What is life insurance?

A formal contract for life insurance is made with an insurance provider. The insured, who is the person seeking insurance, agrees to make recurring payments under the terms of this agreement. These payments may be made in lump-sum premium installments as well as on a monthly, quarterly, or annual basis. In exchange, the insurance company promises to pay a sum of money, referred to as a death benefit, to the people the insured appoints as dependents in the event of the insured’s demise.

What is life insurance? Meaning of life insurance

For your family or business, life insurance acts as a safety net, giving you peace of mind. There are many different kinds of life insurance policies, but they all have the same objective: to pay out a lump sum of money, frequently all at once, to the people you choose as beneficiaries after your death.

The importance of life insurance

Making sure your loved ones have money when you pass away is possible with life insurance. It also supports several financial objectives, such as:

1. Protecting Your Family First: In the event of your passing, your family will get financial support.

2. Education: It can assist in financing your children’s education.

3. Wedding: Funds for the wedding of your child.

4. Home Purchase: You can utilize it to make a home purchase.

5. Retirement: Some schemes pay you when you retire.

Life insurance has the advantage of flexibility. In the future, you may use the cash for important items like a house purchase. It’s a means to guarantee that your plans are carried out even if you are not present.

What is life insurance, for example?

In order to better understand life insurance, three different types of policies—Term insurance, a savings plan, and an investment plan—will be used as examples.

1) Term life insurance

Think of yourself as a 35-year-old with a family to support. You decide to get a term life insurance plan.

Policy Type: You decide on a term insurance policy with a 20-year coverage period and an assured amount of 1 crore (10 million rupees equals one crore).

Premium Payments: To retain the coverage in effect, you must pay recurring premiums, such as Rs 10,000 each year.

Coverage Objective: Your family (beneficiaries) would receive the promised sum of Rs. 1 crore in the unfortunate event that something unfortunate occurs to you within the 20-year term.

The good news is that you stay healthy and survive over the 20-year period.

Scenario 1: No Event There is no reimbursement because the policy has expired in this instance. Having a safety net for those 20 years without using it is similar to having one.

Scenario 2: Untimely Event as the Outcome Sadly, an accident causes your death in the fifteenth year of the policy’s duration. The $1 million payment is given to your family. Your family can restore your lost salary with this cash, settle any outstanding bills, and safeguard your family’s financial future. 

2. Death Benefit Savings Plan:

Imagine you buy an endowment plan, a type of savings-oriented life insurance. You choose a 15-year endowment life insurance plan as your policy type.

Premium Payments: You make recurring premium payments, such as Rs. 20,000. These premiums are split into two parts: a savings component and a death benefit.

Maturity Benefit: If you live past the 15-year term, you will receive a maturity benefit that consists of the sum assured (for example, 5 lakh rupees) and the component of accumulated savings (for example, 3 lakh rupees). So you get 8 lakhs at the end of the term.

Death Benefit: However, if you were to pass away while the policy was in effect, your family would also get the sum assured in addition to the accrued savings component. For instance, if you die in your tenth year, your family will receive Rs. 8 lakhs to help them through an especially difficult time.

Maturity Outcome Scenario: You successfully complete the policy’s term with no adverse incidents. You earn an 8 lakh maturity benefit, which you can put toward a variety of expenditures, including a car, your child’s education, or increasing your retirement savings.

3. A plan of investment with a death benefit:

Consider a unit-linked insurance plan (ULIP), for example, which combines life insurance with investments.

Policy Type: You make a 15-year investment in a ULIP.

Premium Payments: You make routine premium payments, such as Rs. 25,000 a year. Depending on your risk tolerance, a portion of these premiums is invested in a combination of equities and bonds, with the remaining amount going toward the death benefit.

Fund Value: Based on the performance of the investment funds you’ve selected for the ULIP, the policy builds up a fund value over time.

Death Benefit: The ULIP additionally offers a death benefit. In the event of your passing within the policy’s term, your beneficiaries will receive the greater of the sum assured or the fund value. In this case,

The investments in your ULIP perform well over the course of the 15-year period, and the fund value increases dramatically. Your fund value might be, for example, 12 lakhs by the conclusion of the term.

In conclusion, these life insurance examples offer a death benefit to make sure your loved ones will be comfortable financially in the event of your passing. They also offer financial security during the policy term.

5 Benefits of Life Insurance

1. Guaranteed Protection: Life insurance in India gives guaranteed protection, ensuring that in the event of your demise during the policy’s term, your family or beneficiaries will be given a set amount of money.

2. Income Replacement: Life insurance works as an income replacement instrument by paying out a lump sum to cover your family’s expenses in the event that you are no longer able to do so.

3. Flexibility: Life insurance plans in India offer flexibility with regard to premium payments, coverage options, and policy terms, letting you select a plan that matches your unique financial goals and situation.

4. Grants/Loans: Some life insurance policies, such as endowment plans, may give policyholders the choice to borrow money against the policy’s cash value, providing money for unanticipated expenses or other financial needs.

5. Tax Advantages: In India, life insurance premiums and payouts frequently have tax advantages. It is a desirable tax-saving and financial planning instrument because the premiums paid are tax deductible under Section 80C of the Income Tax Act, and the death benefit received by beneficiaries is often tax-free under Section 10(10D).  Tax benefits may stand changed as it is revised time to time by Income tax department

FAQs (Frequently asked questions)