What is a Life Insurance Policy and its Scope

Today, life insurance is a popular financial protection plan to safeguard the financial security of family members. Typically, the policy is a contract between an insurance buyer and an insurance provider. Under such a contract, the insurer promises to pay a lump sum amount of money to the policy nominee in the event of sudden death of the policyholder during the policy. They extend policy coverage in exchange for regular insurance premium payments. Certain life insurance may also allow individuals to opt for predefined critical illness benefits and add-on protection to build a robust cover against unfortunate events arising due to an emergency or accident. Hence, such a policy accompanies several benefits and has an extensive scope. However, not having enough ideas about the same could make individuals miss out on them.

That said, let’s check the key benefits and popular types of policies.

Key benefits of life insurance 

Life insurance plans are designed to provide a life cover to the insured that will offer financial support to individuals in the absence of the policyholder. Besides financial support, life insurance offers tax benefits to the policyholder. Policyholders can claim a tax deduction of a maximum of Rs. 1.5 lakh in a given year under Section 80C of the Indian Income Tax Act. The deduction is available on the premiums paid toward insurance coverage. Additionally, the payout disbursed to the insured is exempted from taxation under the terms and conditions mentioned under Section 10(10D). Often the insurance policy bond can serve as collateral when taking out a loan. The insurance can help individuals avail of a loan at competitive rates during an emergency.

What are the most common types of insurance policies?

The most common types of insurance plans are mentioned below –

  • Term Insurance Policy

This type of life insurance is the simplest kind and also affordable. The plan pays the insured’s family with a predefined sum of money in the event of their death during the active policy term. However, the policy does not provide any cover in case the insured outlives the policy term. This is why the premium of term plans is lower than traditional life insurance plans. Individuals may use an online term insurance calculator to determine the estimated premium for them.

  • Endowment Policies

Typically, insurance plans other than term plans are known as endowment plans. These plans can be further divided into unit-linked, participating, and non-participating.

  • Non-Linked Participating Endowment policy 

This plan allows individuals to participate in the insurance company’s profits and makes them eligible for a share. The plan typically pays the insured’s family a sum of money in the event of their death or an accumulated sum if they survive the policy term. Notably, this survival benefit is linked to the company’s profits.

  • Non-participating Non-linked Endowment Policy 

These policies define how much sum of money the insured’s family will avail on their death or on maturity if they outlive the policy. Notably, for non-participating non-linked endowment plans, there is no investment or variable linked component. The insured knows beforehand how much money they can avail in each scenario. This knowledge helps individuals plan their finances and build necessary provisions to support their family’s financial future.

  • Unit Linked Life Insurance Policy (ULIP)

ULIPs are designed to offer the benefits of investment and insurance. A part of the contributions goes towards insurance premiums the rest towards investment units. Individuals have the flexibility to choose their preferred units.

Such a plan offers a sum of money to the insured’s family in the event of their passing. On the other hand, the insured avails a maturity amount if they outlive the term. Then again, unlike participating policies, the maturity amount disbursed through ULIPs is dependent on investment allocation in different instruments and not on the profits of the insurer.  

See also: The Importance of Digital Signature Certificates in Modern Business Transactions

Who can avail of a life insurance plan?

Life insurance is considered to be a crucial financial tool for every age group. Based on the type of insurance policy, it can offer financial support to the insured’s dependents or provide the policyholder with adequate returns that can help meet targeted goals. Regardless, these are some of the key benefits of a life insurance policy –

Importance of the policy for different age groups 

  1. 20-30 age group

This age group can use insurance policies for their finances, secure their future, or save up to meet future goals. Plans that offer savings or investment benefits would be best suited for them, especially if they do not have much financial responsibility or dependents.

  1. 30+ to 40 years

This age group can use a life cover policy to safeguard the future of their dependents so that they remain independent in the absence of the insured. The sum can be used by the dependents to meet financial obligations and account for future obligations including the cost of higher studies or weddings.

  1. 40+ to 50 years

This age group has several financial obligations, and multiple dependents, and is concerned about their retirement. They may help individuals to plan their retirement with plans that offer protection and savings benefits. They should also avail plans from insurers with a high life insurance claim settlement ratio.

  1. 50+ and above

This age group is more focused on planning and saving money to secure their self and their family’s financial standing. Focusing on policies with tax benefits and savings aspects is preferred by them.

Individuals with these conditions can also benefit from a life insurance plan –

  • Smokers: Individuals who smoke tend to be more prone to health complications. This makes them risky for insurers who may charge them higher premiums to offset the liabilities. However, buying a life cover can help them to build a financial safety net for their family. Regardless, they must disclose their smoking habits to insurers to avoid conflict later. 
  • Disabled individuals: These individuals can also benefit from purchasing a life insurance policy. However, insurers may direct them to undergo a few medical tests before getting an insurance plan.
  • Those with Pre-existing conditions: Individuals with pre-existing health conditions can avail of a life insurance policy to secure their life or their family’s financial needs.  However, they must disclose their conditions so that their claim doesn’t get rejected on the basis of existing conditions.

These aspects and coverage make life insurance policy a reliable means to safeguard the future of self and family’s future. However, individuals must compare the ures and benefits of different policies and providers to pick a suitable plan.

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