What is Life Insurance in India?

What is life insurance?

Life insurance is a contract of indemnity between an insurance policyholder and an insurer where the insurer promises to pay a nominated beneficiary a sum of money upon the death of an insured person.

Depending on the contract, other issues such as terminal illness or critical illness can also result in payment. The policyholder typically pays a premium, either periodically or as one lump sum amount. The benefits may involve other expenses, such as funeral expenses.

The primary reason to take up a life insurance policy is that your family will be secured in financial terms even if anything happens to you.

The advantage of taking a life insurance policy is that you can have more than one life insurance policy.  There is no legal restriction on the number of insurance policies an individual can take.

Taking up a life insurance policy also gives benefits under the Income Tax Act.

It is advantageous to start investing in life insurance policies at your younger age itself.

A group of individuals may also choose to take up a group life insurance policy, which covers the lives of a group of people together.

Life Insurance Corporation of India

Life Insurance Corporation of India is an Indian legal insurance and investment organization. It was formed under the ownership of the Ministry of Finance, Government of India.

The Life insurance corporation of India was established on 1 September 1956, when the Parliament of India passed the Life Insurance of India Act that nationalized the insurance industry in India.

Over 245 insurance companies and provident societies got merged to create the state-owned Life Insurance Corporation of India.

Types of life insurance

  1. Term life insurance – A term life insurance is a type of life insurance that guarantees the payment of a death benefit if the insured dies during a particular term.

You can take a life insurance policy for a particular period typically being a period between 10 and 30 years.

On the expiry of the term, the policyholder can choose to either renew the life insurance policy for another term, or you can either convert the policy to permanent coverage life insurance or allow the term life insurance policy to terminate.

To buy a policy under term life insurance, the premium is determined based on the policy’s value, age, gender and health.

A medical exam may be needed to be undergone by the insured in taking up this life insurance plan.

It is less expensive than a permanent whole life insurance plan.

  1. Whole life insurance – A whole life insurance policy is a type of life insurance plan that provides you coverage for your entire life.

This can be done only if the policyholder of the life insurance pays the premiums of the life insurance policy on time.

It offers a guaranteed payment of the sum assured as a death benefit to the beneficiary of the life insurance policy in the event of the demise of the insured during the whole tenure of the life insurance policy.

This policy is also called a straight life policy or an ordinary life policy.

  1. Child insurance plans – A child insurance plan is aimed to secure the future of your child financially and ensure that your child’s needs are taken care of in case of a mishap.

These plans provide a dual benefit of having life insurance as well as an investment.

This policy has a wide range of benefits like they allow partial withdrawals to take care of requirements of a financial emergency.

The sum assured has to be properly verified before taking up this plan.

  1. Retirement plans – Retirement plans are a type of life insurance plan that is specifically designed to meet up your needs after your retirement.

The medical and living expenses can be met with the help of this type of life insurance plan.

It is a permanent life insurance plan that uses the value of the cash component to help in the funding of the retirement.

  1. Endowment policy – Endowment plans are a type of life insurance that provides a dual purpose.

It is a life insurance plan designed to pay a lump sum of money after a specified term or on the death of the insured.

  1. Money back policy – A money back policy is a type of insurance policy where the insured gets a percentage of the sum assured at a regular interval of time.

In case of the death of the insured, the beneficiary will get the entire amount as the sum assured and the benefits of survival are not deducted.

  1. Unit linked insurance plans – A unit-linked insurance plan is a type of life insurance offered by insurance companies that gives both insurance and an investment in a single plan.

 

Features of a life insurance

A life insurance policy will have the following features:

  1. Issued only in the name of the policyholder – A policyholder is a person who takes up the life insurance policy and pays the required premium amounts. A life insurance policy is only issued in the name of a policyholder.
  2. Flexible premiums – You will decide to choose the frequency and flexibility of payments of your life insurance premiums.
  3. Tenure can be customized – The tenure of your life insurance policy can be customised and decided based on your requirement.
  4. Sum assured can be decided – You can check on the available plans and choose to decide on the plan with the best amount of returns for your investment.
  5. Payment is made on death or maturity – Another important feature of a life insurance policy is that the payment is made either on the death of the insured or on maturity.
  6. Assigning of nominees – You can assign nominees based on your choice to whom the assured sum has to go.
  7. An investment component – Investing in a life insurance policy is also a type of investment made. This gives out the benefit of having a good return at the time of maturity.
  8. Tax Benefits – As per the provision of the Income Tax Act, a deduction is also available under section 80C for the amount of life insurance premiums paid.

 

Benefits of a life insurance

  • Death Benefit – The insurance company provides a life insurance policy to compensate the family of the insured in case of their death.
  • Valuable Return on your investment – You will be getting a good return on your investment at the time of maturity and this amount can then be used to make a greater investment.
  • Helps in financial planning – Life insurance policies help in the financial planning of the individual like savings and future investments.
  • Availability of loan – A life insurance policy can be used as a mortgage by the insured to take a loan on the amount required.
  • Income is guaranteed – You will have a guaranteed income when you take a life insurance policy. In case of maturity, you will get the whole sum assured.
  • Tax Benefits – Tax benefits can be claimed on the life insurance premiums paid throughout a year.