses
A major portion of individual earnings is spent on medical bills and their health care. This amount accounts for 70% of the average Indian individuals’ income. If the insurer or the family’s sole earning member is down with an illness and cannot work, then the income earnings will come to a standstill. Although the person is undergoing treatment, his family’s financial needs will not halt. Thus, life insurance provides the necessary financial aid to the insurer and his family in such cases. The critical illness cover provided sufficient corpus during this period of the policyholder. The lump-sum is disbursed only on a diagnosis. This cover provides sufficient funds that enable the insurer to pay his medical bills and meet the household expenses.
Consider a working individual aged 38-years-old. He buys an insurance cover that has a critical illness cover worth Rs.10 lakh. The term of the cover is 15 years which involves a premium payment of Rs.7,000. Now suppose after 7 years of activation of the cover, the insurer suffers a major chronic illness that requires treatment of Rs.5 lakh. So, the insurance company will make the payment of Rs.5 lakh with 50% of the plan forwarded to the other ailments that may strike in the future. Thus, his cover persists at a value reduced by 50% of the original.
3. Retirement Planning
Individuals in the public sector often enjoy the benefits of pension post-retirement. But such opportunities are not available for the workers in the private sector. Therefore, they need to foresee the circumstances post-retirement and start working towards planning their retirement corpus. The retirement period is the most peaceful time for an individual. It is that time when every retiree is free from the pulls and pressures of the world. But life insurance schemes also provide retirement plans that guarantee a stable source of income for the retiree’s post-retirement. So that they can cherish their retirement period without any regrets; this will enable them to lead a life they always hoped for.
The retirement plans by the life insurance schemes offer a regular pension for the insurer and his spouse. The retirement corpus accumulated could be large if the individual had started early. Therefore, individuals should plan years before to make sure that they accumulate sufficient corpus by the time they retire.
Benefits Of Life Insurance
Having life insurance is the cushion to the worst financial crises that can strike us. It comes with a lot of benefits. Let’s discuss the benefits associated with having a life insurance policy.
- Tax Benefits.
- Return on Investment.
- Loan options
- Life Risk Cover.
- Death benefits.
- Life Stage Planning.
- Assured Income Benefits.
- Wealth creation.
- Security of business.
1. Tax Benefits
The investment amount for life insurance is bounded to rebate under the Income Tax Act. According to section 80C of the act, the tax liability can reimburse. The amount available for reimbursement under the section is Rs.1 lakh. This amount can be invested in life insurance premiums, pension superannuation funds, employee provident fund, equity-linked mutual funds schemes, National Savings Certificate, and public provident funds. Thus, tax benefits have attracted the policyholders to avail of these facilities.
2. Return On Investment
The returns on insurance policies are way better than those offered by any other investment scheme. The insurance policies often offer bonuses on the insurance amount. These bonuses contribute to the returns that the company generates. The insurance money is paid in a monthly premium amount. The money invested in insurance is safe and risk-free. Thus, the full amount will generate good returns and will be returned to the insurer after the policy matures, or it will be returned to the nominees after his demise. Therefore, the invested amount will be securely transferred to the insurer with the bonus.
3. Loan Availability
Through the insurance policies, the policyholder has the added advantage of availing of policy loans. If an insurer requires money desperately, then he can approach the company for a loan. According to the policy provisions, the company will sanction a loan on par with the invested amount or the returns assured under the scheme.
4. Life Risk Cover
Life insurance provides great relief to the insurer as it can be disbursed during any financial crisis. It provides ultimate peace to the insurer and his family as they already have a safety net prepared during the black days. Therefore, financial security is provided to the insurer and his family from unanticipated situations. This is an important feature of the insurance policy that guarantees a risk-free life to the policyholders.
5. Death Benefits
Sometimes, due to unforeseen circumstances, the insurer may lose his life. This means the termination of the source of income for the family. Then the insurance company provides compensation to the family of the deceased called the death benefit. The nominee who the policyholder appointed during the application is liable to get the entire insurance money. The full sum of money is assured, along with interest earned during the entire period of maturity. Besides death benefits, life insurance also provides monthly income. The monthly payment facility is of immense importance for those individuals who are expected to retire or already retired. Numerous insurance companies provide policies with varying rates. Thus, individuals should avail themselves of the right policy through the appropriate providers.
6. Life Stage Planning
Life insurance is a long-term investment that assists the insurer to plan in his life. Thus, any individual can plan his financial goals according to his convenience. The insurance policies offer financial sustenance to the family of the insurer in case of his sudden death. Besides this, it also facilities the insurer to meet his and his family’s goals. Such as children’s educational needs, their marriage, purchasing the dream car, building the dream house, and leading a happy retired life.
7. Assured Income Benefits
The returns from the insurance policy ensure a stable source of income for the insurer and his family. Thus, the insurer and his family can lead a comfortable life as the insurance amount will suffice the bill payments, education fees, monthly expenses of the family, and other payments. The amount disbursed after the maturity of the insurance term compensated for the income loss with the discontinuation of the source of income.
The riders are surplus benefits that are combined with the basic insurance policy. The added advantage of riders increases the insurance coverage of the insurer. They provide comprehensive protection that is more than the risks covered by the insurance cover alone. The riders cover realistic life-oriented issues like medical ailments, treatments, personal accidents, and so on. These expenses may not be entirely covered by the insurance corpus alone. For example, if the insurer avails of the accidental death rider, that can get tax deductions. These deductions are possible under section 80C on the premium payment. For critical illnesses, the deductions can be claimed under section 80D.
9. Wealth Creation
Life insurance schemes are lucrative opportunities to boost the financial level of any individual. As these policies offer great bonuses on the monthly premium payment, they are potential sources of amassing wealth. Besides wealth creation, other investment classes deliver great performances in beating inflation and enabling the growth of insurance corpus. For instance, if an individual pays a monthly premium of Rs.20,000 per month for 20 years, then after the term, he will get returns worth Rs.65.39 lakh at a 4% annual return.
10. Security Of Business
Sometimes the policyholder may be running a business with his partner. If he dies, then his partner can claim the insurance amount and purchase a share of the deceased insurer. Therefore, the partner would have to notify the insurance company about it. So, he has to sign a contract with the company. After this documentation, the partner’s pay-out by selling the shares of the deceased partner will have to return to the nominee appointed by the policyholder. In this case, the nominee or any other eligible candidates like the children of the policyholder are not entitled to receive the stakes in the company.
How To Choose The Right Life Insurance Plan?
To select the best life insurance scheme for yourself and your family, make sure to keep the following points in mind.
- Calculate your annual earnings. Make sure that the insurance cover is at least 10-20% of your annual income.
- Along with life insurance, make sure that the insurance company also offers several amenities with the policy. These benefits include accident covers and critical illness covers.
- Make sure that your insurance plan provides a regular income to you and your family after your death.
- Factors like the settlement ratio of the insurer and the ease of buying the policy are more important than a low premium payment.
- Check the policy details provided by the insurance company. Avail of the insurance scheme from a reputed company that has a good history.
Which Is The Best Life Insurance?
Various insurance companies are providing different schemes in the financial market. As per the individual choices and preferences, he can avail of these schemes. Individuals who wish to take the risk should invest their money in the Unit Linked Insurance Plan. Others who only intend to provide a protection cover to their family can invest in a term insurance policy. Here are some of the additional benefits that should be associated with the insurance policy.
1. Critical Illness Benefits
This is an additional feature associated with most insurance policies. It enables the insurer to gain monetary benefits during severe health crises like heart attacks or cancers. These benefits assist the insurers big-time along the line as they do not replenish the assets in his pocket. A fixed amount is provided to the insurers irrespective of their medical expenditures. This means that the insurer need not provide any bills or other proofs for medical insurance. The best part will not be demanded back from the insurer even if he overcomes the illness.
2. Personal Accident Benefit
Individuals are prone to several accidents. Thus, the personal accident benefit pays the additional amount if the policyholder dies in the accident. So, the family members will receive the assured sum from the company and an additional amount if the policyholder dies in the accident.
3. Steady Income After Death
If the only earning member of the family dies, it is challenging for the family to manage the finances. Thus, life insurance provides a stable source of income in these tough times. This feature can be availed of instead of paying a lump sum which is often difficult to manage.
What Are The Benefits Of Purchasing A Life Insurance Policy Online?
There are several advantages if the insurer purchases the insurance plan online. These are as follows.
- The insurance plans bought online may have discounts. Thus, online purchases are cost-effective.
- The insurance can be easily bought at the click of a button.
- The insurance plans can be easily customized online according to the needs of the applicant.
- The insurance company also provides customer support 24×7.
What Are The Various Payout Options Available With The Plans?
There are several payout options available that cater to the needs of every policyholder. The four types of payout modes are given as follows.
According to this mode of payment, the entire insurance corpus is disbursed at a time. After the policyholder’s demise, the life cover is paid as a fixed amount to the nominee.
Through this mode, the payout is done in equal monthly instalments. Thus, the family’s monthly financial requirements are fulfilled and taken care of.
3. Increasing Income
The company disburses the funds monthly in instalments for 10 years. Thus, the nominee will receive an increase of 10% per annum every year. The nominee will receive an additional life cover of 45% through this payout mode.
4. Lump-Sum Plus Income
The insurance amount can be paid in two parts. The amount can be disbursed in both lump sum and monthly instalments. Thus, half the amount can be received in a lump sum manner, and the other part can be received in equal monthly instalments.
1. Who is a policyholder?
The owner of a life insurance policy is called a policyholder. He is the person who is insured under the insurance policy. But sometimes, the term policyholder is also used to refer to any of the relatives of the insurer or the corporation he works for.
2. Do we get significant returns on every life insurance policy?
No, not all life insurance policies provide an investment with the added benefits of protection. The whole life insurance policy is a great way to save money for future requirements like retirement and during the sudden demise of yourself. But many times, the insurers are not aware of the returns offered on the insurance plans and investment schemes. Therefore, investors must invest their hard-earned money in insurance policies and other investment tools. This will increment the probability of earning huge returns in the future.
3. Can I avail myself of the life insurance policy after I retire?
The life insurance scheme bears fruits only when availed at a young age. This is because young working individuals can afford the premium payment. Moreover, the premium payment is not constant for every individual. Instead, it is determined by the age of the applicant, his healthcare needs, and his family’s medical conditions. Now, if you avail of the insurance policy after you retire, then you already have a bad medical condition. This means that you may be either nursing an ailment, or your family members may be facing some medical issues. So, considering these circumstances, the bank will classify you as a risky buyer and charge a high premium amount. Therefore, if you are retired, then avail an insurance policy will only add to your expenses. But it will be helpful for the dependents in your family. It is advisable to sow the seeds in the youth and reap the benefits post-retirement.
4. Differentiate between premium payment term and policy term.
The policy term refers to the period during which the insurance scheme of the insurer exists. The premium payment is the short duration allotted to the insurer to pay his premium amount.
5. What is the sum assured?
The sum assured is the fixed amount of money promised to policyholders’ family if he passes away during the policy term. This is the total sum that the policyholder is covered for. The sum assured to the policyholder is often mentioned on the insurance company’s policy details.
6. How do life insurance policies work?
The working of a life insurance policy is simple. Let us contemplate with an example. Consider Mr Mendes, who is 40 years old and has bought an Rs.1 crore life insurance policy with ICICI. The policy term extends for the entire life with a premium payment of Rs.500 per month. Now suppose he dies after 5 years of starting the policy. Until this time, he had paid his monthly premium regularly. The premium payment for 5 years sums up to Rs. 30,000. Thus, after he passes away, his family will get the entire insurance cover of Rs.1 crore. This implies that the insurance company will pay out the sum assured irrespective of whether the insurer dies during the policy term.
7. What are the tax benefits under the insurance policy?
The insurance policies qualify for several tax deductions under the income tax act. According to Section 80, the insurer can claim a tax exemption of up to Rs.1.5 lakh on the investment amount. Further, under Section 10D of the income tax act, the payout received at maturity is not subjected to any taxes.
8. What should be the composition of my life insurance cover?
The life insurance coverage needed varies for every individual. Different individuals need to fulfil different needs. But the most important criteria that the insurance sum should fulfil are that it should cover at least 10 times the policyholder’s annual income. For instance, if the annual income is Rs.5 lakh, then the insurance cover should be about Rs.50 lakh. Thus, to achieve this feat, the insurer will have to pay his monthly premiums regularly. The insurance cover should be as large as possible to meet the various costs that will increase in the future.
9. Name some factors that are responsible for affecting the insurance premium.
The life insurance monthly premium payment depends on various factors. Some of the factors are the applicant’s age, the type of coverage he opts for, the amount of coverage he is looking for, medical issues, and other occupational statuses.
10. Can the nominee in life insurance be a minor?
Yes, the nominee in the life insurance scheme can be a minor. But it is suggested that the nominee be a person who has attained maturity.
11. What are the minimum and the maximum age of the policyholder?
The minimum and maximum age of the policyholder is not fixed. It is different for all the insurance companies and the insurance plan availed by the applicant. But in most cases, the minimum age requirement for the policyholder is 18 years, and the maximum age is 65 years.
12. What is the duration for payout in life insurance?
The claim settlement period varies for every insurance company.
13. Are there any consequences if the premium payment is not paid on time?
If the monthly premium payment is not paid within the duration, the company provides a grace period of 30 days. This period is applicable from the due date of the premium payment. If the policyholders fail to make the payment within the grace period, then the policy becomes defunct, and the benefits achieved will be lost. Thus, to restart the insurance policy, the policyholder will have to pay the revival premium.
14. What happens upon the maturity of the life insurance policy?
When the life insurance policy matures, the amount accumulated will be disbursed. The insurance amount is paid out via various payment modes. Based on the options selected, the payment may be made in a lump sum or monthly payments. The returns involve the total premium payments and the bonus earned.
15. It is necessary to pay tax on the maturity benefit?
No, the policyholder need not pay any taxes on the matured amount.
16. What are the tax benefits for a pension plan?
If the individual had regularly paid his monthly premiums, then he can avail of tax benefits. Under Section 80C, they can claim tax benefits on the premium payment. Further, under section 10(23AAB), a deduction of Rs.1 lakh is available on the total annual income.
17. Can the insurance policy be changed after purchasing?
Yes, the insurance companies provide the provisions to change the insurance plan. They are aware that certain circumstances arise, and the policyholder may need to change his plan once purchased.
18. Who can be selected as a beneficiary?
Anyone can be assigned as a beneficiary. It could be an individual, multiple people, a corporation, a charity, or a trustee. If the policyholder does not mention a beneficiary, the entire benefits will be directed to his estate.
19. Can a person buy policies for more than one individual?
Yes, joint policies are available. These joint policies cover more than one person.
Human life is fragile. Accidents and mishaps are the contingencies that force us to plan. Many times, people neglect the importance of life insurance as a redundant saving. They ignore this fact until a sudden disaster comes crashing into their lives. Life is unpredictable, and we should be smart to make good decisions. Preparation is the key to safeguarding your family’s future. Life insurance policies achieve this milestone. They provide financial protection and security to you and your family. It is an important tool that ensures the safety and the security of ones’ family in his absence. Life insurance is an absolute necessity today. The individuals insured through insurance are helped in various aspects of their lives.
In this article, we have seen the different aspects of a family facilitated through insurance schemes. The benefits associated with the insurance plans are tremendous. Apart from good returns, these schemes also ensure tax benefits. The insurance cum investment plans fortify the savings and provide coverage against liabilities. Riders provide additional covers for illness and retirement that are hard to resist. Moreover, several other compulsive offers can be availed by individuals through life insurance plans.
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