What is Life Insurance?

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What is Life Insurance?

You buy home insurance to protect your house and car insurance to protect your car, but what about insurance to protect your family’s financial security? This is where life insurance comes as an essential necessity. It provides your family with a measure of financial protection in the event of a contingency later in life. This article goes into detail about the different life insurance policies out there and their benefits for you and your family members. Read on to know more about life insurance.

Benefits of Life Insurance

1 Financial Security

A major benefit of life insurance is that it provides financial security to you and your family members. Life can be unpredictable, and in the event of death, the immediate family will be left to bear the financial burdens. This could be in the form of not having a regular income or a debt that was not paid for. Life insurance provides a protective umbrella under which your family remains financially protected in your absence.

• Long-Term Savings

Life insurance allows you to save a large corpus of funds for the future. These savings are in the form of long-term investments that are limited to a specific term. Once the term is over, you get the sum-assured amount plus interest. These savings can prove useful for a number of personal and family requirements down the road like marriage; a child’s higher education; marriage; investments into property; wealth creation goals; retirement savings, and other financial needs that may arise in the future.

• Market Linked Investment Options

There are a number of life insurance products like ULIP (Unit-linked Investment Plans) that can be great investment options. Unlike traditional life insurance products, these investment options offer better returns because of the inherent market-linked nature of their returns. However, unlike most market-linked investments, they offer relatively lower risk for the policyholder. This makes it both a reliable investment avenue and a viable instrument for greater future returns.

• Tax Benefits

Under Section 80C1 of the Income Tax Act, all Life insurance policies enjoy a tax deduction for the policyholder. Individuals paying insurance premiums can declare their life insurance premium payment to gain tax returns at the end of the financial year. Taxpayers are allowed a maximum of Rs. 1,50,000 as tax deduction under the Income Tax Act.

1Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details

What are the Different Types of Life Insurance?

There are a number of different types of life insurance products to choose from. Choosing the right one really comes down to an individual’s specific need for financial protection. Let’s discuss some of the types of life insurance products to help you make an informed decision.

• Term Life Insurance Plans

A term plan is a plain and simple life insurance policy that covers the insured in case of death. In a term plan, the beneficiaries receive a fixed sum assured in the event of an untimely death. When compared to other life insurance plans, term plans are considerably less expensive.

• Unit Linked Insurance Plan (ULIP)

A unit linked plan is a mixed-bag for an insurance plan. It seamlessly blends together market-linked investments (like mutual funds) and traditional life cover. The premium paid towards ULIP will be funnelled partly towards life insurance cover and the remaining will be used in a number of different money-market instruments. The type of instrument largely depends on an individual’s risk appetite. There are instruments that are considered less risky than others.

• Life Insurance Endowment

An endowment plan is a mix between life insurance and savings. If you are looking to save for the future, an endowment plan is the way to go. At the end of the policy term, the insured will receive the entire invested amount plus interest at the time of time maturity. Endowment plans are also relatively more expensive when compared to term plans.

• Money-Back Plan

A money-back plan is very similar to an endowment plan. The only difference is that instead of getting the lump sum amount at the end of the term, the policyholder gets a percentage of the sum assured at regular intervals. The Money-back plan is a great way to maintain liquidity throughout the terms to achieve short-term financial goals during the course of the policy tenure.

• Whole Life Insurance

The Whole Life insurance provides insurance coverage to the insured for their entire life or up to 100 years of age. This type of insurance policy typically offers fixed premiums, fixed death benefits, and an end-of-term savings component. If the policyholder lives for more than 100 years, they will receive the entire corpus which includes the principal amount plus interest.

• Child Insurance Plan

Child plans are specifically targeted at building considerable savings for a child’s further studies and in some cases marriage. Child plans generally offer a lump-sum pay-out at the end of the policy term or instalments during key milestones of a child’s life. In the event that a parent passes away during the policy term, all further payments are cancelled and the child receives the maturity benefits as prescribed during the policy creation process.

• Retirement Plan

Retirement plan or pension plan helps an individual build up their savings over an extended period of time. These plans help are meant to support your post-retirement financial future and live life without worry. Retirement plans also help you deal with the uncertainties after you have gained the retirement age of 60 and will ensure a steady flow of income till the time you pass away.

What is Life Insurance Premium?

Once you’ve decided which life insurance plan is right for you, it’s important to know about the premium you would be required to pay every month, quarter or year. A premium is the sum of money that you need to pay in return for life insurance. Getting to know your life insurance premium before signing the dotted line is crucial as you must factor in this payment based on the tenure of the insurance policy. In most cases, once you have decided the premium amount, it is difficult to change the premium at a later time.

Financial Goals That Can Be Secured with Life Insurance

Every individual has their need for finances in the future. Life insurance is a great way to safeguard your loved ones’ financial interests, as well as ensure that you build a substantial corpus of funds to meet your future requirements. These requirements are numerous and can range from:

• Further child’s education

• Marriage of a young child

• Buying property

• Savings for post-retirement

• Buying a car or motorcycle

Financial goals vary from one person to the other. Based on where you see yourself or your family ten or fifteen years from now, you should plan for life insurance accordingly. E.g. If you see yourself owning a house ten years down the line, then make sure you plan for a life insurance plan that will cover the house payment in the future.

How Much Life Insurance Do You Need?

This is a very important question for insurance looking to secure themselves from future eventualities. A simple rule of thumb that is being used for a long time is 10X your regular income. So whatever is your annual income, multiply that by 10 and that is the amount of life insurance that you should have. But if you were looking for a more specific answer, you would really have to dig a little deeper to know the correct number. This number would generally depend on a number of factors like lifestyle, family members, whether you live on rent or own a home, your occupation, and the list goes on.

Another way to calculate the amount of life insurance needed is the Human Life Value (HLV) calculator. The HLV factors the total amount of money it would take for your family to be financially independent in your absence. HLV is calculated by adding {All Expenses + Future Liabilities}. The total number you get when you add these up will give you a fair estimate about your value (only just financially).

How to Choose the Best Life Insurance Policy?

With a plethora of life insurance products out there, it can be a little difficult to choose the right one. If you want to find the best life insurance policy follow the steps mentioned below.

1. Get in Touch With An Consultant/ Provider

Life insurance products involve a number of nuances that might be difficult for a layman to understand. This is where an insurance consultant or provider comes in handy. These individuals usually come with a world of knowledge and are equipped to give the best advice on your insurance needs.

2. Evaluate Life Insurance Cover

Calculate how much cover you would need1 in the event of an untimely demise. A number of providers have instituted the use of life insurance calculators. These calculators will give you a cover amount based on your age, number of family members, monthly expenses, and more.

3. Compare life Insurance Plan

While it’s prudent to speak to a financial advisor, make sure to also do a little research yourself. Look at insurance plans from at least three different providers and compare them to see what are their benefits over the others. In the end, walk away with the plan that meets your financial requirement the best.

How to Buy Life Insurance Online?

Buying life insurance online is a very simple process. This can be done by simply visiting a life insurance provider’s website and following the online instructions. The online process requires the following details to be mentioned.

• Enter personal information like name, age, mobile number, gender, date of birth, annual income, and more.

• Enter life cover amount and the policy term.

• View your premium amount and confirm if this is acceptable.

• Confirm other details like Rider

• Select the online payment method and make the payment.

That’s it. You are now secure. The process may differ from one provider to another. The requirements for buying life insurance are not very different and are generally very uncomplicated.

Get Insured to Stay Secured

Unlike most other investment vehicles, life insurance offers a number of unique benefits that make them a necessity. The benefits mentioned above are sure to keep you stress-free and make the most of the years to come. In addition to providing the necessary cover in your absence, life insurance also gives you the discipline to save a large corpus of funds for future needs. When choosing a life insurance plan, make sure you compare numerous life insurance products offered by different companies. This way you will always make an informed decision about the right insurance product that meets your specific needs.

ADV/3/20-21/2710

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