Everything to Know About Life Insurance

The uncertainty of life has always been a bitter pill to swallow. We might be fine now, but who’s to say what the next hour holds? The pandemic served as a stark reminder of this fact, as it managed to target individuals who considered themselves too healthy to require insurance. 

Although we cannot save ourselves from all of life’s uncertainty, there is a financial tool to ensure your family’s financial security in case of your unfortunate demise. It is called ‘life insurance’. 

What is Life Insurance? 

Life Insurance is a financial tool that ensures the security of family or dependents in case of the unfortunate demise of the insured member. 

Let’s understand this with an example. Rahul has taken life insurance for ₹50 Lakh till age 65. In the event of his untimely demise, before he turns 65, the life insurance provider will pay ₹50 Lakh to his dependents left behind. To receive this coverage, Rahul has to pay a premium for a fixed period, which may vary from one to 5 years or until the complete policy tenure, depending on the plan he selects. 

Now, what happens if Rahul survives the insurance coverage period? Two things may happen – either he will be offered a certain sum at maturity if he opts for a guaranteed return life insurance plan (Endowment, Moneyback, Ulip, etc.), or he will not be paid anything, as is the case with a pure protection plan called- term life insurance.  

Life Insurance Benefits

Still unsure of why having life insurance is so critical? Here are some of the most significant benefits of life insurance: 

1. Financial Security

First things first –  After your death, your family will receive a predetermined sum from the insurance company, depending upon your insurance cover amount. This monetary support will help your loved ones continue their lifestyle as well as aid them in pursuing their aspirations when you’re gone. 

2. Tax Benefits

Investing in life insurance also comes with added tax benefits. According to Section 80C of the Income Tax Act, you can avail of a tax deduction of up to ₹1.5 Lakhs on insurance premiums. Furthermore, under section 10(10D), your family will be exempted from any tax liabilities on the death claim made on your insurance policy. 

3. Collateral Instrument

Not many people know this, but an insurance policy can also serve as a collateral instrument. You can pledge your life insurance as collateral when you avail of loan products, like a home or car loan. This can come in handy in times of financial emergency. 

4. Wealth Creation

A term life insurance will provide you with funds only if you pass away during the insurance tenure. However, other life insurance products guarantee some maturity amount. This is a two-in-one package, giving you protection and an investment opportunity. However, remember that investment should not be the motivation for life insurance. You must prioritize the well-being of your loved ones and select a plan that will benefit them the most when you’re gone.

Most Popular Types of Life Insurance & When to Choose Them

Here are some of the most popular types of life insurance plans:

1. Term Life Insurance

You should choose term life insurance if you want pure life coverage at a relatively low cost. It is especially ideal if you want to ensure the maximum financial security of your loved ones in case of your untimely demise.

2. Term Life Insurance with Return of Premium

This plan is a good option if you want the benefits of term life insurance and the added advantage of getting premiums back (excluding tax) if you survive the policy term. 

3. Unit Linked Insurance Plans (ULIP)

If you are willing to take on some investment risks, ULIP plans are a good option. Here, you can get a life cover and an appreciated income through its investment aspect. But remember, these plans are market-based. This means the return value will have an associated market risk.

4. Endowment Plans

Endowment plans are ideal if you are looking for a combination of insurance and savings. Here, you get access to a fixed lump sum at maturity, along with the bonus in case of survival till the insured period. In the case of demise, the nominee receives the death benefit. 

5. Money-back Policy

A money-back policy is a good option if you are looking for a source of income. This insurance plan allows you to receive periodic payouts or a lump sum return at a specific point during the tenure. Like other life insurance types, the nominee gets the death benefit in the case of the policyholder’s demise. 

6. Whole Life Insurance

As the name suggests, a whole life insurance plan ensures you are secured until the age of 99. It is ideal if you opt for insurance much later in your life. 

7. Group Life Insurance

Under this life insurance variant, you can provide a life cover to a group of people under a single master contract. Employers usually provide it as a part of employee benefits.  

8. Child Insurance Plans

This insurance plan is a good option if you specifically want to insure your child’s future. These plans cover specific needs like their higher education or marriage. 

9. Retirement Plans

Consider retirement plans to build an impressive corpus for your retirement years. These insurance plans offer a life cover and the added benefit of post-retirement income. 

How to Choose Your Life Insurance?

For starters, don’t sign up for any random life insurance plan that comes your way. To find the right plan that compliments your lifestyle, thoroughly researching its pros and cons is essential. 

Here are the top factors that you must keep an eye out for:  

1. Coverage Assured

Life insurance will hold no value if it cannot cover your family’s expenses. Hence, you must ensure that your coverage amount is enough to cover all future family costs. You can calculate your coverage needs using the Human Life Value (HLV), income replacement or Expense Replacement (ER) methods. 

2. Insurance Term

Another factor to think about when choosing a policy is the insurance term. Ideally, coverage till retirement is crucial, giving you ample time to accumulate savings or pay off debts. However, you can also consider longer-term or whole-life insurance for extended security. 

3. Policy features

Insurers offer various added benefits like terminal illness coverages, waiver of premiums, smart exit benefits, etc. Be careful while choosing products since these added benefits can be a game changer when managing your policies and ensuring your nominee gets the most from the plan. 

4. Insurer’s history and claim settlement records

The last thing you want when buying life insurance is for your family not to receive the insurance amount. Therefore, it’s essential to carefully review the insurer’s track record through claim settlement ratio, amount settlement ratio, scale of business, etc. Also, do not forget to familiarize yourself with the clauses, especially the policy’s exclusions, to ensure financial protection for your family. 

5. Premium Payments

Now that you have the cover amount, coverage period, and the list of insurers you can go ahead with, choose the plan that will allow you to pay the insurance premiums comfortably. Choosing a plan with high premiums will strain your finances and put you at risk of discontinuity of the plan. However, underinsuring yourself just because of premium is also a blunder. Be smart, calculate the premium that does not impact your other investments and protect your family’s future. 

Key Takeaways

More than the financial benefits, choosing the right type of life insurance will provide peace of mind, ensuring your family is financially secure in your absence. However, just buying anylife insurance plan will not do the trick. You must choose a provider that aligns with your needs and makes the claim process simple and convenient for your family. You can consider platforms like PhonePe for a seamless and hassle-free life insurance purchase experience.