Nature and Scope of Life Insurance

Nature and Scope of Life Insurance Policy

Life insurance is a contract between the insurer and the policyholder, where the insurer guarantees to pay a death benefit to the family of the insured in exchange for a premium upon the death of the policyholder. To keep your plan active, you must pay a regular premium to the insurer for a specific timeframe.

Whether you want to secure your family financially or plan your retirement, life insurance is the best way to achieve your long-term goals.

Apart from a life cover, life insurance also offers wealth creation and tax benefits. Hence, we are here to help you understand the nature and scope of life insurance in India.

Nature of Life Insurance

Life insurance is an important financial tool, designed to secure and fulfill the financial requirements of the insured's family when they are no longer around. Some of you may not be aware that there are 6 types of life insurance products available.

Each product is designed to serve different life objectives. While some offer protection with life cover, others can offer savings as well as investment elements. Hence, to understand the nature of life insurance, you must first understand the types of life insurance products.

6 Types of Life Insurance Plans in India

1. Term Insurance Plans

   Term insurance is the purest form of life insurance, where the insurer offers financial coverage to the policyholder for a specific period. It is a protection-oriented plan that offers high life cover at affordable premiums.

   The insurer pays a death benefit to the family of the insured upon the death of the policyholder. This death benefit can be helpful to substitute income, pay any outstanding loans, or maintain living standards. You can even add optional riders to enhance your base cover and get additional protection for specified conditions.

2. ULIPs - Unit Linked Insurance Plans

   A Unit Linked Insurance Plan (ULIP) is a life insurance investment product that offers the dual benefit of protection and investment. Some part of the premium is invested in a variety of market-linked funds, while the remaining part is used to provide life cover.

   Whether you want to leave a corpus for your kids or want to build wealth for retirement, ULIPs are an ideal choice. They even let you make a partial withdrawal after the completion of a lock-in period of five years.

3. Endowment Insurance Plans

   Endowment plans refer to life insurance products that offer guaranteed returns. It is an ideal financial tool for people who want guaranteed returns along with the protection of life insurance.

   It allows you to get a maturity amount once you outlive the policy period and also offers death benefits to your nominee in the event of your unfortunate death. Some part of the premium is saved for a maturity benefit, and the other is invested for a life cover.

4. Money Back Insurance Plans

   In a money-back plan, the policyholder gets a percentage of the life cover in regular installments instead of getting the lump sum amount at maturity. It is an endowment plan with the benefit of a steady income source. These plans are designed to help you meet your short-term financial goals, and the regular payout is tax-free, subject to Section 10(10D).

5. Whole Life Insurance Plans

   As the name suggests, whole life insurance offers policyholders coverage for 99-100 years. With whole life insurance, you can acquire lifelong protection and build cash value over time. The regular payout is tax-free, subject to Section 10(10D).

   It is an ideal plan for people who want to leave a financial legacy for their kids. Upon the unfortunate death of the policyholder, the nominee shall get the death benefit along with an accumulated bonus for the total premiums paid.

6. Child Insurance Plans

   Child plans are insurance-cum-investment plans that help you to build wealth for your child's future. It is an ideal financial tool for parents to secure their kid's financial future. The plan offers maturity benefits either in the form of annual installments or as a lump sum payout after the child turns 18. Upon the unfortunate death of the insured parent, child plans can give immediate payment to cover a child's expenses.

Benefits and Scope of Life Insurance

Undoubtedly, the death of a person has a devastating effect on their family members. While one cannot do anything about the emotional loss, you can provide financial protection to your family with life insurance. Hence, life insurance becomes a basic necessity for every household. Apart from a life cover, there are several benefits associated with life insurance:

• Gives Financial Stability

  Life's uncertainties are inevitable, but you can provide financial security for your family with life insurance. An adequate life cover helps your family to pay off debts, maintain living standards, and substitute income.

• Wealth Creation

  Some life insurance products offer investment and savings elements that allow you to create wealth. Some part of the premium is invested in market-linked funds, while the remaining part is used to provide life cover.

• Tax Benefits

  Life insurance offers tax benefits under Section 80C and 10(10D) of the Income Tax Act.

  • Under Section 80C, you can avail of up to ₹1.5 lakh tax exemption on premiums paid towards the plan.
  • Under Section 10(10D), the maturity amount or death benefit is tax-free.

• Buy Young, Save More

  With a life insurance plan, you can lock in a low premium when you buy life insurance at an early stage of life. However, if you buy the same plan at an older stage of life, you will be paying higher premiums.

• Death Benefit

  Upon the death of the policyholder, the insurer shall pay the death benefit amount to the nominee. The life cover from the insurance can be used to replace a stable income source in the absence of an earning member.

Conclusion

Don't wait for financial uncertainties; be prepared for life's uncertainties in advance. There's no doubt life insurance can be a helping hand for your family when you're not around. Hence, get yourself insured today if you haven't done so far.