Life insurance or commonly mentioned as “life assurance” in the Commonwealth, is a contract between an insurance policy holder and an assurer or insurer , where the insurer promises to pay a designated beneficiary a sum of money or the benefit in exchange for a premium, upon the death of an insured person (often the policy holder). It is depending on the contract, other events for example terminal illness or critical illness can also trigger payment. The policy holder naturally pays a premium, either on a regular basis or as one lump sum. Other expenses (for instance funeral expenses) also can be included in the benefits.
Life policies are lawful contracts and the terms of the contract explain the limitations of the insured incidents. Particular exclusions are often written into the contract to limit the liability of the insurer; widespread examples are claims relating to suicide, fraud, war, riot, and civil commotion.
Life-based contracts tend to fall into two main categories:
Protection Policies – It is designed to offer a benefit, typically a lump sum payment, in the event of specified event. A general form of a protection policy design is term insurance.
Investment Policies – where the major objective is to make easy the growth of capital by normal or single premiums. Common forms (especially in the U.S.) are universal life, whole life, and variable life policies.
Advantages of Life Insurance
Life insurance provides an infusion of cash for trade with the adverse financial penalty of the insured’s death. Life insurance enjoys complimentary tax treatment unlike any other financial implement. Death benefits are normally income-tax-free to the beneficiary.
Life Insurance provides the double benefits of savings and security. The following benefits give details why this investment instrument should be an essential part of your financial plans.
- Risk Cover – Today life today is full of uncertainties; in this scenario Life Insurance ensures that your loved ones continue to enjoy a good quality of life against any unforeseen event.
- Planning for life stage needs – Life Insurance not solely provides for backing within the event of untimely death however conjointly acts as a protracted term investment. You’ll meet your goals, be it your children’s education, their wedding, building your dream home or coming up with a relaxed retired life, in line with your life stage and risk appetence. Traditional life insurance policies i.e. traditional endowment plans, offer in-built guarantees and defined maturity benefits through variety of product options for example Guaranteed Cash Values, Money Back, and Guaranteed Maturity Values.
- Protection against rising health expenses – Life Insurers through riders or stand alone insurance plans provide the advantages of protection against vital diseases and hospitalization expenses. This profit has assumed vital importance given the increasing incidence of life style diseases and escalating medical prices.
- Builds the habit of thrift – As we know life Insurance is a long-term contract where as policyholder, you have to compensate/pay a fixed amount at a defined periodicity. This builds the custom of long-term savings. Habitual savings over a long period ensures that a decent amount is built to meet financial or monetary needs at various life stages.
- Protection plus savings over a long term – Since usual policies are viewed both by the distributors and the customers as a long term promise; these policies facilitate the policyholders meet the dual want of security and long term wealth creation competently.
- Assured income through annuities – Life Insurance is one of the best tools for retirement planning. The money saved during the earning life span is utilized to afford a steady source of income during the retired phase of life.
- Growth through dividends – Customary policies recommend an chance to participate in the economic growth without taking the investment risk. The investment income is distributed among the policyholders through annual proclamation of dividends/bonus.
- Facility of loans without affecting the policy benefits – Policyholders have the choice of taking loan against the policy. This helps you meet up your unplanned life period needs without adversely affecting the benefits of the policy they have bought.
- Mortgage Redemption- Insurance acts as an effective tool to cover mortgages and loans taken by the policyholders so that, in case of any unforeseen event, the burden of repayment does not fall on the bereaved family.
- Tax Benefits-Insurance plans provide attractive tax-benefits for both at the time of entry and exit under most of the plans.