Insurance is a legal agreement between an insurance company & a policyholder, where the policyholder pays a premium to the insurance company. An insurance company offers coverage against losses, damages, & certain events, such as illness, accidents, & property damage, thereby providing financial security. Thus, it involves a regular payment made by the policyholder to an insurance company, in exchange for which the insurance company offers payment for the loss covered in case of certain specified events. Now that we understand the concept of “what is insurance”, it becomes important to consider one of its important types: life insurance, which helps secure the financial future of your family members in the unfortunate event of the policyholder’s death.
What is Life Insurance?
Life Insurance is a contract between an insurance company & a policyholder, where the latter is required to pay premiums in exchange for coverage. This financial payout is provided to family members in the event of the policyholder's sudden demise or to the policyholder themselves in the form of a maturity benefit if they survive the plan. This amount of sum assured lets them manage expenses & secure their financial future in the absence of the policyholder.
Let us understand how a life insurance plan works:
Suppose Mr X purchases a life insurance plan for 20 years with a sum assured of INR 10 lakhs, having an annual premium of INR 25000 for a policy tenure of 20 years.
A) Mr X survives the plan.
Mr X must have paid a premium of INR 5 lakhs till the end of 20 years of policy tenure, where he will be receiving INR 10 lakhs at the end of 20 years. This amount of INR 10 lakhs is basically the total of the sum assured & bonus or applicable return amount. After which, the policy will come to an end.
B) Mr X dies during the 10th year of the plan.
Mr X must have paid a premium of INR 2.5 lakhs till the end of 10 years of policy tenure. In case of his sudden demise, the family members will receive INR 10 lakhs plus bonus as a death benefit, after which the policy will terminate.
C) Mr X opts for premium protection in the plan.
In case of the sudden demise of Mr X in the 10th year, his family members will get a death benefit of INR 10 lakhs. After which, the policy will continue to accumulate the investment amount. The amount accumulated in the end of the 20th year, the family members will get the maturity benefit of INR 10 lakhs plus applicable bonus.
Once you have understood the basic working of life insurance, it becomes equally important to understand the difference between life insurance & other insurance types. The most common comparison that can be made is between Life Insurance & General Insurance.
Difference between Life Insurance & General Insurance
While both Life Insurance & General Insurance offer financial protection, they differ in certain parameters. Let us assess them below:
Basis of Difference | Life Insurance | General Insurance |
Meaning | This type of insurance offers financial coverage against the loss of life. | This type of insurance offers financial coverage against the assets or materials. |
Type | This form of investment offers returns or financial coverage against the loss of life in future. | It is a contract of indemnity against losses. |
Term of Contract | This insurance is meant for long tenure. | It is meant for a shorter duration or can be renewed at regular intervals. |
Premium | It is to be paid at regular intervals, i.e. monthly, quarterly, or annually. | It is to be paid in a lump sum at the time of purchase or when renewing the policy. |
Claim | The claim amount is received at the time of the policyholder’s death or maturity of the plan. | The claim amount is to be paid when the loss occurs or compensated for the loss. |
Policy Value | It is to be ascertained when the policy is bought, where the premium & amount of sum assured are directly dependent on the same. | It depends on the value of the asset & is paid at the time of the occurrence of damage. |
Role in Investment | It helps in securing the financial future in the long term, such as child education, retirement, etc. | It offers financial coverage against assets. |
Benefits of Life Insurance
Provided below are the benefits of Life insurance:
• Wealth Creation
A life insurance policy helps to secure future needs in terms of finance, offering good returns & income.
• Financial Security
Whenever a life insurance policy is bought, the insurance company will charge a premium to provide financial security to the policyholder’s beneficiaries in the unfortunate event of death. The family members can use the life insurance proceeds to secure their future & meet routine expenses.
• Builds Saving Habit
The premium amount is to be paid to keep the policy active, i.e. otherwise it will get cancelled. Thus, it inculcates a habit of regular savings, which benefits in the long run.
• Tax Benefits
Multiple tax benefits are offered by life insurance, such as the premium paid gets a deduction of up to INR 1.5 lakhs per annum u/s 80C & maturity benefits therefrom are also tax-free, subject to certain terms & conditions u/s 10(10D) of the Income Tax Act, 1961.
• Helps to achieve financial goals
Some policies, like ULIP, help build a cash value over a period of time, as these plans have an investment component as well. The premium amount gets invested in marketable securities, & the return is earned. Over a period of time, it becomes a large corpus that will help achieve goals.
Conclusion
Life Insurance is a contract entered into between an insurance company & a policyholder, where the policyholder agrees to pay a premium amount in exchange for the financial security in case of the sudden demise of the policyholder.
Human life is certainly subject to many risks & uncertainties due to natural & accidental mishappenings. Hence, an individual should opt for a life insurance which offers financial coverage against contingencies, such as death, accident, disability, etc. The different life insurance plans provide money on the unfortunate demise of the policyholder to the family members, which brings financial security to them. The proceeds from the insurance claim can be used to meet daily expenses, hence maintain the present lifestyle.
(The views, opinions, and claims in this article are solely those of the author’s and do not represent the editorial stance of The Assam Tribune)