Benefits of a Life Insurance Policy

by SMCIB on Wednesday, 12 April 2023

Benefits of a Life Insurance Policy

Life can be considered an unpredictable ride, full of twists and turns that we might never see coming. While we may not be able to control these unforeseen events, we can take proactive steps to protect our families from the unexpected.

If you are a breadwinner, it is only natural that you worry about the financial burden your loved ones would face if something were to happen to you. And that is exactly where life insurance comes in - it is a safety net that ensures that your family will be taken care of financially if the worst were to happen. It comes with a range of benefits that help you and your loved ones meet your goals and dreams.

Imagine that you have a child and want to make sure that they receive the best possible education and all the support to get everything they wish for. A life insurance policy will help you achieve this goal of yours - whether or not you are around.

In this article, we will explore some of the benefits of a life insurance policy. Let’s dive right in!

What is Life Insurance?

A life insurance policy is a legal agreement between you and an insurer.

  • The insurer covers your financial risks.
  • In exchange, you agree to pay a regular fee.

If you pass away while the policy is in effect, the insurance company will pay out a fixed sum of money, known as a death benefit, to your nominee. This can help your loved ones cover expenses such as funding your child’s education, paying off outstanding liabilities, etc.

In a life insurance policy –

  • You will be referred to as the 'insured' or 'life assured'.
  • The regular payment that you are required to pay to maintain the policy is called the 'premium'.
  • The amount of money the insurance company will pay out to your family in the event of your death is known as the 'cover amount'.
  • The individuals who will receive the death benefit from the insurance company are known as the 'nominees' or 'beneficiaries'.

The primary objective of life insurance is to provide financial security to your loved ones in the event of your untimely death. It also serves as a long-term savings tool and helps you achieve various financial goals. Depending on the type of policy you choose, you may have the option to build wealth over time, save for your retirement, pay for your child's education, etc.

Benefits of Life Insurance

1️⃣ It guarantees the financial protection of your family
If your family relies on your income to maintain their lifestyle, an unexpected event can leave them in a difficult financial situation. This is where life insurance helps. It offers a lump sum payment or a steady income to your family in the event of your untimely death. They can use the money for their milestones, dreams, and everyday expenses.

A life insurance policy ensures that your loved ones are well taken care of in your absence. Even if you have money saved in the bank, it may prove to be insufficient in the future. Life insurance looks after your and your family’s obligations in the long term.

For example,
Shankar, a 35-year-old man, is the sole breadwinner in his family. His wife is a homemaker and takes care of their two young children. Knowing the risks his family would face if something were to happen to him, Shankar purchases a term insurance policy with a sum assured of Rs. 50 lakhs and chooses his wife as the nominee. A few years later, Shankar is diagnosed with a severe illness and passes away soon after. The insurer will pay his wife a lump sum that will help her take care of daily living expenses and future goals.


2️⃣ It acts as an income replacement
Regardless of whether you work a 9-to-5 job, are self-employed or own a small business, your income plays a significant role in your family's financial stability. Right from covering basic necessities like housing, food, utilities, clothing, etc. to taking care of education costs and EMIs, your income may be the only source of financial support. And, if something were to happen to you, your income would no longer be available for your family.

But with life insurance, the death benefit can be used to cover various costs, including daily expenses, outstanding loans, and long-term goals such as children’s higher education expenses, buying a vehicle, etc. This income replacement can help you rest easy knowing that your family's standard of living will be maintained even in your absence.

3️⃣ It serves as a secondary source of income
In addition to providing a death benefit, some life insurance policies may also offer a survival benefit. A survival benefit is paid to you at the end of the premium payment term, i.e., you will receive this benefit after you have finished paying the premiums.

Say you purchase a money-back plan with a cover amount of Rs. 10 lakhs for a policy term of 20 years. You choose the 10-year limited pay option, which means you need to complete all premium payments in the next 10 years.

Your policy states that you will receive the survival benefit over a period of 10 years after the premium payment term is over. It is equal to 10% of the cover amount. So, you will receive Rs 1 lakh from policy years 11 to 20 on an annual basis. This amount can help you pay off recurring expenses like EMIs, rent, school fees, etc.

By offering a survival benefit, these policies provide financial protection and help you achieve various milestones in your life.

4️⃣ It helps your loved ones pay off debts

If you pass away, the debts you owe like mortgages, car loans, credit card bills, and so on, still need to be paid. This burden will ultimately fall on your loved ones’ shoulders which will hamper their financial future even further. In such cases, life insurance acts as a financial safety net for your family. This amount can help them cover any outstanding loans and liabilities, allowing them to focus on healing and living a better life.

5️⃣ It helps your family achieve their financial goals and dreams
Your family, whether it’s your spouse, children, or any other members, will have their own set of goals and dreams - both short-term and long-term. This includes a lot of things, right from purchasing monthly groceries to sending your child abroad for their studies or giving them a big wedding. And, these aspirations will continue to exist whether or not you are around. A life insurance policy can help ensure those needs are met no matter the situation. With a life insurance policy, your family can ensure that they have financial stability in the event of your untimely demise.

For example,
Ravi is a software engineer who is the sole breadwinner of his family of 4. He dreams of building a house for his family and getting his children educated at a prestigious university. To ensure this, he purchases an endowment policy with a sum assured of Rs. 40 lakhs. Unfortunately, a few years later, Ravi passes away in an accident. His wife (the nominee) receives a death benefit of Rs. 40 lakhs with which she can build their house and also provide for their children's education.


6️⃣ It generates a cash value
Some types of life insurance policies, such as whole life insurance, endowment plans, etc., offer a cash value feature. The longer you keep the policy active by paying regular premiums, the more cash value it accumulates. In case of a financial emergency, such as unexpected medical bills or a sudden loss of income, you can borrow money against this cash value. For instance, say you own a whole life insurance plan and have been paying the premiums for around 25 years. You need some cash for expensive hospital treatment. All you need to do is inform your insurer about your need to withdraw money from your plan. They will tell you the cash value that has been generated under your plan and how much you can withdraw.  You can withdraw the money accordingly.

However, it is important to note that not all life insurance policies provide this option. For instance, term insurance plans do not generate any cash value

7️⃣ It also provides a loan facility
Achieving your financial goals requires funding. If you want to avail of a loan, the lender may ask you for collateral. Instead of using your assets like property or gold as collateral, you can use your life insurance plan. Certain types of life insurance policies can serve as collateral, provided they have completed a specific lock-in period.

However, it is important to note that not all life insurance policies provide this option. For instance, term insurance plans do not provide the option to avail of a loan against them.

For example,
Sakthi is an IT professional who has taken a whole life insurance policy with a sum assured of Rs. 50 lakhs. After a few years, Sakthi wants to fund his daughter’s higher education. However, he doesn't intend to sell his investments or pledge his property as collateral to avail of a loan. After checking with his insurer, he finds out that he can use his policy as collateral. He does so and secures the loan with ease. Sakthi can cover his daughter’s education expenses without compromising on his long-term financial goals or having to sell his assets.


8️⃣ It offers tax benefits
Another advantage of a life insurance policy is tax benefits. They are -

  1. The premiums payable are eligible for a tax deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961.
  2. The claim amount you or your nominee receive from a life insurance policy is also eligible for tax benefits under Section 10(10D) of the Act.


To Conclude,
We have now come to the end of this article. Investing in a life insurance policy is an important financial decision that offers a host of benefits. These benefits help you and your family achieve short-term and long-term goals. And most importantly, a life insurance policy guarantees that your family's financial future is protected in the unfortunate event of your untimely death.

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