Insurance is an important safety net for every individual and household, helping them tackle the financial impact of contingencies and unforeseen scenarios, from the loss of life to damages to property and even health problems. Amongst the plethora of insurance options available, life insurance is a crucial addition to any financial portfolio. But what is life insurance? Here is learning more about the same in this article.
Life Insurance– A Simple Definition
What is Life insurance- it is a specific type of insurance where the insurance company covers the life of the insured individual in return for a fixed premium amount, payable over the fixed tenure of the policy. In the event of the unfortunate demise of the individual within the policy period, the insurance company pays the sum assured or death benefit to the policyholder’s nominee. This enables the insured person’s family to tide over the financial impact of the loss, meet lifestyle costs, repay debts, or take care of future goals.
There are several kinds of life insurance plans available. Term insurance plans are pure life coverage policies that only provide death benefits and have no accompanying maturity benefits. If the insured survives the policy term, there are no payouts from the insurance company, and the policy terminates accordingly. There are also other plans like endowments or ULIPs, which come with maturity benefits along with life coverage.
Why Should You Purchase Life Insurance?
Now that you know what is life insurance, you should know the key reasons to invest in the same. These include the following:
- Life insurance guarantees the financial well-being of your family in the event of your unfortunate demise within the policy period.
- It helps the family members take care of future needs in your absence, including the higher education of your children or their weddings in the future.
- Life insurance also helps compensate for the loss of income due to the demise of the family’s primary breadwinner, helping them meet monthly expenses.
- Life insurance ensures handsome tax savings for insured individuals under Section 80C. Premium payments for life coverage are eligible for tax deductions up to Rs. 1,50,000 under this Section. At the same time, life insurance payouts from insurance companies due to the policyholder’s demise are exempted from taxes under Section 10 (10D).
- Life insurance also helps you plan for your retirement and other future goals. You can do this with the help of specifically tailored policies, including ULIPs, endowment plans, and even child plans for meeting your family’s future requirements. You also get accompanying life coverage with these types of plans.
- Life insurance helps family members pay off existing debts or liabilities upon the demise of the insured individual within the policy period. For example, if you pass away with a pending home loan, your family can repay the same swiftly with the sum assured amount without worrying about paying the monthly EMIs in your absence.
- Life insurance is not a costly investment; it ensures high coverage for people in good health for comparatively lower premiums. The earlier you start investing in life insurance, the lower your premiums.
- You can customize your life insurance plan by adding riders to the same. These include waiver of premiums, critical illness, and more. These can be availed by paying an additional premium over and above the life coverage amount. This may also help you get additional tax benefits while widening the overall scope of coverage to include various other scenarios. For instance, if you choose a critical illness rider, the premium payments are eligible for tax deductions up to Rs. 25,000 (for non-senior citizens) and Rs. 50,000 (for senior citizens) under Section 80D.
- Life insurance ensures peace of mind for all policyholders as their families are secured even in their absence. This is the biggest benefit and reason to purchase these plans.
Buying Life Coverage: Some Handy Tips
There are several tips that you should keep in mind while purchasing life insurance coverage. These include the following:
- You should be careful to choose suitable coverage, depending on your family’s projected future financial requirements (factoring inflation into the calculation). Ensure you account for future educational and other goals, along with your current liabilities.
- The usual thumb rule is that the coverage should at least be 10-15 times your yearly income. You may go for 20 times your annual income to account for inflation and other goals. There are many calculation methods you can check out in this regard that can help you accurately determine your ideal cover amount.
- You should compare life insurance policies from multiple insurers before finalizing the best one for your needs. Compare them based on parameters like the coverage amount vis-à-vis the premium, the inclusions and exclusions, benefits, the insurer’s reputation, and the claim settlement ratio (the ratio of claims settled to the total number of claims).
Hence, now you have an idea of what is life insurance and these are some tips that will help you while buying life insurance. Needless to say, it is an imperative component of every financial portfolio.