Life Insurance
Life Insurance: Meaning, Benefits & How It Works
There is a big ‘if’ in the word ‘Life’ itself. The word ‘if’ represents all the challenges that life throws at you. Life is uncertain and the best way to deal with these uncertainties is to be prepared against them. One such uncertainty is death. While death is inevitable, premature death is uncertain and if it happens, it creates emotional as well as financial loss. While emotional loss cannot be compensated against, financial loss can be. This is where life insurance comes into the picture. Life insurance policies are designed to cover the risk of premature death. If the insured dies during the term of the policy, life insurance plans pay a death benefit. However, life insurance is a broad concept which cannot be summed up in the above two lines. So, let’s understand life insurance definition in details.
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Life insurance is a policy which covers the risk of premature death. If, during the term of the policy, the life insured dies, the policy promises to pay a death benefit. Life insurance policies are legal contracts where, against the coverage offered by the insurance company, you are supposed to pay a premium for availing the coverage. Moreover, besides premature death, many life insurance plans also cover survival to the end of the policy tenure wherein a maturity benefit is paid.
Some of the salient features of life insurance policies are as follows –
Here are the reasons why life insurance plans are important –
As stated earlier, life insurance plans come in different variants. Let’s understand these variants and their respective features-
Term insurance is the most basic type of life insurance policy. The policy promises death benefit during the term of the plan. On maturity, usually, nothing is paid. Term plans are the cheapest form of life insurance which gives you unmatched financial protection.
There are different types of term plans which are as follows:
Whole life plans, as the name suggests, run for your whole life and allow coverage till you reach 99 or 100 years. These plans are like term insurance plans but with indefinite coverage duration.
Endowment plans are traditional savings-oriented life insurance plans. These plans provide coverage against premature death. Moreover, on maturity, a guaranteed maturity benefit is also promised. Endowment plans, therefore, promise insurance as well as savings.
5. Guaranteed additions or loyalty additions are also promised under many endowment assurance plans
Money back plans are also called anticipated endowment plans because they are like endowment plans but with anticipated benefits. Under these plans, the sum assured is paid in instalments at specified durations over the policy tenure. This allows liquidity while at the same time providing life insurance notes coverage.
Unit linked insurance plans are unique life insurance plans which provide the double benefit of insurance as well as investment returns. Premiums paid for these plans are invested in market linked funds. This fund then grows as per the performance of the market. If the insured dies during the policy tenure, a death benefit is paid. On maturity, the fund value is paid which is equal to the premiums invested along with the returns that they earned over the term of the policy.
Child insurance plans are life insurance plans which are created to secure your child’s future. Under these plans, there is an inbuilt premium waiver rider. This rider waives the premiums in case of death of the parent who is also the policyholder. Though the premiums are waived, the policy continues and pays a benefit after the end of the term when the child needs it for higher education or marriage. Child insurance plans, therefore, ensure a corpus for the child’s future whether the parent is alive or not.
Life insurance companies also offer health insurance policies. These policies either cover specific illnesses or a list of critical illnesses. If the insured suffers from the illnesses covered by the plan, a lump sum benefit is paid as per the policy’s benefit structure.
Annuity plans or pension plans are retirement oriented life insurance plans. Under these plans you can either create a retirement corpus or avail lifelong incomes from an already accumulated corpus. Pension plans help you plan for your financial needs post retirement.
Besides the above-mentioned types of life insurance plans, there are riders too which are additional coverage benefits. Riders are available with almost all types of life insurance plans (except health and immediate annuity plans). You can choose any rider as per your coverage needs by paying an additional premium.
Life insurance riders can be offered in the following types –
Now that you have understood life insurance meaning and the different types of life insurance policies, let’s understand claims. It is important to understand what is life insurance claim so that you can understand the benefits that you receive from different plans. Life insurance claims are of different types which can be understood below –
Here’s a brief description of each type of claim –
In India, there are 24 life insurance companies operating in the market. Apart from LIC, which is owned by the Government of India, all other insurers are privately owned companies.
Life insurance companies are often judged by their claim settlement ratios. The ratio denotes the number of claims paid by the life insurance company against the total claims made upon it in a financial year. It is calculated as a percentage and published by the Insurance Regulatory and Development Authority of India (IRDAI) every year. The higher the ratio, the better the company is perceived to be since it can be trusted to settle its claims. You can, therefore, choose a life insurance company based on its claim settlement ratio among other things.
Here is a complete list of life insurance companies currently operating in India along with their published Claim Settlement Ratios for the financial year 2017-18 –
When talking about the benefits of life insurance policies, their tax efficiency was highlighted. Let’s understand how life insurance plans can help you save tax –
The premiums that you pay for your life insurance plans (except annuity plans and health insurance plans) are allowed as a deduction from your taxable income under Section 80C. As per the provisions of this Section, you can claim a deduction of up to INR 1.5 lakhs by paying premiums of your life insurance policies. The premiums paid for annuity plans also qualify as a deduction but under a different Section. Pension plan premiums are allowed as a deduction under Section 80CCC of the Income Tax Act. The limit under this Section is also up to INR 1.5 lakhs but it also includes the deductions under Section 80C. Thus, you can claim a maximum deduction of up to INR 1.5 lakhs aggregately from life insurance premiums as well as pension plan premiums under Section 80C and Section 80CCC respectively. For health insurance policies, the deduction is allowed under Section 80D. You can claim a maximum deduction of up to INR 25,000 by investing in health insurance plans. If you are a senior citizen, you can enjoy a higher deduction as the limit increases to INR 50,000. Moreover, if you buy a health insurance plan for your dependent parents, you can claim an additional deduction. This deduction would be up to INR 25,000 if your parents are below 60 years of age and INR 50,000 if they are senior citizens. Thus, Section 80D offers you a maximum deduction of up to INR 1 lakh.
The claims received under life insurance policies are completely tax-free under Section 10(10D) of the Income Tax Act. Whatever be the type of claim that you receive, the entire amount would be allowed as a tax-free income without a maximum limit.
In case of deferred annuity plans, 1/3rd of the corpus which you withdraw as cash is called the commuted pension. This commuted pension is completely tax-free in your hands under Section 10(10A) of the Income Tax Act.
The annuity payments that you receive from life insurance pension plans are considered to be an income in your hands. This income is taxable and would be subject to tax at your prevailing income tax slab rates.
Having understood life insurance meaning and its importance, it is imperative that you buy a life insurance policy for your financial needs. To buy the policy, you have two options which are as follows –
The benefits of buying online from Turtlemint are as follows –
Given these benefits, buying from Turtlemint is a wise choice.
To buy a life insurance policy, you need to fill up a proposal form and submit your relevant documents. The documents needed to buy a life insurance policy include the following –
When these documents are submitted, the life insurance company verifies the information you mentioned in the proposal form. If everything is found to be correct, the life insurance policy is issued.
A life insurance policy proves to be a financial weapon in the face of contingencies. While you cannot avoid the challenges life throws your way, you can definitely insure the risks that you face. Life insurance plans promise coverage of your life risk and help you create a safe financial net for your loved ones. So, invest in a life insurance policy and secure your family’s happiness.
Source : Turtlemint
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