If you are wondering what life insurance or life insurance means, you should know that a life insurance policy is an agreement between an individual and an insurance provider so that the insurance company provides financial protection to the policyholder in exchange for a monthly or annual fee (known as a premium).
Before buying your life insurance, it is important to understand the definition, type, benefits, and features of life insurance.
According to the definition of life insurance, the insurer (insurance company) provides insurance to the policyholder or nominee, in exchange for the premium payment for the life insurance policy, if the policyholder dies prematurely, his family or nominee receives a guaranteed amount. Based on the contract, in case of death of the policyholder or, when the policy matures, the insurer pays a single amount to the person or his family after a certain period.
What is a life insurance premium?
Simply put, “life insurance premium” means you pay your life insurance company for your coverage. Life insurance premiums can be regular monthly/annual payments or lump sum payments. Payment (also called Death Benefit) is a life insurance company that will pay your beneficiaries if you die unexpectedly during the term.
Types of life insurance?
Now that you are aware of the meaning of life insurance and the definition of life insurance, you should know the main types of life insurance plans:
Conventional life insurance
Traditional life insurance plans offer multiple benefits in terms of life cover and returns, providing security and safety to insurers. These policies are considered risk-free. This is because they provide a cover amount in case of the death of the insured or at the end of the term. There are three types of this life insurance plan:
- Term life insurance
- Guaranteed return plan
- Money back policy
Term life insurance: plans are generally considered to be risk-free, low cost, and generally have maximum coverage. These plans are purchased for a specific period (e.g. 10 years or 20 years). This plan pays a fixed payment in case of the death of the insured or at the end of the term. Term life insurance plans are the purest form of life insurance, as they provide life cover without any savings or profit component.
Guaranteed return plan: Endowment plans provide financial protection through life cover with guaranteed returns. If the policyholder survives till the maturity date of the policy, he will get a lump sum. The amount of life covered with these plans is much less and people usually buy these plans for the convenience of maturity. These plans are great if you save for big purchases.
Money-back policy: In a money-back policy, the customer receives a fixed percentage of the guaranteed amount for a guaranteed payment over some time. In short, a money-back plan is an endowment plan with liquidity. In this way, the policyholder can achieve short-term financial goals.
ULIPs (Unit Linked Insurance Plans) offer the individual both protection and savings with flexibility. Since these products are linked to the stock market, they are more likely to give better returns than traditional life insurance plans. There is a risk of low returns with high returns, which will depend on market performance. Depending on the risk tolerance of the policyholders, they may invest in various funds provided by the insurer. The insurer then invests the collected amount in various shares and equities.
Advantages of life insurance plan
Once you understand what life insurance means and understand the different types of life insurance policies, let’s take a look at the 4 main benefits of getting the best life insurance policy and what it is.
- Financial security
- Long-term savings
- Investment Options
- Tax benefits
Financial security: Life can be unpredictable and full of uncertainty. It is difficult to reduce the chances of an unfortunate event like death. In such a situation, the family faces a financial crisis arising from a lack of fixed income. Investing in the best life insurance policy early in life serves as a safety blanket during such events. According to the definition of life insurance, the insurer is obliged to pay a pre-determined sum assured to the nominee or beneficiary. As a result, his family is protected even in the absence of a policyholder.
Long-term savings: If one wants to make long-term investments, it is important to think about the meaning of life insurance. These types of insurance plans help you make systematic savings and create a corpus, which can be used for a variety of reasons, such as building a new home, attending a quality school for your child, and financing the cost of a child’s marriage.
Investment Options: Understanding the meaning of life insurance in your financial context will allow you to plan your investment efficiently. Life insurance providers offer Unit-Linked Investment Plans (ULIPs), which are basically investment instruments based on market-linked returns and life insurance, meaning you can get dual benefits through a single financial product. These market-linked life insurance plans offer significant returns at maturity, so they make ULIPs a reliable investment tool.
Tax benefits: There are income tax benefits on life insurance under sections 80C and 10D of the Income Tax Act. Under Section 80C, you pay a premium for a life insurance policy which qualifies for a rebate of up to1.5 million, while Section 10 (10D) exempts income if the premium does not exceed 10% of the sum insured or Insurance is at least 10 times the insurance premium.