Know more about life insurance meaning, benefits & types of life insurance in detail.
If you are wondering what is life insurance meaning, you should know that a life insurance policy is a contract between an individual and an insurance provider, in which the insurance company gives financial protection to the policyholder in exchange for monthly fees (known as premiums).
As per the life insurance definition, the insurer (insurance company) pays a sum assured to the policyholder or to the named nominees in case the policyholder meets with an untimely demise in exchange for the premium payments made towards a life insurance policy.
Based on the arrangement, in the event of the death of the policyholder or, if the policy matures, the insurance provider shall pay the person or his family a lump sum amount after a certain amount of time. There are different types of life insurance policies to suit the individual needs and requirements of the policy buyers.
Understanding life insurance definition, its benefits, and features are important before you buy one. Read on to know more about what is life insurance means for you.
What Are the Benefits of Life Insurance Plans?
Once you get an understanding of what is life insurance means, as well as the different types of life insurance policies, you will find that there are 3 main advantages of getting the best life insurance policy that you should know about. Following are the 3 primary benefits offered by different types of life insurance policies:
1. Financial Security
Life is unpredictable and can be full of uncertainties. It is difficult to reduce the possibility of an unfortunate event like death. In such a scenario, the family faces financial constraints arising from the lack of a steady income.
Investing in the best life insurance policy early on in life acts as a safety blanket during such eventuality. According to the life insurance definition, the insurance provider is obliged to pay the nominee or beneficiary the pre-defined sum assured. As a result, even in the policyholder’s absence, his family stays protected.
2. Long-Term Savings
If one wants to make long-term investments, it’s important to think about life insurance meaning. Such insurance plans help you make systematic savings and create a corpus, which can be used for several reasons, such as building a new home, financing quality schooling for your child, and funding a child’s marriage expenses.
What’s more, when you learn the life insurance definition, you will find some types of life insurance policies often offer monthly pay-outs in the form of annuities, which is an ideal way to aim at and achieve retirement goals.
3. Investment Options
Understanding the meaning of life insurance in your financial context will allow you to plan your investments efficiently as well. Life insurance providers offer Unit-Linked Investment Plans (ULIPs), which are mainly investment instruments based on market-linked returns and life insurance, meaning you can get dual benefits with a single financial product.
These market-linked life insurance products provide significant gains during maturity, therefore making them ULIPs a reliable investment tool.
4. Tax Benefits
According to the life insurance definition, you are required to pay regular premiums to keep the policy active. With life insurance plans, you also get tax benefits under prevailing laws as per Income Tax Act, 1961. The life insurance premium paid can be availed as a tax deduction under Section 80C of the Income Tax Act, 1961. You can avail of a deduction up to Rs.1.5 lakh under Section 80C.
What are the Different Types of Life Insurance?
Now that you are aware of what is life insurance meaning and life insurance definition, you should check the main types of life insurance plans:
- Term Life Insurance Plans – Pure risk covers
- Unit linked insurance plan (ULIP) – Insurance as well as Investment opportunities
- Endowment Plan – Insurance and Savings
- Money-Back – Periodic returns alongside insurance cover
- Whole Life Insurance – Whole life coverage to the life assured
- Child’s Plan – For achieving your child’s life goals like education and marriage
- Retirement Plan – Post-retirement income
Let’s learn further and understand the specifics of different types of life insurance policies.
1. Term Life Insurance Plans
Term life insurance plans are the purest form of life insurance type as they offer life cover with no savings or profit elements. Term life insurance plans are the most affordable type of life insurance policy as premiums are relatively cheaper in comparison to other life insurance plans.
2. Unit Linked Insurance Plan (ULIP)
One of the most unique life insurance types, a unit-linked insurance plan, is a thorough mixture of investment (market-linked returns) and insurance. As per the life insurance definition, the premium paid for the ULIP plan is partially used as a risk (insurance) cover and partially invested in different funds.
Depending on the policyholder’s risk tolerance, they can invest in different funds offered by the insurance provider. Then the insurance provider invests the collected amount into different money-market instruments such as shares and equities.
3. Endowment Plan
The endowment plan is a traditional type of life insurance policy that is a blend of insurance and savings.
With life insurance types such as an endowment plan, if the life assured live longer than the policy period, the insurance company provides maturity benefit to the policyholder. Additionally, some endowment plans may offer periodic bonuses that are either paid on maturity or to the beneficiary in case of the policyholder’s untimely death.
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4. Money-Back
Money-back life insurance plans are unique types of life insurance policies in which a portion of the sum assured is paid back directly to the insured at regular intervals as a survival benefit. This way, the policyholder can achieve short-term financial objectives.
5. Whole Life Insurance
Whole life insurance plans are amongst the life insurance types that cover the life insured for a lifetime, or in a few cases, up to the age of 100 years.
At the time of purchasing a whole life insurance policy, the sum assured gets determined. During the purchase, a nominee is mentioned. In case of any unfortunate event, as per the whole life insurance definition, they get paid with the death claim and any bonuses, if applicable.
Nevertheless, if the life assured lives longer than 100 years, the insurance provider gives the life insured with a maturity benefit equal to the endowment corpus.
6. Child Plan
Child life insurance plans aim at building a corpus for the future development of a child. Typically, such life insurance types help in funding the education and marriage of a child.
Such plans provide installments annually or in one lump sum pay-out, following the major milestones of a child’s life. In case the insured parent meets with an untimely death during the policy term – future premiums are waived off, and the policy benefits continue without disruption.
7. Retirement Plan
Retirement life insurance plans support building a stable financial source for an individual’s retirement years. The purpose and meaning of life insurance for retirement is to help one become financially independent and live without any worry.
Most retirement life insurance definitions fall under life insurance types that offer annual pay-out (by means of annuities) or a one-time lump sum pay-out (by means of commutation of the accumulated amount, up to the prescribed limits) on the completion of 60 years of age.
In case of an eventuality, within the policy term, the insurer pays the insurance benefit to your family.
