What is Life Insurance?
Life Insurance is defined as a contract between the policy holder and the insurance company, where the life insurance company pays a specific sum to the insured individual's family upon his death. The life insurance sum is paid in exchange for a specific amount of premium. Life is beautiful, but also uncertain. Whatever you do, however smart and hard you work, you are never sure what life has in store for you.
It is therefore important that you do not leave anything to chance, especially ‘life insurance’. As death is the only certain thing in life, apart from taxes, it pays to insure it well in advance.
Life Insurance Definition & Explanation
If you were to go by the dictionary definition, “life insurance” is a financial product that pays you or your dependants a sum of money either after a set period or upon your death as the case may be.
However, if you were to understand the term clearly and also appreciate its importance in your life, consider “life insurance” as a back-up plan for life. Life insurance in its simplest form means being prepared financially, come what may. It ensures that your family and you receive financial support in case you are not able to bring in the much-needed income yourself (maybe due to an accident, retirement, or untimely demise).
In legal terms, life insurance is a contract between an insurance policy holder (insured) and an insurance company (insurer). Under this contract, the insurer promises to pay a pre-decided sum of money (also known as “Sum Assured” or “Cover Amount”) upon the death of the insured person or after a certain period.
The significance of having a life insurance is to avail the "peace of mind" that it brings along. However, having an adequate amount of life insurance effectively sets your mind free of some important questions like:
• What will happen to my family financially after I die?
• How will my wife and kids take care of their expenses after I am no more?
• How will I provide for my family in case I lose my job after an accident?
• How do I ensure that I am able to fund my child’s higher education?
• How do I ensure an income after my retirement?
Now, in order to have a financially secured future, you (the insured) have to pay the insurer (insurance company) a “life insurance premium”, which is either a regular annual payment or a one-time payment as the case may be.
Types of life insurance – Traditional and Market linked
There are several types of life insurance plans for specific needs.
One of the categories is “traditional life insurance plans” such as term insurance (pure protection), endowment and money back plans. Such plans offer multiple benefits in terms of life cover and returns, thus providing safety and security to the insured. These policies are considered risk-free. This is because they provide a fixed benefit (Cover Amount) in case of death of the insured person or at end of the term.
The other category is “market-linked plans”, also known as ULIPs (unit linked insurance plans). These provide both protection and savings combined with flexibility to the covered person. As these products are linked to capital markets, they may have the potential to deliver better returns than traditional plans. However, with high returns there is a risk of low returns as well, which will depend on the market’s performance.
Why you MUST buy life insurance?
Life, as we know it, can throw a surprise at any moment. Surprises are welcome as long as they are pleasant. Rude surprises completely take us by the hook!
A heath emergency, an accident, or sudden death – these are some eventualities that you and your family must always be prepared for. That is where the importance of life insurance lies.
In other words, look at life insurance as your replacement as far as income is concerned. Thus, helping your family and you get over any kind of financial problems, if you are not able to take care of them. As simple as that!
Disclaimer: This article is for general reference reading, please take an expert’s advice in case of doubt.