Life insurance helps protect your family’s future. When you buy a life insurance policy, you agree to pay a fixed premium. In return, the insurance company provides financial support to your family in case of your untimely death. Many plans also allow you to save, invest, or get tax* benefits. However, life insurance also has some drawbacks. Premiums can be costly for older people, and choosing the right plan can feel confusing. Understanding both the advantages and disadvantages helps you choose a policy based on your needs. This article explains the advantages and disadvantages of life insurance policy.
Advantages |
Disadvantages |
The death benefit provides compensation to the nominee |
Too expensive for older people |
Potential returns through bonuses2 on premiums |
Returns are lower than standalone investments |
Tax benefits under Section 80C up to ₹1.5 lakh |
Issues with claim settlement due to policy terms |
Loan facility available against policy value |
Too many policy options make choosing difficult |
Read further to understand each point in detail.
Advantages of life insurance
Life insurance policies offer a range of benefits:
Death benefit
This is one of the primary benefits of a life insurance policy. If the insured person meets with an untimely death, then the nominee receives compensation from the insurance company in the form of a death benefit. The compensation amount is usually the sum assured plus any bonus2 accrued over the period the policy was active.
Potential returns
Many life insurance policies offer returns on premium amounts. There are different types of life insurance policies offering returns in the form of a bonus2. Hence, you can get the dual benefit of getting insurance coverage and returns on savings by paying a life insurance premium.
Tax* advantages of life insurance
One of the important uses of life insurance is saving tax*. When you purchase a life insurance plan, the premium amount can be deducted from your taxable income under Section 80C of the Income Tax* Act 1961. The maximum deduction is up to ₹1.5 lakh in a financial year, subject to other permitted investments under the section. Life insurance tax* benefits are used by many people to reduce their tax* liability.
Loan against the policy
Many reputed insurance companies offer loans against life insurance policies at affordable rates. Based on the provisions of the policy, you can borrow up to a certain percentage of the sum assured. This can help you manage financial needs without using your savings.
Financial planning through different stages of life
With a range of life insurance policies available, you can plan your finances using life insurance at different stages of your life. While death benefit allows you to ensure the financial security of your loved ones in case of your untimely death, there are policies that offer returns to help meet different financial goals like your child’s education, building a home, etc. Make sure that you compare different life insurance plans and choose the one that aligns with your needs.
Add-on covers
Many insurance providers offer riders# to boost the scope and extent of that standard life insurance policy. These add-on covers, or riders# allow policyholders to customise the coverage as per their needs. These include waiver of premium payments, loss of income due to a partial or complete disability, etc.
These benefits make life insurance policies worth the investment. However, before you buy one, make sure that you understand the limitations of insurance too.
Disadvantages of Life Insurance
Here are some disadvantages of life insurance:
Too expensive for old people
Many people purchase a life insurance policy when they are young. This makes sense since the premium amounts are low for young policyholders. One thing that you need to know about premium calculations is that there are various factors that impact it, including your age, medical condition, family’s medical history, etc.
With increasing age, if you are diagnosed with any medical condition, then the insurance company will charge a higher premium since it will consider you to be a higher-risk individual. With age, the premium amount can rise significantly, making it expensive for people over 60/70.
Returns are not more
Many life insurance policies offer the benefits of protection and savings. These policies are preferred by many people looking for a single instrument that offers insurance and returns. However, the returns offered by these plans are lower than standalone investment instruments.
Issues with claim settlement
Life insurance policies have certain inclusions and exclusions along with terms and conditions for claim3 approval. There are many instances of claims being rejected, or the compensation amount being reduced due to certain clauses of the policy.
Therefore, it is important to go through the policy documents carefully before making the purchase. You should also ensure that you look for a reliable insurance provider with an enhanced individual death claim settlement ratio3. TATA AIA Life Insurance has an individual death claim settlement ratio3 of 98% (FY 2020-21) and a simple claims settlement process.
Too many options
There are many insurers in India offering a wide range of life insurance policies. While this means more choices for buyers, choosing the right one can be confusing. Also, many policies are not straightforward and require an understanding of financial products.
Conclusion
Life insurance is helpful, but it is important to know both its advantages and its disadvantages. It offers financial security, tax* savings, and options to build long-term funds. At the same time, some plans may give lower returns, and choosing the right policy requires comparing various policies. So, it is important to compare plans, read all terms clearly, and choose the policy that aligns with your financial goals and budget.
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