There’s no doubt that compared to previous generations, today’s generation is more aware of financial planning. That said, most individuals focus on investments and building a corpus, but fail to consider the one key component of financial planning — purchasing Life Insurance.
Most financial advisors agree that insuring your life and providing for your dependents — in the case of an unfortunate incident — is a must before you focus on other aspects of your financial security. Here we shine the spotlight on all that you need to know about Life Insurance — right from the definition, benefits, to the different types of Life Insurance available.
What is Life Insurance and why do you need it?
Simply put, it is a contract between you and your insurance company. You pay the insurance company premiums over a period of time. In return, it provides your dependents — spouse and children — with a lump sum amount if you pass away during the term period.
Life Insurance helps your family find their financial footing if something happens to you — the breadwinner of the family.
Here are the top benefits of Life Insurance policies:
- Life Cover – This is the biggest benefit of Life Insurance policies. In case an unfortunate accident happens, and the policyholder passes away, the insurance company provides monetary compensation to the family (spouse or children) of the insured.
- Helps to Build a Corpus – Some types of life insurance plans, like child plans, retirement plans, Unit Linked Insurance Plans (ULIPs) and endowment plans help you build a corpus apart from providing life cover.
- Guaranteed Sum Assured : Most insurance policies — apart from term insurance — provide the insurer with a guaranteed Sum Assured at the time of maturity.
- Tax Benefits – The premiums you pay towards your Life Insurance policy, as well as the sum you receive on maturity of the plan or death benefits, are free from taxation under Section 80C and Section 10D of the Income Tax Act. However, the actual tax benefits vary based on your policy type, the premium amount you pay and other factors.
- Loan on Life Insurance – Some lenders, as well as insurance companies, allow you to borrow a particular sum of money using your Life Insurance policy documents. Here, your insurance policy acts as your collateral.
- Financial Planning – Life Insurance policy plans also act as a mode of investment, like ULIPs, endowment plans, child plans and retirement plans — thereby helping you plan your finances in tune with your specific requirements at each stage of life.
Popular Types of Life Insurance Policies
1. Term Plan
This is the basic type of life insurance. These plans come with a fixed period – say 10, 20, or 30 years. If the policyholder passes away during the term covered by the plan, the insurance company pays the death benefit to the nominee. These plans don’t come with other maturity benefits, so the premiums are much lower compared to other Life Insurance policies.
Best benefit: High life coverage for lower premiums.
2. Whole Life Insurance
This is similar to term insurance, but here the policyholder is covered for the entire duration of his/her life, unlike term insurance which offers coverage only for a specified term. The Sum Assured is given to the nominee after the death of the policyholder.
Best benefit: Life coverage that never expires.
3. Endowment Plans
This insurance plan is a combination of Life Insurance as well as savings. A part of your premium is used to pay for your life cover, while the rest is used for investments. One major difference between endowment plan and term plan is that the former offers maturity benefits to the policyholder if s/he outlives the term of the policy. However, if the policyholder passes away during the term, the nominee receives the death benefits.
Best benefit: Unlike term insurance, where you don’t receive any maturity benefit, endowment plan offers maturity benefits and other bonuses to the policyholder.
4. Money-back Life Insurance
This is similar to the endowment plan. However, one major difference is that this plan offers a percentage of the premium as money back to the policyholder at regular intervals.
Best benefit: The regular payouts help the policyholder meet short-term financial goals.
5. Unit Linked Insurance Plan (ULIP)
This is a combination of both insurance and investment. The premium you pay gets divided between investing in equities and purchasing risk cover. You can choose the funds you want to invest in, based on your risk profile.
Best benefit: You get life coverage as well as get started with investments using a single plan.
6. Child Plans
These are special types of Life Insurance policies which help parents build a corpus to fund their child’s higher education or marriage. The Sum Assured is provided as one-time payout or annual instalments, once the child reaches the age of 18 If the parent of the insured passes away during the term of the plan, the child is provided with the Sum Assured immediately.
Best benefit: Helps save for your child’s future.
7. Retirement Plans
These are Life Insurance plans that help you build funds for the future. Just like Child Plans, these policies provide payouts — annual or one time — once the policyholder reaches the age of 60. In case the policyholder passes away during the term, the Sum Assured is paid to the nominee.
Best benefit: Helps plan for a financially independent retirement.
Final thoughts: Which is the best Life Insurance policy?
Just like two different individuals don’t lead the same life, similarly, no single policy suits all. Go through the different types of Life Insurance policy plans and compare policy documents so that you can pick the right one that matches all your specific requirements.
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