Having a life insurance plan has become a necessity these days. Due to the unpredictability of life, it is essential to secure the future of your loved ones against any eventualities that may arise. Nowadays, there are a range of life insurance products available in the market and choosing one can be a difficult decision to make. Thus, it is important to understand all the aspects of the life insurance policy before you make a choice. So, knowing what a life insurance policy is and how does insurance work becomes exceedingly important.
In this article, we will discuss what is life insurance coverage and the working of life insurance.
What is a Life Insurance Policy?
Life insurance is a legal agreement between the insured and the life insurance company in which the life insurance company agrees to pay a specified amount of money to the nominee or beneficiary of the policy if the insured dies within the tenure of the life insurance plan. If the life insurance plan includes maturity benefits, the life insurance company has to pay the maturity benefits to the insured if they survive the tenure of the policy. In exchange for life insurance coverage, the insured pays the life insurance company a specified amount of premium either monthly, yearly, quarterly, or as a single lump sum payment.
Let us get into the details of how does life insurance work.
How Does Life Insurance Work?
The first step is to choose a life insurance plan that suits your needs and requirements.
All about life insurance
Life insurance: A life insurance plan is a legal contract between the insurer and insured wherein the insurer agrees to pay a sum assured to the beneficiary of the policy in case of death of the policyholder during the tenure of the policy. Some life insurance plans also include maturity benefits that are paid to you if you survive the term of the policy.
Premiums: Premiums are the amount that you pay to the insurer to keep the policy active.
Tenure: The tenure of the policy is the number of years for which the policy will cover you. The tenure of the policy has to be selected at the time of policy purchase.
Death benefit: It is the sum assured that is paid to the beneficiary if the policyholder dies within the tenure of the policy.
Maturity benefit: It is the sum that is paid to the policyholder if they survive the tenure of the policy. Some plans, like term insurance plans, do not offer a maturity benefit. So, if you want maturity benefits, you need to choose a plan accordingly.
Types of plans
If you are the sole breadwinner of your family with dependents, you can purchase a term life insurance plan which is a pure protection plan. Under a term insurance plan, you get better life insurance coverage at affordable premiums. The term insurance plan helps your family fulfil their financial goals in your absence.
If you are looking for returns, you can choose ULIPs, which offer a combination of investment and life insurance.
If you are looking for savings and life insurance, you can choose savings plans.
For retirement purposes, you can choose retirement and pension plans.
Types of benefits under the plans
Death benefit: Under a life insurance policy, a sum assured is paid to the nominee or the beneficiary in case of the demise of the policyholder. The nominee/beneficiary has to file a claim with the life insurance company to get the death benefits.
To claim the death benefits, the beneficiary needs to submit the required documents along with the death certificate of the policyholder. Once the details have been verified, the death benefit will be paid to the beneficiary.
Maturity benefits: If you have a policy like a savings plan orreturn insurance, you will receive maturity benefits if you survive the tenure of the policy. For a maturity benefit claim, you need to submit all the necessary documents, and the benefit will be paid to you by the life insurance company.
Benefits of a Life Insurance Plan
Now that you understand how life insurance works let us get into the benefits of life insurance plan:
Financial security to the family
A life insurance plan provides financial security to the family in your absence. The death benefit ensures that your family is able to fulfil their daily needs and financial goals even if you are not there. This is one of the most important benefits of a life insurance plan.
Creation of wealth
Along with life insurance coverage, a life insurance plan can also act as an excellent instrument for the creation of wealth. If you wish to save for a longer period, you can opt for a savings plan.
Life insurance plans also allow you to avail of tax* benefits. The premium paid for keeping the policy active allows you to save tax* under Section 80C. Moreover, the death benefits that your loved ones will receive are exempt from taxes under Section 10(10D).
Prevent the burden on loan
In case of your untimely demise, the burden of debt might fall on the family. With a life insurance plan, your family might be able to pay off the loan. Also, some life insurance plans allow you to take a loan against the policy, depending upon the terms and conditions applicable.
Insurance companies offer retirement and pension plans to ensure that you do not have financial constraints during the golden years of your life. With annuity-based pension plans, you can ensure that you have a regular flow of income so that you can make the most of your retirement.
Life insurance is a financial instrument that ensures the protection of your loved ones in your absence. Moreover, if you are looking for a savings or investment element, there are many plansto choose from. Depending upon your requirements, you must choose the right life insurance plan after understanding how insurance works.