Throughout our lives we work, we invest, we create value, and we do everything to leave our loved ones a secure future through an inheritance. But life is full of surprises. Thus you should be prepared for such surprises. Life Insurance helps you to be financially prepared for any unexpected life event. Whether it is your life, your health, your home, your car, or even a trip abroad, getting insured is a one stop solution to life’s many uncertainties.
What is Life insurance?
In simple terms, insurance is nothing but a financial cushion for your loved ones, if you were not around anymore. A life insurance policy takes care of the needs of your family and helps them cope with unfortunate times. All you need to do is, to decide on a cover amount and pay monthly premiums. Your life Insurance policy will support your family in case of an unfortunate event.
How does insurance work?
When you select an insurance provider, they assess your needs and present situation. This includes your lifestyle, your health history, any risks involved in your profession, etc. Based on these factors, and the requirements of your family, a cover amount is decided also known as the sum assured.
In case of an unfortunate event, your family gets this cover amount to help them meet their financial requirements. However, for your family to avail these benefits, it is important that you pay your premiums regularly.
What are the different types of insurance available in India?
There are two types of insurance policies in India, namely, life insurance and general insurance. These are further classified as follows:
Life insurance: Just like the name suggests, life insurance, insures your life. This implies that in case of loss of life, the beneficiary gets the cover amount. Life insurance is particularly important for people who are the chief earning members of their family. There are different types of life insurances, such as:
- Term plan insurance: This is the purest form of life insurance, these plans offer protection for a fixed term at very low premiums. If the insured passes away within that period, the insurance company pays the benefits of the policies to the nominee.
- Endowment policy: This is similar to a term plan. The only difference is that the insurer pays maturity benefits if the policyholder outlives the term of the policy.
- Unit Linked Insurance Plans (ULIPs): The premium paid is directed towards both insurance cover and investment. The insurer invests a certain fixed percentage of the premiums in qualified investment assets, while reserving the rest to provide an insurance cover.
- Whole life policy: The policy lasts for your entire life. This protects your family for an extended period of time. Upon loss of life, the lump sum amount is paid to the family.
- Moneyback policy: It provides periodic returns in addition to insurance cover. The insured receives some amount regularly as benefits, and on maturity, the balance amount is paid. However, the family receives the full amount in case of an unfortunate event.
- Pension plans: This helps you secure your old age by providing you regular monthly income after you retire. In case of an unfortunate event, your family would receive the benefits of the policy.
- Child plans: Your child gets the sum assured in case you are not around anymore. The insurance company pays the premium on your behalf thereafter. This is to give your child a specific sum at periodic intervals for his/her secure future.
General insurance: A general insurance or a non-life insurance covers for losses apart from those which are covered under life insurance. The major categories of general insurance include:
- Health insurance: It reimburses your medical bills in case of hospitalisation or major illnesses. There are many policies that may offer additional riders, such as maternity benefits, accident cover, etc.
- Motor insurance: It is mandatory in India for vehicles to be insured. Depending on the type, the insurance may cover accidents, thefts or any other damage to you, your vehicle or the third party.
- Home insurance: It compensates for any damage to your house in the event of theft or damage caused due to natural calamities.
- Travel insurance: It covers losses caused while you are travelling. Usually, the policy covers losses such as medical emergencies, loss of luggage, etc.
Insurance Policy Components
In order to understand the various aspects of an insurance policy, it is important to familiarize yourself with the following terms:
- Premium: This is the monthly sum that you pay to your insurance provider. The premium is a pre-decided amount and depends on several factors like your age, medical history, insurance cover, etc.
- Policy cover: All the information about your insurance policy is mentioned on your policy cover. This document includes your cover amount, terms and conditions of the policy, exclusions or limitations, etc.
- Policy term: It is the period for which the policy is valid. It may vary depending on the type of policy. For example, a term policy is valid for only a predefined period as mentioned in the policy. On the other hand, a whole life policy is valid until the death of the insured.
- Premium payment term: Although many people assume that payment term lasts a lifetime. But it may be equal to or less than the policy term. There are also some policies that require you to pay a premium for as long as you live.
Life Insurance is a great way to ensure that your loved ones are financially protected in case of your absence. It also gives you the added advantage of tax savings which helps to increase your disposable income.
What are the tax benefits on insurance?
In addition to providing protection and returns, insurance policies help you save tax. Under Section 80C of the Income Tax Act, 1961, life insurance premiums up to ₹ 1.5 lakhs annually are deductible from the taxable income. Additionally, under Section 10D, the income that you receive on maturity of your policy remains tax-free if the premium does not exceed 10% of the sum assured* or if the sum assured is at least 10 times the premium amount in case of single premium life insurance policy.
Section 80D also allows you to deduct up to ₹ 25,000 (₹ 50,000 for senior citizens) for medical insurance.
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* For policies issued after April 1, 2012