You may have come across books with titles such as "Life Insurance for Beginners" or "A Guide to Life Insurance". They might have compelled you to ponder over what life insurance, or life assurance, actually means. This chapter will provide you with some essential and fundamental information on this significant financial solution.
Life Insurance: An Example
Do you remember Subhash? His father retired from his job and, after a few years, suddenly passed away due to an illness, leaving behind his wife and three children, including Subhash. The responsibility of taking care of the family fell upon Subhash. His siblings were not employed at the time, and their mother did not have a pension. Replacing Subhash in this position with someone else could have been a big financial blow.
Due to Subhash's good financial planning, he had purchased a
life insurance policy in his father's name a few years prior, which included a
compulsory life insurance component. When Subhash's father passed away
suddenly, the insurance policy proved to be a valuable asset and provided the
family with security during a difficult time.
How does life insurance work? As we learned in the previous chapter, the insurer needs to pay a premium. This premium can be paid in a lump sum or on a monthly, quarterly, semi-annual, or annual basis. The policy is usually valid for a certain period. This premium is also included in the deduction under section 80C of the Income Tax Act.
If you take out insurance under the policy, you must nominate a person who can benefit from the insurance amount after your passing.
Life insurance policies generally offer two types of benefits:
- Death benefit if you do not survive until the end of the policy term.
- Maturity benefit if you remain alive even after the policy term.
Some plans only provide death benefits. They are known as pure protection plans.
How is life insurance useful?
Life can take an uncertain turn, and it can be difficult for those who lose the main earning member of their family. But if there is a life insurance policy, the death benefit can be very useful for the surviving members. Here are some situations where life insurance can be helpful:
- It can cover the cost of a funeral.
- It can help pay off outstanding debts.
- It can provide for the family's living expenses in the absence of the primary breadwinner.
- It can be used as an inheritance for the family's future.
Conclusion:
This depiction of life insurance was merely a rudimentary snapshot. However, what are the other types of insurance, such as health insurance or home insurance? We shall read about such insurance in the following chapter, which is related to general insurance.
So far you have read that life insurance is a legal contract between an insurance company and a party seeking insurance. The insured person pays the premium to the insurance company. In exchange, the policyholder provides financial assistance if an insured event occurs. This premium can be paid in a lump sum or on a monthly, quarterly, half-yearly or yearly basis. If you are the insured person under the policy, you will need to appoint a nominee who will receive the benefits after your demise.
Various types of life insurance plans exist, such as term
plan, ULIP, whole life plan, and money back plan.
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