What is Life Insurance Policy and its Types?

Since life insurance shields policyholders and their loved ones from life’s uncertainties, it is a crucial component of financial planning. To maintain the coverage of the policy, the policyholder must make payments to the insurance provider—either all at once or in equal installments. Let us understand what is life insurance policy meaning with examples and its types in this topic.

It serves multiple purposes beyond simply supporting dependents financially in case of the policyholder’s death. You can use it to settle debts such as loans or mortgages, replace lost wages, fund your children’s education, or cover burial and funeral expenses. Furthermore, various types of life insurance plans offer extra benefits, such as the ability to access assets during the insured’s lifetime or accumulate cash value, thereby enhancing their utility as a financial planning tool.

Life Insurance Definition

A life insurance policy is an agreement between a person and an insurance provider whereby the insurer guarantees to pay the policyholder’s beneficiaries a predetermined amount of money, known as the death benefit, in the case of the policyholder’s passing.

It assures financial protection in unforeseen situations. Insurance companies aimed to initiate life insurance in order to ensure that the income of families remains unaffected in the event of sudden or premature death of family members. Additionally, they sought to provide a safety net that would safeguard financial stability during such unforeseen circumstances. You can avail Life cover for yourself and your family members from personal risk. It stands on top most important point under financial planning.

Ensuring financial stability for your family is vital, regardless of your status. Your loved ones shouldn’t face financial hardships in your absence. This stability covers various aspects such as daily expenses, children’s education, and reimbursement claims. It also includes costs like funeral and memorial services. Additionally, it safeguards against business disruptions due to the death of an owner or co-owner. Now a day’s life insurance are used for multi-purpose. For instance: wealth preservation, tax exemptions, etc.

Why do we Need Life Insurance?

It does not matter for those who are single and have no dependents; But such insurance is necessary for any individual who has family relies on your income or have dependents to take care of it. Before you decide of buying life insurance, few things you should ask yourself like: Do I require life protection cover, If yes then how much do I require or for how long will require or what type of policy will fulfil your required protection cover.

General rule of life cover says that atleast you should select insured amount 6-10 times your gross annual pay. This is just a general thumb rule but you should analyse your entire requirement for life, your family goals, children education and other circumstances before selecting life insurance amount and duration for coverage.

Types of Life Insurance

To secure their financial futures and protect their families, individuals must understand the complexities of life insurance policies. Understanding such insurance involves comprehending various policy types, factors that affect coverage and premiums, and the array of riders and customization options available. This introduction explores the basics of life insurance plans, stressing their significance, complexities, and factors to consider when selecting the most appropriate policy to fulfill individual objectives and requirements.

Below are some of the popular types of life insurance. There are other flavours, add-ons available for such insurance. Let us check out some of the types of life insurance available in the market:

Whole Life Insurance

This policy protects policyholder complete life span against death. Also known as permanent life insurance, whole life insurance provides guaranteed protection for the entire lifespan of the policyholder. Premiums typically increase as the policyholder ages. You can choose to pay premiums on a monthly, quarterly, or yearly basis.

Whole life insurance provides the benefit of a policy that never expires. It ensures that beneficiaries receive the corpus fund when the policyholder passes away. This helps beneficiaries to stay away from financial crisis and fulfil their financial needs.

Endowment Policy

Endowment policy is the combination of life cover and financial saving at the same time. Major disadvantage of endowment policy is that it is valid for certain period. Insurance holder gets benefit in two ways:

• In case of death within policy tenure, beneficiary will be paid assured amount
• In case of survival after policy tenure, policy holder will get premium paid with other benefits like: bonus, share on investment returns, etc.

Endowment policies are one of the most popular policies. General concept behind this policy is to give best returns to policy holder on survival. One may also argue that it represents an improved and more advanced iteration of ULIP (unit-linked life insurance product). Under this, policyholder can select various investment options provided based on risk desire for their premiums.

Money Back Policy

Money back policy, another flavour of life insurance policy liked by most the people. This policy gives policyholder regular income on survival after certain period of policy. When an individual survives, a portion of the sum assured is disbursed as regular monthly or yearly income. However, in the event of death, the beneficiary will receive the remaining value of the sum assured.

For example: Mr. Roy has purchased money back policy valid for 25 years with the sum assured of Rs.25,00,000 upon 10 years insurance company will pay Rs.15,000 as a regular monthly payment. After 12 years of policy Mr. Roy died. In that case, regular payment of Rs.15,000 monthly will be paid for 2 years (total amount paid: (15,000 * 24 = Rs.3,60,000) and on death beneficiary will be paid remaining sum assured of Rs.21,40,000 (25,00,000 – 3,60,000 = Rs.21,40,000) .

Annuities and Pension

Under this policy, the policyholder pays either a single premium or regular premium instalments for a set number of years. In return, the insurance company provides regular income, either monthly or yearly, for the entire life or for a fixed number of years.

One major disadvantage of annuities and pension policies is that they do not offer any lifetime cover; instead, they only provide regular income for the entire life or a certain number of years.

This policy resembles a money-back policy, with the unique feature being the absence of a sum assured upon death. Hence, individuals choose this policy to ensure regular payments post-retirement.

Term Insurance Policy

Term insurance policy is purely risk cover policy for specific period of time. In recent years, there has been a tremendous surge in the purchase of this term insurance policy. Currently, countries worldwide are highly accepting and opting for this policy. Top policies among other life insurance protection purchased by insurance holders consist of term life insurance policies. Let us detail understand and discuss more clearly about term insurance in our next tutorial session.

Conclusion

Life insurance policies ensure people’s financial security and provide peace of mind to families and individuals. If the insured passes away, these policies offer a safety net against life’s uncertainties and provide financial assistance to surviving family members. Additionally, it can help achieve various financial goals such as debt repayment, income replacement, financing for schooling, and estate planning.

Ultimately, investing in a quality life insurance policy is a wise choice for both financial stability and peace of mind. Proactively planning for the future allows people to guarantee the well-being of their loved ones and the perpetuation of their legacy long after they pass away.

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