What is life insurance? Its types and benefits

November 29, 2018

What is Life Insurance? What are its types and benefits?

There’s no doubt that compared to previous generations, today’s generation is more aware of financial planning. That said, most individuals focus on investments and building a corpus, but fail to consider the one key component of financial planning — purchasing Life Insurance.

Most financial advisors agree that insuring your life and providing for your dependents — in the case of an unfortunate incident — is a must before you focus on other aspects of your financial security. Here we shine the spotlight on all that you need to know about Life Insurance — right from the definition, benefits, to the different types of Life Insurance available.

What is Life Insurance and why do you need it?

Simply put, it is a contract between you and your insurance company. You pay the insurance company premiums over a period of time. In return, it provides your dependents — spouse and children — with a lump sum amount if you pass away during the term period.

Life Insurance helps your family find their financial footing if something happens to you — the breadwinner of the family.

Here are the top benefits of Life Insurance policies:

  • Life Cover – This is the biggest benefit of Life Insurance policies. In case an unfortunate accident happens, and the policyholder passes away, the insurance company provides monetary compensation to the family (spouse or children) of the insured.
  • Helps to Build a Corpus – Some types of life insurance plans, like child plans, retirement plans, Unit Linked Insurance Plans (ULIPs) and endowment plans help you build a corpus apart from providing life cover.
  • Guaranteed Sum Assured : Most insurance policies — apart from term insurance — provide the insurer with a guaranteed Sum Assured at the time of maturity.
  • Tax Benefits – The premiums you pay towards your Life Insurance policy, as well as the sum you receive on maturity of the plan or death benefits, are free from taxation under Section 80C and Section 10D of the Income Tax Act. However, the actual tax benefits vary based on your policy type, the premium amount you pay and other factors.
  • Loan on Life Insurance – Some lenders, as well as insurance companies, allow you to borrow a particular sum of money using your Life Insurance policy documents. Here, your insurance policy acts as your collateral.
  • Financial Planning – Life Insurance policy plans also act as a mode of investment, like ULIPs, endowment plans, child plans and retirement plans — thereby helping you plan your finances in tune with your specific requirements at each stage of life.

Popular Types of Life Insurance Policies

1. Term Plan

This is the basic type of life insurance. These plans come with a fixed period – say 10, 20, or 30 years. If the policyholder passes away during the term covered by the plan, the insurance company pays the death benefit to the nominee. These plans don’t come with other maturity benefits, so the premiums are much lower compared to other Life Insurance policies.

Best benefit: High life coverage for lower premiums.

2. Whole Life Insurance

This is similar to term insurance, but here the policyholder is covered for the entire duration of his/her life, unlike term insurance which offers coverage only for a specified term. The Sum Assured is given to the nominee after the death of the policyholder.

Best benefit: Life coverage that never expires.

3. Endowment Plans

This insurance plan is a combination of Life Insurance as well as savings. A part of your premium is used to pay for your life cover, while the rest is used for investments. One major difference between endowment plan and term plan is that the former offers maturity benefits to the policyholder if s/he outlives the term of the policy. However, if the policyholder passes away during the term, the nominee receives the death benefits.

Best benefit: Unlike term insurance, where you don’t receive any maturity benefit, endowment plan offers maturity benefits and other bonuses to the policyholder.

4. Money-back Life Insurance

This is similar to the endowment plan. However, one major difference is that this plan offers a percentage of the premium as money back to the policyholder at regular intervals.

Best benefit: The regular payouts help the policyholder meet short-term financial goals.

5. Unit Linked Insurance Plan (ULIP)

This is a combination of both insurance and investment. The premium you pay gets divided between investing in equities and purchasing risk cover. You can choose the funds you want to invest in, based on your risk profile.

Best benefit: You get life coverage as well as get started with investments using a single plan.

6. Child Plans

These are special types of Life Insurance policies which help parents build a corpus to fund their child’s higher education or marriage. The Sum Assured is provided as one-time payout or annual instalments, once the child reaches the age of 18 If the parent of the insured passes away during the term of the plan, the child is provided with the Sum Assured immediately.

Best benefit: Helps save for your child’s future.

7. Retirement Plans

These are Life Insurance plans that help you build funds for the future. Just like Child Plans, these policies provide payouts — annual or one time — once the policyholder reaches the age of 60. In case the policyholder passes away during the term, the Sum Assured is paid to the nominee.

Best benefit: Helps plan for a financially independent retirement.

Final thoughts: Which is the best Life Insurance policy?

Just like two different individuals don’t lead the same life, similarly, no single policy suits all. Go through the different types of Life Insurance policy plans and compare policy documents so that you can pick the right one that matches all your specific requirements.

 

DISCLAIMER

The contents of this document are meant merely for information purposes. The information contained herein is subject to updation, completion, revision, verification and amendment and the same may change materially. The information provided herein is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would (by reason of that person‘s nationality, residence or otherwise) be contrary to law or regulation or would subject lClCl Bank or its affiliates to any licensing or registration requirements. This document is not an offer, invitation or solicitation of any kind to buy or sell any security and is not intended to create any rights or obligations. Nothing in this document is intended to constitute legal, tax, securities or investment advice, or opinion regarding the appropriateness of any investment, or a solicitation for any product or service. Please obtain professional legal, tax and other investment advice before making any investment. Any investment decisions that may be made by you shall be at your sole discretion, independent analysis and at your own evaluation of the risks involved. The use of any information set out in this document is entirely at the recipient's own risk. The information set out in this document has been prepared by ICICI Bank based upon projections which have been determined in good faith by lClCl Bank and from sources deemed reliable. There can be no assurance that such projections will prove to be accurate. lClCl Bank does not accept any responsibility for any errors whether caused by negligence or otherwise or for any loss or damage incurred by anyone in reliance on anything set out in this document. The information set out in this document has been prepared by ICICI Bank based upon projections which have been determined in good faith and sources considered reliable by lClCl Bank. In preparing this document we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us or which was otherwise reviewed by us. Past performance cannot be a guide to future performance. 'lClCl ' and the 'I-man' logo are the trademarks and property of lCICl Bank. Misuse of any intellectual property, or any other content displayed herein is strictly prohibited.

Comments()