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What is Life Insurance?
Life Insurance policy is an agreement between a person and an insurance company. As per the agreement, the person (policyholder) pays a premium to the insurer regularly. In exchange for the premium, the insurer promises to pay a sum of money (death benefit) to the policyholder's chosen beneficiary in the event of the policyholder's death.
The main goal of life insurance is to give the policyholder's loved ones financial security after the policyholder passes away. This can assist in paying for expenses, including funeral bills, unpaid debts, and ongoing living expenses.
Whole Life Insurance and Term Life Insurance are a few examples of the types of Life Insurance policies (more on this later in the article). While Whole Life Insurance offers everlasting coverage and accrues cash value over time, Term Life Insurance only offers coverage for a predetermined amount of time.
The conditions of the policy, the policyholder's age, health, and lifestyle, as well as the amount of the death benefit and the premiums paid by the policyholder can change. However, in general, rates will be cheaper for the younger and healthier policyholders.
Overall, it is crucial to analyse the policy terms and understand what is and is not covered before buying the policy, as life insurance products contain exclusions and certain limitations.
A brief history of life insurance
Here is a list of some key milestones in the history of life insurance.
Ancient Rome: Burial clubs were established to help members with funeral costs, and widows and orphans were frequently given financial support.
Middle Ages: Throughout Europe, organisations started providing financial assistance to member families in the case of a member's passing.
1601: The Amicable Association for a Perpetual Assurance Office issued the first Life Insurance policy in England. The insured person's life was protected by the insurance policy, which paid out a certain amount upon their passing.
1759: The Philadelphia Synod of the Presbyterian Church in America established the Corporation for Relief of Poor and Distressed Widows and Children of Presbyterian Pastors.
1840s: As actuarial science and medical research improved, life insurance became more widely accessible and more reasonably priced.
1865: Equitable Life Assurance Society of the United States was established, becoming the country's first contemporary life insurance firm.
1906: In order to oversee the insurance sector and safeguard consumers, the National Association of Insurance Commissioners (NAIC) was founded in the US.
1945: With many businesses providing Group Life Insurance plans to their employees, life insurance coverage has become a well-liked employee benefit.
History of life insurance in India
Here’s a brief history of life insurance in India.
Under the British Raj, life insurance first appeared in India around the turn of the 19th century.
The Oriental Life Insurance Company was the first life insurance firm in India, and it was founded in Kolkata (then Calcutta) in 1818.
Subsequently, other European businesses emerged, like the Madras Equitable Life Insurance Society and the Bombay Life Assurance Company.
The government nationalised the life insurance market in 1947, and the Life Insurance Company of India (LIC) was founded in 1956.
Nowadays, there are several government and private life insurance firms in India.
Which are the different types of life insurance plans in India?
In India, several types of life insurance plans are offered to meet the diverse demands of people. Here are a few of the most common types of life insurance plans.
Term Life Insurance
The policyholder pays a set premium for a certain term. In the event of the policyholder's passing within the term, the insurance company pays the death benefit to the designated beneficiary. In case the policyholder survives the policy term, they are not entitled to any kind of payout, as a Term Insurance policy does not mature, it expires. This is the most straightforward and cost-effective type of life insurance plan.
Whole Life Insurance
The policyholder pays regular premiums for the duration of their life in exchange for this type of policy's lifetime coverage. The death benefit is paid to the designated beneficiary after the policyholder's demise.
Endowment Plans
These plans provide savings in addition to financial support. Here, the policyholder makes regular premium payments throughout the policy tenure. If the policyholder survives the policy duration then a lump sum amount will be paid at the end of it. In case the policyholder dies before the maturity date, then the beneficiaries will receive the death benefit.
ULIPs (Unit-linked Insurance Plans)
These policies include investment possibilities as well as life insurance coverage. The policyholder's premium payments are invested in various funds, which they can select based on their investment objectives and level of risk tolerance.
Pension Plans
After retirement, this insurance policy continues to provide the policyholder with a regular income. The insured pays consistent premiums during their working career, and following retirement, the insurance company provides the policyholder with a consistent income. In case of the policyholder’s death before or after retirement, the beneficiaries will receive the death benefit.
5 reasons why life insurance is important
Following are the top five reasons why life insurance is important.
Financial protection
Your family and loved ones are financially protected under your Life Insurance policy in case of your untimely passing. To ensure your family's financial stability, the insurance company will pay out a death benefit that can be used to pay for various expenses.
Peace of mind
Worrying about your loved ones' financial security can be reduced by knowing they will be financially secure even when you are no longer around.
Tax benefits
Tax advantages are provided by life insurance policies in the form of deductions under Section 80C and tax-free death benefits under Section 10(10D) of the Income Tax Act.
Income replacement
If you are the breadwinner of your family, life insurance can help replace your income in case of your premature death. This way, your family's standard of living might not be affected a lot, and they can still meet their financial needs thanks to the death benefit of your Life Insurance policy.
Debt Repayment
Life Insurance may partially cover unpaid debts like credit card balances, vehicle loans, and mortgages. This can help prevent financial hardship for your family.
Benefits of Life Insurance
Here are the top five benefits of buying a Life Insurance policy.
Long-Term Savings
Certain Life Insurance plans, including endowment and ULIPs, can be perceived as long-term investments. These insurance policies help you save money for future goals like retirement and other expenses in addition to offering financial security.
Loan facility
Certain Life Insurance policies also provide loans against the surrender value of the policy, which might be helpful in an emergency.
Life Insurance Riders
Life Insurance policies may also provide a number of riders or add-ons that can be added to the base policy to get more benefits like Critical Illness coverage and Accidental Death benefits.
Additional retirement income
Annuities and Unit-linked Insurance Plans (ULIPs) are two types of Life Insurance policies that can be used to supplement retirement income. These insurance plans give the policyholder a steady stream of income throughout their retirement years.
What are the tax benefits of buying life insurance?
Here are some of the tax benefits of buying life insurance. Note that tax benefits are subject to changes based on the government’s policies.
Tax deductions on premiums
The taxpayer may claim a deduction under section 80C for premiums paid on a Life Insurance policy during the corresponding year. Deduction is limited to 20% of the capital sum assured for policies issued before 31 March, 2012 and 10% for policies issued on or after 1 April, 2012.
Tax-free Death Benefit
The death benefit received by the nominee in case of the policyholder's death is also tax-free under Section 10(10D) of the Income Tax Act. The entire amount received by the nominee is exempt from income tax.
Who should buy a Life Insurance policy in India?
Life insurance is required for everyone with financial dependents, such as family members or business partners. Here are some examples of people in India requiring life insurance coverage.
Married couples
If you are married, have children, or have other dependents, a Life Insurance policy can provide your family with financial stability after your untimely death.
Parents
If you are a parent, a Life Insurance policy can safeguard your children financially in the event of your untimely death. For example, their education expenses can be taken care of.
Business owners
If you operate a business, a Life Insurance policy can help assure the continuation of business operations in the event of your untimely death. The death benefit can be used to pay off any outstanding obligations or liabilities or to buy out your share.
Individuals with large debts
Suppose you have a major loan, such as a home or car loan. In that case, a Life Insurance policy can financially safeguard your family in the event of your untimely death, guaranteeing they are not saddled with the remaining debt.
Individuals with dependent parents
If you have dependent parents, a Life Insurance policy can provide financial assistance to them in the event of your untimely death, allowing them to maintain their quality of life.
Tips to buy the best Life Insurance policy in India
Here are some tips to help you buy the best Life Insurance policy in India.
1.Assess your insurance needs
Before you begin shopping for a Life Insurance policy, assess your insurance requirements based on your financial objectives, family size, dependents, and other considerations.
2.Compare policies
Do not settle for the first policy that you come across. Compare various insurers to locate the one with the best features, coverage, and premium rates.
3. Pick the correct policy
Choose the proper policy for your insurance needs, financial goals, and risk tolerance.
4. Check the add-ons/riders
Check the policy's riders and select the ones that best match your needs.
5. Read the policy document carefully
Before you sign up for the policy, thoroughly read the policy paperwork and understand the terms and conditions, coverage, exclusions, and other details.
Factors that affect the cost of a Life Insurance policy
The cost of a Life Insurance policy varies depending upon certain factors including the policyholder's age, health, and lifestyle, the type of policy, coverage level, and policy duration. Here are some of the factors that determine the cost of a Life Insurance plan.
Age
Usually, the younger you are when you purchase a Life Insurance policy, the lower your premium rates will be.
Health
Your health state has a big impact on the cost of Life Insurance. Your premium rates may be higher if you have any pre-existing medical illnesses or live an unhealthy lifestyle.
Smoking habits
Due to the increased health risks of smoking, smokers often pay a higher insurance premium than nonsmokers.
Quantity of coverage
The higher the coverage amount, the higher the premium rates.
Type of policy
Term insurance products are typically less expensive than permanent Life Insurance policies such as a Whole Life policy.
Policy Term
The longer the insurance term, the higher the premium rates.
Example for Life Insurance
A term insurance policy with a coverage limit of Rs. 1 crore for a 30-year-old nonsmoker can cost between Rs. 5,000 and Rs. 10,000 per year on average, depending on the length of the policy and other circumstances. However, the real cost can vary based on your personal situation and the insurance company you choose. To discover the best deal that suits your specific needs and budget, it is recommended that you research online and compare policies from multiple insurers.
How to choose the right sum assured under life insurance
Choosing the right life insurance sum assured is essential because it defines the level of financial protection your family will receive in the event of your untimely death. While choosing the right sum assured for your Life Insurance policy, keep the following variables in mind.
Define your financial objectives and the level of financial security your family will require in your absence. Assess the costs of children's education, marriage, and other future commitments before selecting a sum that offers sufficient protection.
Consider your present income, expenses, and outstanding debts, such as a personal loan, auto loan, or home loan, before selecting a sum that will cover your responsibilities and guarantee that your family can continue to live comfortably.
Consider your age and health status while selecting the right sum assured for your Life Insurance plan. Usually, younger, healthier policyholders can seek a higher sum assured.
How to save on life insurance premium
Here are some tips on saving on life insurance premiums.
Compare and choose
Shop around and compare policies from different insurers to choose the best deal that meets your specific needs and budget.
Choose the right coverage amount
Choosing the right coverage amount is essential to ensure that your family is adequately protected in your absence.
Start early
Start investing in life insurance at an early age. Younger policyholders generally pay lower premiums than older policyholders.
Maintain a healthy lifestyle
Maintaining a healthy lifestyle, such as exercising regularly, eating a healthy diet, and avoiding tobacco and alcohol, can help you get lower premium rates.
Opt for a longer tenure
Longer tenures in insurance policies often come with lower premium rates, allowing you to enjoy extended coverage without straining your budget.
FAQs for Life insurance
Here are some common questions about Life Insurance plans.
Can I purchase a Life Insurance policy online?
Yes, a lot of insurance providers offer life insurance coverage online. From the convenience of your home, you can compare policies, determine rates, and purchase policies online.
What does a Life Insurance policy rider mean?
You can add a rider to increase your Life Insurance policy’s coverage. Riders offer extra benefits such as Critical Illness coverage, Disability coverage, Accidental Death compensation, and Premium Waivers.
Is my Life Insurance policy a good collateral for a loan?
Yes, several types of Life Insurance plans, including Whole Life and Endowment Policies, let policyholders borrow a loan against them. The loan amount is typically limited to a portion of the policy payout and has an interest charge.
What is the minimum age to buy a life insurance policy in India?
The minimum age to buy a life insurance policy in India is 18 years.
Can a person have multiple life insurance policies in India?
Yes, a person can have multiple life insurance policies in India, subject to the insurer's terms and conditions.
Are there any tax benefits of buying a life insurance policy in India?
Yes, premiums paid towards life insurance policies are eligible for tax benefits under Section 80C of the Income Tax Act, up to a maximum limit of Rs. 1.5 lakh.
Is it mandatory to undergo a medical examination before buying a life insurance policy in India?
It depends on the age and sum assured of the policy. For higher sum assured or older age, a medical examination may be required.
Can a person buy a life insurance policy online in India?
Yes, many life insurance companies in India offer the option to buy policies online through their websites or mobile apps.
Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.
