Life insurance serves as a financial safety net, providing protection and peace of mind to individuals and their families. Understanding how life insurance works is essential for making informed decisions about securing your financial future. Let's delve into the intricacies of life insurance and uncover everything you need to know.
What is a life insurance?
Life insurance is a contract between the policyholder and the insurance company, where the insurer agrees to pay a sum of money (known as the death benefit) to the designated beneficiary upon the death of the insured person. Term insurance plans are most common types of life insurance, offering financial protection to the insured's dependents and ensures their financial needs are met in the event of the insured's demise.
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How does a life insurance work?
Life insurance works on the principle of risk pooling and risk transfer. Policyholders pay premiums to the insurance company, which pools these funds to provide coverage to all policyholders. In the event of the insured's death during the policy term, the insurer pays out the death benefit to the beneficiary named in the policy. If the policyholder survives through the policy term, they receive a guaranteed sum assured at the time of maturity. Some life insurance policies also offer return of premium benefit along with the sum assured at the end of the policy tenure.
Why should I buy a life insurance plan?
Here are some of the compelling reasons why you must consider buying life insurance:
- Financial protection: Life insurance provides a safety net for your loved ones, ensuring they are financially secure in the event of your demise.
- Debt repayment: It helps settle outstanding debts such as mortgages, loans, or credit card balances, preventing the burden from falling on your family.
- Income replacement: Life insurance replaces lost income, ensuring your family can maintain their standard of living and meet ongoing expenses.
- Education fund: It assists in funding your children's education and future expenses, ensuring they have access to quality education regardless of your absence.
- Estate planning: Life insurance facilitates the smooth transfer of assets and minimises financial burdens for your heirs, ensuring your legacy is preserved.
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Key benefits of life insurance
Apart from the above-mentioned benefits, following are the some of other key benefits of life insurance:
- Peace of mind: Knowing that your loved ones are financially protected in your absence brings peace of mind, allowing you to focus on other aspects of life.
- Tax benefits: Premiums paid towards life insurance may be tax-deductible, and the death cover is typically tax-free for beneficiaries, providing tax advantages.
- Flexibility: Life insurance policies often offer flexibility in terms of coverage amount, premium payment options, and additional features like riders for critical illness or disability coverage, catering to individual needs and preferences.
- Cash value: Some life insurance policies accumulate cash value over time, which can be accessed through policy loans or withdrawals.
