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Understanding life insurance

April 13, 2016 09:44 IST

A dummy’s guide to what insurance is all about

Most people in India, at some or the other stage in their lives must have thought of buying a life insurance product for themselves. To put it in simpler terms, a life Insurance policy is an agreement between the insured and the insurer where the insurance company agrees to pay the nominee a lump sum amount in the event of any mishap with the insured.

The life insurance helps in providing financial protection to you and your family or dependants after you. You pay a small amount in the form of premium for a specified tenure and the insurance company pays back a lump sum amount (sum insured) to your nominee (mentioned in the policy) in the event of any mishap with you.

Types of life insurance plans

Term insurance: Term insurance is the most affordable form of life insurance plan. It provides you high risk cover by paying out lesser premium. In case of your death, the insurance company pays the sum assured to your nominee or beneficiary mentioned in the policy.

Whole life insurance: This plan covers you for life and thus you pay the regular premium until you die. Your nominee gets the full sum assured at the event of your death.

Endowment plan: Unlike term plan, endowment plan pays you sum assured along with the profits in both the cases -- death and survival. This plan charges higher premium which is then invested in the asset market, that is, in equity and debt.

Child plans: Provides financial coverage to your child's future needs and allows you to plan his/her future in a better way. You can add riders also for making it more effective.

Retirement plans: This plan assists you in securing your post retirement life financially. Choose from multiple options.

Investment plans: This plan helps you in enhancing your wealth, savings, and get an insurance coverage as well.

Unit-linked plan: This plan provides you both investments as well as insurance. The performance of this plan is linked with the market. You choose the allocation of investments in the stock market. The sum assured is paid out on the event of death.

Money back plan: This is a variant of endowment plan. A portion of sum assured is paid out at regular intervals. In case you survive, you get the balance sum assured and if you die, your nominee gets the full sum assured.

Why life insurance?

Financial security: Life insurance policies give financial security to you and your family in every critical aspect. For instance, you can get financial support for your child’s education, marriage even after retirement and also provide your family a financial security after you.

Investment option: Some life insurance policies such as unit-linked plans can be purchased for investment as well as insurance purpose. You can even choose the allocation of the investment in the financial market.

Loan: Apart from an insurance and investment purpose, you can also raise loans against some of the life insurance policies.

Tax benefit: Most of the life insurance policies give you the benefit of tax deduction on premium payment and tax-free sum assured under Section 80C and 10 (10) D of the Income Tax Act, respectively.

Wider options: Life insurance gives you variety of options such as death benefits under term plan, finance for child education, regular income under pension plan, investment under unit-linked plan, etc.

Tips to buy life insurance policy in India...

Buy early: The earlier you buy the policy, the better it is. This helps you in getting an adequate risk cover as well as building a good corpus

Compare: You must compare life insurance policies online in order to get a good deal and save lot of money

Analysis: You should do the proper analysis before selecting a policy which fulfills your needs

How much to buy: Analysing the potential needs of your beneficiary will help you decide on how much insurance you need to buy

These steps will surely work for you in getting the best life insurance policy online.

Illustration: Uttam Ghosh/Rediff.com

Naval Goel is CEO and Founder, PolicyX

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Naval Goel
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