Life is all about balancing the thrill of adventures and the need for stability and safety. An effective financial plan is essential to ensuring a secure future for you and your family. Life insurance does just that.
It is a contract between you and an insurance company that provides financial protection to your family in exchange for timely premium payments. Not only does it ensure your family's financial security, but some life insurance policies also provide a range of benefits to help you meet your financial objectives, such as funding the education of your children, buying a house, saving for retirement, creating a secondary income source, etc.
But, before investing your hard-earned money in a life insurance policy, it is crucial to understand its features and benefits. By doing so, you will be able to determine whether or not the plan is right for you. In this article, we will discuss what a typical life insurance policy offers.
What Does a Typical Life Insurance Policy Offer?
The main aspects of a life insurance policy are -
- Death Benefit
The primary purpose of life insurance is to ensure your family is well-secured during times of uncertainty. So, if you pass away while the policy is active, it provides your family with a sum of money called the death benefit. They can use this money to settle any long-term goals such as outstanding loans, children’s education, etc. and even short-term goals like paying EMIs, household expenses, etc. Basically, it will help your loved ones lead a comfortable life and live their dreams - even when you are long gone.
The death benefit is decided at the time of policy purchase. And, based on the type of policy, the amount may vary - it can either be fixed or variable.
Note: Your nominee will receive the death benefit only if you pass away while the policy is in force.
For example, Aman, 30, is a bank employee. His wife and 5-year-old son are financially dependent on him. He wants to secure their future. So, he purchases a term insurance plan with a sum assured of Rs. 50 Lakhs for a policy duration of 25 years. He chooses his wife as the nominee of the policy. If Aman passes away during the policy term of 25 years, his wife will receive a death benefit of Rs. 50 Lakhs which will help her cover her son's education expenses and take care of her financial needs.
- Maturity Benefit
Some life insurance policies offer you a maturity benefit when the policy attains maturity, i.e., when the policy ends. You can find the policy maturity date on the policy document. The maturity benefit is paid out to you if you survive the policy term. This money can help you fulfil your financial goals like settling outstanding debts, taking care of daily needs, saving for retirement, starting a new business, etc.
The maturity benefit is decided when your purchase the policy. It may vary depending on the policy you choose and the amount can be fixed or variable.
Note: Not all life insurance policies offer a maturity benefit. For example, term insurance does not pay you anything if you survive the policy term.
For example, Rahul, 45, is a single father living with his 15-year-old daughter. His daughter wants to attend a music course abroad when she grows up. So, Rahul wants to secure her future and leave a financial legacy for her. He purchases a whole life insurance policy with a sum assured of Rs. 80 lakhs and appoints his daughter as the nominee of the policy.
● If Rahul passes away while the policy is still active,
His daughter will receive a death benefit of Rs. 80 lakhs from the insurance company which will help her take care of her college expenses.
● If Rahul survives the policy term,
Since Rahul has purchased a whole life insurance policy, the policy term will end when he is 99/100 years old. If Rahul survives this duration, he will receive a maturity benefit of Rs. 80 lakhs - after which the policy will terminate.
Some life insurance policies may also provide a survival benefit if you survive a specified period during the policy term. Its main purpose is to provide you with liquidity that helps you meet all your financial obligations with ease and also acts as a source of regular income - complementing your other income sources. This money can serve as a buffer for unforeseen expenses or to meet financial objectives.
Note: Not all life insurance policies provide you with a survival benefit.
Option to Avail of a Loan
You may wish to take loans to fund big expenses such as your children’s education, starting a business, buying a car, etc. In such cases, the lending party may require you to submit collateral in exchange for the loan amount and you may need to pledge assets like your home or gold. However, what if we told you that you could borrow money against your life insurance policy? Yes, some insurers allow you to avail of a loan after a certain period. Once this period is over, you can use your policy as collateral and borrow against it.
Note: Not all life insurance plans offer you this benefit. For example, you cannot avail of a loan facility in term insurance plans.
You need to pay premiums regularly to keep your life insurance coverage active. Over time, a portion of the premiums you pay gets accumulated under your life insurance policy. This is called a ‘cash value’. It can be withdrawn or borrowed for a variety of uses, like paying your future premiums or covering unexpected expenses. As you pay more premiums, you will generate more cash value. This cash value can serve as a valuable resource to meet your financial obligations.
Under a life insurance policy, you can avail of tax benefits on the premiums you pay and payouts you receive.
?Under Section 80C of the Income Tax Act of 1961, you get tax benefits on the premiums you pay for life insurance plans.
?Under Section 10(10D) of the Income Tax Act of 1961, the payout you or your family will receive is exempt from tax.
1. Maturity proceeds received from life insurance policies issued on or after April 1st, 2023 shall not be exempted from taxation if the annual premium of the policy exceeds Rs. 5 lakhs.
2. The maturity proceeds received under a Unit Linked Insurance Policy (ULIP), issued on or after 01.02.2021, shall not be exempt from taxation if the annual premium exceeds Rs 2.5 Lakhs.
By purchasing a life insurance policy, you are protecting your family's future, as well as securing your own dreams and goals. So, ensure you conduct thorough research and choose the right policy that suits your and your family's needs.