When you think of life insurance, the first thought that probably comes to your mind is securing the future of your loved ones. While this is absolutely true, did you know the actual life insurance meaning can go way beyond coverage? When used correctly, a life insurance policy can act as a financial asset for you. Just like many other investment products, life insurance can be used when you are alive and offer you the liquidity that you need to fulfil your financial goals.
So, read on as we try to demystify the life insurance meaning. Here’s hoping that when you understand what a life insurance policy covers and how it works, it will help you make well-informed decisions about you and your loved ones’ financial well-being.
Life insurance: Explained
Let us take a look at the very basic example of a traditional life insurance plan. Radhika Verma is a 30-year-old software designer. She buys a life insurance policy of Rs. 50 lakhs for the next 25 years. Her husband, Ramesh Verma, is her appointed nominee. In case Radhika passes away during the policy term, which is 25 years, Ramesh will receive the death benefit of Rs. 50 lakhs.
Now, this is how a traditional life insurance policy works. What happens if the insured outlives the policy depends on the type of life insurance plan that has been chosen? Broadly, life insurance in India can be classified into three categories:
1. Term life insurance
A term plan offers life coverage for a specified time period that can typically range from 1 year to the age of 65 or 70 years. Here, if the insured passes away in the given tenure, the nominee receives the sum assured, which is also called the death benefit. Hereafter, the policy comes to an end. In case the insured outlives the policy, nothing is payable, and the policy comes to an end.
Note: The only exception here occurs if you opt for ROP. In a Return of Premium (ROP) Plan, the premiums that are paid over the term period are returned when the policy matures.
2. Whole life insurance
While a term plan is available for a specific term, a whole life plan, as the name suggests, is an example of permanent life insurance. Your insurance company will pay the decided death benefit whenever the insured passes away.
3. Endowment life insurance plans
An endowment life insurance policy is said to be the ideal combination of insurance and investment. It offers both components, a death benefit and a survival benefit. Let’s use Radhika’s example to understand better. Here, if Radhika outlives the policy, at the end of 25 years, she will receive the survival benefit along with accrued benefit, if applicable.
Advantages of life insurance
Let us dig in a little deeper to understand how the advantages of life insurance plans make them a financial asset.
1. Ensure your loved ones’ financial security
Even if an unfortunate event occurs, the benefits received can help them prevent a financial crisis. With adequate cover, these plans can help your family members clear any outstanding debts that may be in your name.
2. Disciplined savings for long-term financial goals
When you commit to a life insurance policy, you need to pay the premiums regularly (unless you have opted for a single premium). This regularity calls for proper financial planning and inculcates disciplined spending.
3. Offers tax benefits
One of the most popular benefits of life insurance is the tax benefit. Under Section 80C, you may be eligible to get up to Rs. 1.5 lakhs of tax benefits against the premium that is paid in a year (if you qualify). The death benefit is always tax-free under section 10(10D). The maturity amount may also fetch your certain tax benefits if you qualify.
4. Make use of the liquidity option
If eligible, you may be able to take a loan against your policy. Depending on the type of plan you have opted for, it may be possible to surrender the policy and convert it into cash.
5. Invest in the capital market
With ULIPs, unit-linked insurance plans, you get the option to break up the premium. One part is kept for coverage, while the other can be invested in debt, balanced and/ or equity funds.
6. Enhanced coverage with riders
Adding riders to your base policy can enhance the coverage manifold. Depending on your needs, you can opt for a waiver of premium, accidental death, accidental disability, critical illness, and more.
Conclusion
The right life insurance policy can serve more than its basic purpose. When the benefits of insurance and savings are combined, you can make the most of your life insurance policy.
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