A life insurance policy can be defined as a contract between insurance companies and insurance policyholders, where the insurer promises to pay a certain amount of money upon the death of the insured person. For a life insurance policy to remain operational without any deviation, the policyholder must pay regular premiums over a period of time.
A life insurance policy works if the policyholder has paid all premiums regularly. In return for the premium, the insurance company will provide them with a comprehensive life cover.
Difference Between Life Insurance and General Insurance Policy
There is a wide difference between life insurance and general insurance policy. While a life insurance policy offers coverage against the life of the policyholder, a general insurance policy covers other aspects of a person’s life, like health, car, travel, and much more. The life insurance policy has a saving component which is not present in the general insurance policy.
Now that you possess a clear understanding of the difference between life insurance and general insurance policy let us move forward to learn more.
How Does a Life Insurance Policy Work?
Life insurance is a legal contract where the insured is obliged to pay a small sum called a premium to ensure a large protective sum. Usually, life insurance remains valid for a limited period. Thus during that period, the life insurer is bound to pay the death benefit, which is termed as the sum assured to the nominee. And in the case the policyholder survives the term, they receive a maturity benefit depending upon the type of life insurance chosen.
Benefits of a Life Insurance Policy
A life insurance policy is a long-term investment which provides numerous advantages to the insured. Some of the advantages are provided below:
- Financial Protection:
A life insurance policy’s prime and major benefit is to offer financial security to the family members of policyholders. After their death, the insurance company will provide a designated sum of money to their family members, known as a sum assured. This ensures that the family members are financially secure even after your death.
- Tax Benefit:
To promote saving and investment, the government has made many investment instruments eligible for tax saving. Here you can avail of a tax deduction of up to ₹ 1.5 lakhs towards the premium you pay in a year u/s 80 C of Income Tax Act 1961. This will benefit you in saving your tax.
- Achieve Your Big Financial Goals:
Some life insurance policies do have an investment component. The premium you deposit is invested in marketable securities and earns a return. This return on securities can be used in future for your child’s education or marriage, etc.
- Builds Saving Habits:
In order to maintain the life insurance policy and keep it active, you may need to pay regular premiums. If the premium is not deposited, your policy can be cancelled. By investing regularly, you will build your habit of saving money regularly.
These are some of the benefits associated with buying a life insurance policy. But knowing the benefits is not enough. You must also need to know how to select the best life insurance policy that will make your family financially secure.
Some of the points to be considered before choosing a life insurance policy are given below:
- Determine the Life Cover Required:
Determining the life cover required is useful to ensure your family is financially independent and fulfils their needs in your absence. As a rule of thumb, your ideal life cover is determined by multiplying your current annual income by 15 or 20 if your age is below 40 and 10-15 if you are past 40.
- Compare Different Policies:
Knowing essential details about the policies available in the market is the best way to compare them. Premium rates differ depending upon the cover chosen and the term period of the policy. Policies come with a wide choice, but choosing them after comparison is a financially wise decision.
- Premium Frequency:
Life insurance policy companies sometimes offer the policyholder the benefit of flexible premium payment options. The options are provided to the policyholder to pay the premium on a quarterly, half-yearly or annual basis. You can choose the payment frequency according to your financial convenience.
- Claim Settlement Ratio:
The claim settlement ratio is nothing but the total number of claims settled against the aggregated claim filed by a company in a year. The higher this ratio, the lesser would be your chance of a claim being rejected.
- Riders:
Most insurance companies offer a choice of additional riders. These help to provide additional protection over the policy opted for.
Before buying any policy, knowing the difference between life insurance and general insurance policies and their offerings are important. If your goal is to offer financial security to your family in the future, you must buy a life insurance policy. Check for different policies available online and buy the best one according to your and your family’s requirements.
Also Read: 5 Tips for You to Become a More Successful Life Insurance Agent
