Life insurance is a contract signed between an individual and a life insurance company. The individual pays a certain premium at fixed intervals. In contrast, the insurance company pays the beneficiaries the insured amount on the occurrence of the insured event like death/disability or defined benefit of the product on maturity. Once you have understood what life insurance is, it is also necessary to know how life insurance works. The principle of life insurance is simple. As the insured, you would have a sum in mind that you may want a life insurance policy for. You will need to keep in mind that this amount should be able to cover the expenses of your family members in case of an unfortunate event.

The insurance company will calculate the premium amount you need to pay based on this amount. You will pay this premium amount, the insured, either in installments or a lump sum. Do note that the premiums need to be paid for a predefined tenure set by the insurance company or as opted by you at the policy's inception. The life insurance policy amount or sum assured is only given to the beneficiary after the policyholder’s death. This amount will be the sum assured plus other accrued benefits, if any, as stated in the policy document.

Benefits of life insurance

The biggest benefit of life insurance is it helps in creating a safe financial nest for your family. The benefits continue. If you intend to purchase a new life insurance policy, you should familiarize yourself with its benefits. We’ve listed a few down below:

1. Financial Security: One of the primary benefits of having life insurance is to provide a safety net for your family. In case of an unfortunate event, the proceeds from the death benefit can be used by the beneficiaries to meet their expenses and not worry about reaching their financial & life goals. Also, note that the death benefit proceeds are entirely tax-free. Life Insurance provides financial support in case of any unfortunate event.

Some policies are also known to provide maturity benefits. The proceeds from this payout can be used to fulfill the long-term goals of the family and provide financial stability to the family as well.

2. Securing your child’s future: The primary objective in a Child Plan is to build a corpus for their higher Education / Marriage and to fulfil any other milestones set by their Parent / Guardian. More importantly, a Child Insurance Plan provides a safety cushion in case of any unfortunate event as most of these plans come with a premium waiver benefit, whereby the insurance company takes care of the burden of paying future premiums, thereby safeguarding the maturity amount. Upon maturity, the payout will be paid in a lump sum. You can also choose to receive the payouts at intervals to pay for certain life events like marriage or you can also choose to receive the payout at intervals to pay for certain life events like marriage or higher education of the child.

3. Retirement planning: Retirement planning is crucial today, especially where individuals no longer receive pensions, can depend on their children, and must deal with the inflationary effect on expenses. It essentially entails building a corpus and a steady stream of money post-retirement. There are specific plans that will help create a corpus for retirement, which is then used to purchase an annuity plan that helps to generate a fixed, regular income through a pension.

4. Tax benefits: While framing your tax planning, life insurance should also be considered. Besides the benefit of securing your family’s future, you can also claim tax deductions on the premiums paid and tax exemptions on maturity benefits paid out on a life insurance policy.

5. Assured benefits on death: Life insurance is primarily considered financial protection in case of an unfortunate event. Term life insurance policies usually offer a fixed sum assured that secures your loved ones in case of a demise of the life assured.

6. Risk mitigation and coverage: If you are the sole breadwinner of your family, one of your biggest worries is how your family would manage financially if an unfortunate event occurred. This is where life insurance comes in as a risk mitigation option. The premise of life insurance is to mitigate risk and provide financial help to your survivors so that they are taken care of, even if you are not around.