Life insurance is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) in exchange for a premium, upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either monthly or as one lump sum. Other expenses, such as funeral expenses, can also be included in the benefits.
Life policies are legal contracts and the terms of the contract describe the limitations of the insured events. Specific exclusions are often written into the contract to limit the liability of the insurer. Common examples are claims relating to suicide, fraud, war, riot, and civil commotion.
Life-based contracts tend to fall into two major categories:
Protection policies—designed to provide a benefit, typically a lump sum payment, in the event of specified event. A common form of a protection policy design is term insurance.
Investment policies—where the main objective is to facilitate the growth of capital by regular or single premiums. Common forms (in the U.S.) are whole life, universal life, and variable life policies.
Advantages of Life Insurance
1. Risk Cover
Life today is full of uncertainties; in those scenario life insurance ensures that your loved ones continue to enjoy a good quality of life despite any unforeseen events.
2. Tax Benefits
Insurance plans provide attractive tax-benefits both at the time of entry and exit under most of the plans.
Life insurance not only provides financial support in the event of untimely death, but also acts as a long term investment. You can meet your goals, be it your children’s education, their marriage, building your dream home or planning a relaxed retired life, according to your life stage and risk appetite. Traditional life insurance policies (i.e. traditional endowment plans) offer built-in guarantees and defined maturity benefits through a variety of product options such as money back, guaranteed cash values, and guaranteed maturity values. Life insurance, being a long-term savings instrument, also ensures that the life insurers focus on returns over a long-term and do not take risky investment decisions for short term gains.
4. Builds the Habit of Thrift
Life Insurance is a long-term contract where, as a policyholder, you have to pay a fixed amount over time. This builds the habit of long-term savings. Regular savings over a long period ensures that a decent corpus is built to meet financial needs at various life stages.
5. Assured Income through Annuities
Life insurance is one of the best instruments for retirement planning. The money saved during the earning life span is utilized to provide a steady source of income during the retired phase of life.
6. Protection Plus Savings over a Long Term
Since traditional policies are viewed both by the distributors as well as the customers as a long term commitment, these policies help the policyholders meet the dual need of protection and long term wealth creation efficiently.
7. Growth through Dividends
Traditional policies offer an opportunity to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual announcement of dividends or bonuses.
8. Facility of Loans without Affecting the Policy Benefits
Policyholders have the option of taking out a loan against the policy. This helps you meet your unplanned life stage needs without adversely affecting the benefits of the policy you bought.
Contact a qualified life insurance agent to discuss any additional benefits or risks involved in purchasing life insurance. They can also help you decided on the type of insurance that best fits your needs.