What is life insurance and how is it helpful ?

What is life insurance

What is life insurance – Life insurance offers many benefits, which is why it is considered as one of the most important financial instruments for an individual. It gives you a chance to build wealth and provides financial security to your loved ones in your absence. Life insurance also offers you various opportunities to invest to meet your retirement needs.

Term Insurance – Term insurance plans provide life cover at the most affordable rates to protect your loved ones. This is the simplest form of life insurance. Term plans provide financial security for the future of your loved ones even in your absence.

 Unit Linked Insurance Plans – Known as ULIPs, combine life insurance with financial investments. Unit-linked insurance plans offer a wide choice of fund options and portfolio strategies. ULIPs allow you to withdraw money regularly from your policy after a lock-in of 5 years.

Endowment Plans – Traditional savings insurance plans are risk-free investment plans that also provide an insurance shield. Traditional plan returns known as endowment and money back policies are not linked to the stock market, and hence carry less risk. Traditional insurance plans offer bonuses like reversionary bonus and terminal bonus for staying invested, which increases the maturity amount.

Savings Plans – Savings plans are life insurance plans that combine life insurance cover and investment benefits. So, apart from securing yourself and your family, you also create a corpus to meet your financial goals at every stage of life. Most protection and savings plans usually offer you a fixed amount as maturity benefit at the end of the policy, but some specific plans also help you create a regular flow of income during your policy term.

Whole Life Insurance Plan – Whole life insurance plan covers you till the age of 99 years. They differ from general insurance policies that have a defined term of 10, 20 or 30 years, and are used when you have financial dependents for a relatively long period, possibly throughout your life.

Retirement and Pension Plans – Retirement insurance plans provide ways to create your own pension income. You can either choose to deposit your retirement corpus as per your risk appetite, or invest in lump sum to get guaranteed instant income for life.

How life insurance is helpful

Life insurance can be helpful in several ways:

  1. Financial Protection: Life insurance provides financial protection to your loved ones in the event of your unexpected death. It can help cover expenses such as funeral costs, outstanding debts, and ongoing living expenses.
  2. Debt Management: If you have outstanding debts such as a mortgage, car loan, or credit card debt, life insurance can help pay off these debts so that your loved ones do not have to take on these financial burdens.
  3. Estate Planning: Life insurance can be used as a part of estate planning. It can help ensure that your assets are distributed according to your wishes and can help cover estate taxes.
  4. Business Protection: Life insurance can be helpful for business owners as well. It can provide funds for business continuation, buy-sell agreements, and key person protection.
  5. Peace of Mind: Having life insurance can provide peace of mind that your loved ones will be taken care of if something were to happen to you.
  6. Guaranteed Savings: Certain types of life insurance policies, such as whole life insurance, offer a guaranteed savings component. This can be helpful in building savings and providing a guaranteed payout to beneficiaries.
  7. Tax Benefits: Life insurance policies can offer tax benefits, such as tax-deferred growth and tax-free death benefits. This can be helpful in reducing the overall tax burden on your loved ones.

Some important facts of life insurance

Here are some important facts to know about life insurance:

  1. There are two main types of life insurance: term life insurance and permanent life insurance. Term life insurance provides coverage for a set period of time, while permanent life insurance provides coverage for life.
  2. Life insurance premiums are determined based on factors such as age, health, and lifestyle. The healthier and younger you are, the lower your premiums are likely to be.
  3. Life insurance policies have a beneficiary, or the person who will receive the death benefit if you were to pass away. It’s important to regularly review and update your beneficiaries as your life circumstances change.
  4. Life insurance policies have exclusions, such as suicide, that may not be covered by the policy.
  5. Life insurance policies may have a waiting period, known as the contestability period, during which the insurance company can investigate and deny a claim if there was misrepresentation or non-disclosure of information on the policy application.
  6. Life insurance policies have a death benefit, which is the amount of money that is paid out to the beneficiary upon the policyholder’s death.
  7. Life insurance policies may have a cash value component, which accumulates over time and can be used to borrow against or surrender for a payout.
  8. Life insurance policies can have additional riders, such as accidental death benefit, waiver of premium, or long-term care, that can enhance the policy’s coverage.
  9. It’s important to shop around and compare policies from different insurance companies to find the best coverage and rates for your individual needs.

Some Disadvantages of Life Insurance

While life insurance can provide important benefits, there are also some disadvantages to consider:

  1. Cost: Depending on the type and amount of coverage you choose, life insurance premiums can be expensive, especially for older individuals or those with health issues.
  2. Overinsurance: Some individuals may purchase more life insurance than they actually need, resulting in higher premiums and unnecessary expenses.
  3. Policy Limitations: Life insurance policies can have limitations and exclusions that may impact coverage. For example, some policies may not cover deaths resulting from certain causes, such as suicide or criminal activity.
  4. Limited Use: Unlike other types of insurance, such as car or home insurance, life insurance only provides benefits in the event of the policyholder’s death. It does not provide any other financial or health benefits.
  5. Complexity: Understanding the terms and conditions of a life insurance policy can be complex and confusing, making it difficult for some individuals to choose the right coverage for their needs.
  6. Tax Implications: The proceeds from a life insurance policy may be subject to taxes, which can impact the amount of money your beneficiaries receive.
  7. Premium Increases: Some life insurance policies may have premium increases over time, which can make it difficult to budget for and maintain coverage.
  8. Underwriting Process: The underwriting process for life insurance can be lengthy and may require medical exams and other documentation, which can be time-consuming and inconvenient.

It’s important to consider these factors when deciding whether or not to purchase life insurance and to choose the coverage that is best suited to your individual needs and circumstances.

Advantages of Life Insurance

  • Risk Cover– Life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event.
  • Planning for life stage needs– Life Insurance not only provides for financial support in the event of untimely death but also acts as a long term investment. You can meet your goals, be it your children’s education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options such as Money Back, Guaranteed Cash Values, Guaranteed Maturity Values.
  • Protection against rising health expenses– Life Insurers through riders or stand alone health insurance plans offer the benefits of protection against critical diseases and hospitalization expenses. This benefit has assumed critical importance given the increasing incidence of lifestyle diseases and escalating medical costs.
  • Builds the habit of thrift– Life Insurance is a long-term contract where as policyholder, you have to pay a fixed amount at a defined periodicity. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.
  • Safe and profitable long-term investment– Life Insurance is a highly regulated sector. IRDAI, the regulatory body, through various rules and regulations ensures that the safety of the policyholder’s money is the primary responsibility of all stakeholders. Life Insurance being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
  • Assured income through annuities – Life Insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life.
  • Protection plus savings over a long term– Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment; these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently.
  • Growth through dividends– Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends/bonus.
  • Facility of loans without affecting the policy benefits– Policyholders have the option of taking loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy they have bought.
  • Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of the plans.
  • Mortgage Redemption– Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family.

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