Life Insurance
What is Life Insurance?
Life insurance is a contract between an insurance policyholder and an insurer. In exchange for regular premium payments, the insurer agrees to pay a lump sum, known as the death benefit or sum assured, to a designated beneficiary upon the insured person’s death. This financial tool ensures that your family is protected from financial hardship in your absence.
Why is life insurance important?
Beyond providing a financial safety net, life insurance helps with several aspects of financial planning:
- Income replacement: It provides a reliable stream of income for dependents who rely on the policyholder’s earnings to maintain their standard of living.
- Debt repayment: The payout can be used to clear outstanding liabilities, such as home loans, car loans, and credit card debts, preventing the financial burden from falling on surviving family members.
- Funding future goals: Some policies help build a financial corpus to achieve long-term goals, such as a child’s education or marriage expenses.
- Tax benefits: In many regions, the premiums paid may be eligible for tax deductions, and the death benefit is often tax-exempt.
- Peace of mind: Knowing that your family’s financial future is secure provides immense peace of mind and allows you to focus on the present.
Types of life insurance policies.
Understanding the different types of life insurance can help you choose the right one for your specific needs.
1. Term insurance
- What it is: A pure protection plan that covers you for a fixed period, like 10, 20, or 30 years.
- How it works: If the insured person dies within the policy term, the nominee receives the sum assured. If they outlive the policy, there is typically no payout.
- Best for: Young professionals, new parents, and sole breadwinners who need high coverage at an affordable premium.
2. Whole life insurance
- What it is: A permanent policy that provides coverage for the insured’s entire life, often up to 99 or 100 years of age.
- How it works: It includes a cash value component that grows over time. The death benefit is paid to beneficiaries upon the policyholder’s death, whenever it occurs.
- Best for: Individuals seeking lifelong coverage and a savings component, or those who want to leave a financial legacy.
3. Unit-Linked Insurance Plans (ULIPs)
- What it is: A hybrid plan that combines life insurance with investment options.
- How it works: Part of the premium pays for the life cover, while the rest is invested in market-linked funds (equity, debt, or balanced funds).
- Best for: Investors who are comfortable with market risks and want long-term wealth creation along with a life cover.
4. Endowment plans
- What it is: A plan that combines life protection with guaranteed savings.
- How it works: It provides a lump sum on either the policyholder’s death or when the policy matures.
- Best for: Individuals looking for both financial security and systematic, risk-averse savings for a specific goal.
5. Money-back policies
- What it is: An endowment-style plan that provides periodic payouts, called survival benefits, during the policy term.
- How it works: The balance of the sum assured, plus any bonuses, is paid out at maturity or on death. The full sum assured is paid on death, regardless of any survival benefits already paid.
- Best for: Those who need liquidity at various life stages while retaining insurance protection.
Who should buy life insurance?
- Parents and breadwinners: To secure their children’s education and future, as well as to ensure the family’s financial stability.
- Business owners: To ensure business continuity and protect against the financial instability that could result from a partner’s or key employee’s death.
- Individuals with outstanding debts: To ensure that liabilities such as home loans do not become a burden on their family.
- Married couples: Even if both partners work, life insurance provides a safety net to cover expenses and maintain their lifestyle if one partner passes away.
- Young adults: Buying a policy early in life can lock in lower premiums for long-term financial protection.