Life insurance is a legally binding contract between the insured and the insurance company, in which the insured and his/her nominees is provided financial cover and security in exchange for premiums paid regularly. If the life insurance policy matures, or if the policyholder passes away, the insurance company will provide a payout or lump sum amount to the family members on the basis of the insurance contract. A life insurance policy must be purchased based on your personal requirements.
To understand what is life insurance and select one that is most suited to your needs, you must first know the types of life insurance policies available in the market:
- Term Plan – this type of life insurance plan offers only death benefits and provides financial coverage for a specific period of time
- Whole Life Plan – as the name suggests, whole life insurance offers coverage for the duration of your whole life.
- Money Back Policy – in this type of life insurance cover, you receive a chunk of the benefit in the form of a regular income.
- Endowment Policy – this is a type of life insurance in India which brings with it a component of savings; also called a traditional life insurance policy.
- Unit Linked Plan – this is a combination of insurance and investment, and provide coverage for a long-term period.
- Child Plan – this is for the future financial security and education requirements of your child. This type of life insurance helps in building a corpus for when the child turns 18.
- Retirement Plan – this type of life insurance provides financial security after you retire. The payout is either in annual instalments or as a one-time at the age of 60.
All these life insurance plans provide many similar and unique advantages. Overall, all these life insurance policies help in meeting the short-term and long-term financial goals of the family such as marriage, child’s tuition fees and future education, purchasing a house of your own, regular source of income or pension to senior citizens in retirement (including NRIs), etc. Not only financial goals, but life insurance covers also provide financial coverage in times of dire need and emergencies. They also cover health benefits, and some of these plans also provide coverage for critical illnesses, accidents and hospitalization.
You might wonder how much life insurance do you actually require. Although human life is priceless, it is still essential for you to analyze and calculate the estimated value of your life in terms of financial independence of you and your family. This estimate of your financial value is called the Human Life Value or HLV. You can calculate your personal Human Life Value in two steps:
- First, calculate and add up all your expenses, including lifestyle and household costs.
- Then calculate the future liabilities that your family members might have to pay in the event of your unexpected death.
After adding these figures, you will get your HLV, which you can then use along with guidance from your expert financial advisor to gauge which life insurance policy or combination of policies will work best for you.
Buying a life insurance policy provides a safety net to you and your family in case of unforeseen and unexpected events that require finances over and above your regular income. It also gives your family members death benefit in case of your untimely death, so your family members have the financial coverage they need in your absence. Life insurance also provides long-term savings, as it helps you build a corpus for the future and save money in an organized manner; they also have certain tax benefits. You can then use your savings to meet your financial goals and future expenses, including your retirement expenses. Not only that, but some life insurance policies such as the ULIP plans also act as investment instruments, which can help you grow your money.
This is the A to Z about life insurance policies. Purchasing a life insurance policy is the best thing you can do for yourself and your family, and if you don’t have a life insurance policy at hand, then make sure you buy one at the earliest. After all, your life is too precious to not have adequate financial security!