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Buying a life insurance policy is one of the most important financial decisions of your life. So, before opting for it, you must know what exactly a life insurance policy is and why do you need it. Knowing this will help you to purchase the most suitable policy.
For your better understanding, here we have touched upon some of the key things that are important for you to know before you purchase a life insurance policy.
Who are the parties involved in a life insurance policy?
Firstly, you should be aware of the parties which are involved in a life insurance policy. Mainly, there are four important players in every life insurance policy which are-
Insurance company: Also known as the insurer. It is the party that offers/issues you the policy.
Owner: An owner is a person who owns a policy in his/her name.
Insured: An insured is a person against whom a policy has been taken/issued. However, sometimes, an owner and an insured individual can be the same depending on who buys the policy.
Beneficiary: Also known as a nominee. It is an individual or individuals, who will receive a payout/claim benefit in case the insured dies before the policy ends.
What are the types of life insurance policies?
There are two types of life insurance policies. They are as follows-
Term Insurance: It is a type of life insurance policy that provides coverage only for a specified term. If the insured dies during the time specified in the policy and that policy are still in force, then the death benefit will be paid to the beneficiary/nominee upon filing the claim.
Permanent Life Insurance: A permanent life insurance policy is an umbrella term for life insurance policies that never expire. Such policies combine a death benefit with a savings portion. The premium paid under this policy goes towards maintaining the policy's death benefit and allowing the policy to build cash value, against which the policy owner can borrow funds as and when required.
What should be your age while applying for a life insurance policy?
To get a life insurance cover in your name, your age should be in between 18 and 65 years. Most of the life insurers follow this rule while issuing a policy to any individual. It helps them to analyse the risk associated with the individual as well as decide the premium amount of the policy.
What are the factors that affect the life insurance premium?
Some of the important factors that affect your life insurance premium-
Age: Age of an applicant has a direct impact on the policy premium. The individuals who are of a young age are likely to pay less premium than older individuals. This is because they are less prone to severe illnesses.
Type of policy selected: There are several types of policies available in the market such as child plans, savings plans, retirement plans, among others. Premium amounts can vary depending on the plan you have chosen.
Sum assured: This is the prime determinant of premiums quoted by an insurance company. Sum assured is the total amount a company agrees to pay the beneficiaries of a policyholder in the event of death.
Policy term: The term/tenure of the policy also affects the premium amount that you will be paying. The longer your policy's tenure, the larger will be the amount of the benefit you will receive at the time of death.
Riders: Riders are add-on products that you can include in your existing policy. Adding them will not only increase the coverage of your policy, but it will also increase the premium amount that you need to pay to your insurer.
What are the tax benefits available under life insurance?
Investing your money in a life insurance cover will also offer you plenty of tax benefits under the Income Tax Act, 1961. Benefits are available based on Sections 80C, 80CCC, and 80D of the Income Tax Act and provide exemptions on premiums paid up to Rs. 1,50,000.
Life insurance tax deduction laws have changed now
After the introduction of the Direct Tax Code (DTC), the eligibility for a tax deduction based on life insurance premiums has also changed. Under the new reform, an individual needs to have a life cover which should be more than 10 times the annual premium. For example, if a person pays a premium of Rs. 15,000 every year, the minimum coverage they need to have is Rs. 1,50,000.
Buying life insurance is a must-have if an individual has dependents
Although buying a life insurance cover is extremely important for yourself. But it becomes more important when you have dependents who rely on your income. That dependent could be anyone such as spouse, children, or parents. To reduce the risk of leaving the family stranded financially, such individuals need to have a policy against their name.
Above all, life insurance is one of the best financial tools which helps you to safeguard the finances and future of your entire family. If in case you do not have any life insurance policy right now and are planning to buy one, make sure to get the right one that offers maximum coverage after going through the above-mentioned information.