We live in a world of uncertainties, where the least we can do to safeguard the future of our loved ones is to protect their financial freedom for times when we are not around to take care of them. In this regard, a life insurance plan can help you achieve this goal with much ease. As you know life insurance is a legally binding contract between the policy buyer and insurance company in which the insurer offers financial cover or protection to the insured and extends a death benefit to the policy nominee in the event of the untimely death of the insurance holder. It may also offer a bonus or a maturity benefit, if applicable on the life insurance plan. Notably, this coverage is offered in exchange for a predefined premium amount that you need to pay to the insurer at prefixed date over a period of term. This premium is determined based on your risk profile as a policy buyer, your financial standing, and your insurance cover needs. However, to make the most of this feature it is important to know more about what is life insurance and its scope. This will help select a plan and focus more on financial planning.
How Does a Life Insurance Policy Work?
As mentioned, life insurance is a contract where you need to pay a premium for a period of time to avail of financial coverage. The protection will help cover financial liabilities arising due to the death or accident of the insured during the policy term or act as a replacement for their income. The death benefit helps the policy beneficiaries to meet their financial obligations and remain financially independent till they get back on their feet.
On the other hand, in case of an accident or surviving the maturity period, you may avail an accidental benefit or maturity benefit, respectively, and meet your financial needs. The features and benefits of life insurance would depend entirely on the type of policy you pick. For instance, term insurance is a pure protection plan that will offer only life cover for a prefixed period of time against a predefined premium amount. In case you survive the policy term you will not receive any bonus or maturity benefit. Such a plan offers death benefits when the insured succumbs to untimely death during the policy term.
On the other hand, a term plan with return of premium add-on may offer a part of the premium paid during the claim process, if applicable. In the case of whole life insurance, the plans extend life cover and cash value to the insured. You can avail a cover for your entire life and also choose to withdraw money from the accumulated premium amount. However, the borrowed sum must be returned or it could impact the death benefit.
What are the Key Benefits of Life Insurance?
The most common benefit of a life insurance plan is that it is designed to offer financial protection against unforeseen situations and helps create a provision to support family members. Depending on your choice of insurance, you may find some plans with long-term protection coverage while others with extended investment benefits. Other key benefits of insurance include –
- Financial protection
The death benefit or sum assured that insurers offer to policy beneficiaries in the event of the death of the insured helps replace their income. This promised sum offers security to family members and helps safeguard their financial standing. Typically, sum assured is a substantial amount that can help your family account for their living expenses and meet sudden financial obligations with ease without depending on others or withdrawing from their savings. To ensure optimal security of family members, take into account their living standard and annual expenses and then seek a plan with a sum assured that can help cover it. You can use an online insurance calculator to determine the suitable sum assured and premium.
- Facilitates savings
In order to keep your insurance plan active, you would be required to pay policy premiums on a regular basis. Failing to pay premiums on time can lead to policy lapse or cancellation altogether. This regular premium schedule will help you inculcate the habit of savings and mobilizing a part of it towards insurance. However, to ensure you can pay the premium without straining your budget, opt for plans that suit your payment capacity.
- Tax saving benefit
Life insurance plans are eligible for tax benefits. For instance, you can claim up to Rs. 1.5 lakh from premiums paid in a year under section 80C of the Income Tax Act. This will help you save significantly on your premiums and increase your disposable income.
- Savings component
Some insurance plans like ULIP can help you build a corpus over time. Plans like ULIP come with features of protection and investment where a part of your premium will go towards your life cover and rest towards market-linked schemes. This way you can build a protection cover and accumulate earnings in the form of returns on investment. The accumulated sum can help you meet your financial goals and account for future obligations with ease. However, in the case of picking plans with investment components, it is important to understand whether they align with your risk-taking capacity. Also, carefully choose investment instruments to park money so that you can enjoy the benefits of investing without exposing your capital to market risks.
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Life insurance plans are among the safe options for long-term investment and financial planning. They can help you build a financial security net for your loved one and help save money over time. Additionally, they can help facilitate tax savings allowing you to save more and grow your corpus. While all these features make life insurance a lucrative financial plan, you must check and compare all policies and their offerings to pick the best for your needs. You can use online comparison tools that can help you compare key offerings and check the limitations of multiple plans at once. Subsequently, after knowing what life insurance is, you must use an online insurance calculator to understand which sum assured would be suitable for your family’s needs and if the accompanying premium would be easy on your pocket. Based on this you can pick a suitable plan and lower your concerns about your family’s financial security.
