Life insurance is a form of insurance that, as its name suggests, literally insures your life! A good financial plan includes both investment and insurance, and life insurance should be a key part of it. Hence, it is essential to comprehend the purpose and goals of life insurance.
Understanding Life Insurance and Its Meaning & Definition
Let's break down the concept of life insurance and understand what a life insurance policy entails. It is a form of insurance that aims to secure the financial future of your family when you are not alive. Today, your family members, such as your spouse, children, or parents, may depend on your income to support their needs. For example, your spouse and parents might rely on your earnings to maintain their standard of living, while your children look to your income for their education. Things may be all well and good when you’re alive, but what if you suddenly pass away? They may be in a fix, right? They may have to overcome financial difficulties (such as loan repayment or maintaining their current lifestyle) without you around, and to do the same, they may have to tap into their existing wealth (leading to wealth erosion) or take up other loans. Having a life insurance policy can help in preventing or at least reducing these difficulties for them.
Some life insurance policies (such as endowment plans and unit linked insurance plans) also offer you the chance to grow your money and get returns on maturity, i.e., at the end of the policy tenure. So essentially, such policies are not just helping you secure the financial future of your family but also build wealth.
How Does Life Insurance Work?
A life insurance policy is a contract offered by an insurer that pays your family money when you pass away during the policy period. This payout can help your family overcome financial difficulties that may arise when you pass away. To keep the contract active, you have to pay a fee called as premium. Let’s take a small example to understand its working.
Ramesh is a 30-year-old software engineer who purchases a term plan (a type of life insurance policy) with a Rs. 1 crore life cover to help secure his family’s financial future. He regularly pays premiums (that is, the fees for keeping the policy active) for the plan. Ramesh had taken a home loan to buy a 2 BHK flat. At the age of 40, unfortunately, Ramesh passes away due to a road accident, but his home loan amount is yet to be fully repaid. His family is at the risk of losing their home, but their life insurance plan comes to their rescue. Upon his family member initiating a claim for Ramesh’s term plan, they receive the life cover of the plan, which is Rs. 1 crore. This payout helps them repay the existing loan and make the house their own. While losing a loved one is an irreversible loss, a life insurance policy can at least help the family heal from financial wounds.
Further, some life insurance policies, such as unit linked insurance plans (ULIPs), offer life cover as well as the chance to grow your money.
Types of Life Insurance Plans in India
1. Term insurance: It is a pure protection policy that offers only a life cover and covers you for a certain period of time. It does not offer any investment component that can be used to grow your money.
2. Whole life insurance: This plan covers you for your entire life and provides the life cover payout to your family when you pass away. These policies cover you till you turn 99 years old, and they can be used for inheritance planning, i.e., passing down your wealth.
3. Endowment plan: In this plan, a maturity benefit is given when you outlive the plan. Unlike term plans, which pay the life cover to the family members only when the policyholder passes away, endowment plans pay the life cover when the policyholder passes away as well as when they survive the policy duration.
4. Money back plan: Similar to an endowment plan, this plan too offers a maturity benefit. You receive the benefit as instalments after the end of the policy term. A portion of the sum assured gets paid over regular intervals during the policy period, and the remaining portion gets paid after the end of the policy period.
5. Child plan: This life insurance plan aims to secure the financial future of your child in your absence. They have an investment component aimed at building a corpus for your child (which can be used for their education, marriage, etc.), along with a life cover, helping in securing your child’s financial future.
6. Pension plan: This plan can help you in creating a regular income stream post your retirement. They help in making a financial foundation for your retirement years.
7. Unit linked insurance plan (ULIP): This plan offers you a life cover component as well as an investment component, essentially allowing you to secure the financial future of your family and giving you the chance to grow your money.
Benefits of Life Insurance Plans
Now that you’re familiar with life insurance, let’s delve into the many benefits that a life insurance plan provides.
1. Protection: Life insurance policies help you to protect the financial future of your loved ones when you pass away unexpectedly. Their life cover payout can help your family overcome financial difficulties when you’re not around. When you buy a life insurance policy, you will have the peace of mind knowing that your family is financially protected in case you pass away unexpectedly.
2. Investment: Some life insurance policies, such as endowment plans and unit linked insurance plans (ULIPs), offer a powerful combination of financial protection and wealth creation. Unlike term insurance, which solely provides a death benefit, these investment-oriented life insurance policies enable you to build a substantial corpus over time while ensuring your family’s financial security.
3. Tax benefits: Under Section 80C of the Income Tax Act, 1961, you can claim tax deductions on annual premium payments up to Rs 1.5 lakh. Additionally, the maturity benefits of policies where the total premiums paid do not exceed Rs. 5 lakh are tax-exempt under Section 10(10D). Moreover, the death benefit paid to your family during the policy term is completely tax-free, providing financial security without any tax implications. These tax benefits make life insurance not only a tool for securing your family's future but also a strategic component for optimising your tax liabilities. However, your policy will need to meet certain conditions to get these benefits, which you can discuss with your financial advisor.
How to Choose the Right Life Insurance?
The wide range of life insurance plans available in India can feel overwhelming. To choose the right one effectively, it’s important to first understand what life insurance entails and clearly define your financial goals. For example, if your primary objective is to secure your family's financial future in an affordable manner, a term plan may be the ideal fit for you. On the other hand, if you aim to both protect your family's financial future and grow your wealth, a unit linked insurance plan (ULIP) could be agreat choice for your needs.
How Much Life Insurance Cover Do You Need?
Another important aspect to consider before purchasing a life insurance policy is determining the adequate life cover you need. To simplify this process, use the underinsurance checker tool to quickly get the ideal life cover recommendation. While there are various methods to assess your required coverage, this calculator offers a simple and accurate way to ensure you are not underinsured.
Additionally, you can calculate your coverage manually using the formula provided below:
Life cover = Number of Years You Plan to Work for x Your Current Annual Income*
*It is the pre-tax annual income that you earn by actively working, aka the income that’ll stop coming in if you’re not around. It includes your salary and business income but not any rental income, interest, and dividend.
When you pick a life insurance policy, try to meet your adequate life cover need. If one plan is not able to meet your need, you can consider buying multiple plans till this need is met.
How to Buy Life Insurance Online
Now that you understand what life insurance is, purchasing a policy can be a straightforward and convenient process, especially with the option to buy online, depending on the insurer. Here’s how you can go about buying a life insurance policy in India online:
1. Visit a buying platform (such as an insurance aggregator website or the website of the insurer).
2. Compare different life insurance policies or just select the one that fits your needs.
3. Provide all the required information to submit your life insurance application. Be sure to declare all required information truthfully so that the chance of your policy claim rejection is less later on.
4. Make the required payment.
5. You’ll get an online acknowledgement, and you’ll receive the digital copy of your life insurance policy document.
Is Life Insurance Worth It?
If you have family members who rely on you financially, understanding life insurance is essential for effective financial planning. While investments help in building wealth, a life insurance plan acts as a critical safeguard to ensure your family's financial security in your absence.
Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
Frequently Asked Questions
Q1. What is life insurance in simple words?
A life insurance policy is a contract that gives a payout to the family of a policyholder upon the policyholder’s death during the policy period. A fee called premium, is required to keep a life insurance policy active.
Q2. Is life insurance worth buying?
The biggest benefit that a life insurance policy offers is that it helps you secure the financial future of your family. If you have family members depending on you financially, consider getting a life insurance policy.
Q3.How many beneficiaries can be on a life insurance policy?
You can have multiple nominees for your life insurance policy.
Q4. How long does it take to get the life insurance amount after a death?
When a claim is submitted, your insurer will accept/reject it in:
1. 15 days if no investigation is required
2. 45 days otherwise
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