Advantages of Life Insurance

Know the benefits of life insurance to secure financial stability for you and your family.
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3 min
05-September-2024

Life insurance policies come in various forms, each tailored to meet different needs and goals. From term life insurance, which provides coverage for a set period, to whole life insurance, which offers lifelong protection, there are many options to choose from. Term life insurance is especially popular because it is affordable and easy to understand.

In this article, explore the key benefits of life insurance. Know how it helps cover final expenses, supports dependents, provides tax benefits, covers chronic and terminal illnesses, aids in retirement savings, and why it remains an underused financial tool. Additionally, we will explore ways to maximise the benefits of your life insurance policy.

What are the key benefits of life insurance?

Following are the top advantages of life insurance policies:

  1. Financial security for dependents: One of the key advantages of term life insurance is that it ensures your family’s financial needs are met even in your absence. It helps cover daily living expenses, education costs, and other essential expenditures, ensuring your loved ones maintain their standard of living.
  2. Debt repayment: Life insurance can be used to pay off outstanding debts such as home loans, personal loans, and credit card bills. The advantages of term life insurance include protecting your family from financial burdens, preventing them from struggling with unpaid liabilities after your passing.
  3. Wealth transfer: Another major advantage of life insurance is that it allows you to leave a financial legacy for your heirs. This ensures they receive a lump sum payout, helping them maintain financial stability and meet future expenses without worry.
  4. Business continuity: For business owners, life insurance provides financial support to keep the business running smoothly. It can cover operational expenses, settle business debts, or even fund a buyout if a business partner passes away, ensuring stability and continuity.
  5. Savings and investment: Certain life insurance policies include a savings or investment component, helping you accumulate cash value over time. This cash can be withdrawn or borrowed against, offering additional financial security while keeping your policy intact.
  6. Tax benefits: Life insurance policies offer tax advantages under various tax laws. The advantages of term life insurance include tax-free death benefits and deductions on premium payments, making it a tax-efficient financial planning tool.
  7. Protection plus savings over the long term: Life insurance provides both protection and long-term savings. While term life insurance offers affordable coverage, other plans like ULIPs and endowment policies help grow wealth over time, securing your financial future.
  8. Mortgage redemption: Life insurance can help pay off your home loan in case of your untimely demise. This prevents your family from facing the risk of losing their home due to unpaid mortgage liabilities, providing them with financial security.
  9. Facility of loans without affecting policy benefits: Some life insurance policies allow you to take a loan against the policy’s cash value. This enables you to access funds for emergencies or major expenses without affecting the core benefits of your policy.
  10. Assured income through annuities: Annuity plans linked to life insurance provide a steady stream of income after retirement. This ensures financial stability in your later years, helping you maintain your lifestyle and cover essential expenses without financial stress.

Also, read: Term insurance comparison

Importance of life insurance in financial planning

Life insurance is an essential financial instrument that plays a crucial role in financial planning. It provides a safety net for your loved ones, ensuring financial stability in case of unforeseen events. Beyond just offering protection, life insurance serves as a versatile tool that can aid in achieving long-term financial goals.

Know the advantages of life insurance:

  1. Financial security for dependents:Life insurance provides financial security for your dependents. If the policyholder passes away, the insurance payout can help pay for living expenses, debts, and education costs. This support helps keep their standard of living.
  2. Tax benefits: Life insurance offers tax savings in two ways: premiums paid qualify for deductions under Section 80C, and the payout is usually tax-free under Section 10(10D). These benefits make life insurance a smart choice for tax planning while ensuring financial security.
  3. Investment and savings: Certain life insurance policies, like Unit Linked Insurance Plans (ULIPs), combine insurance with investment. These policies allow you to build a corpus over time, which can be used for future financial goals such as buying a home, funding your child's education, or planning for retirement.
  4. Debt protection: Life insurance can also protect your assets by covering outstanding loans or mortgages in case of an untimely death. This ensures that your family is not burdened with debt repayments during an already difficult time.
  5. Ensure your child's future security: A life insurance policy can help secure your child's future by ensuring they have financial support for education, marriage, and other major life events, even if you are not around. This gives peace of mind knowing your child’s needs will be met.
  6.  Retirement planning: Life insurance can serve as a retirement tool by providing a steady income stream through annuities. This ensures financial independence in your golden years, allowing you to enjoy a stress-free retirement without worrying about money.

Incorporating life insurance into your financial plan not only safeguards your family's future but also provides you with peace of mind, knowing that you have taken a critical step towards comprehensive financial security.

Factors to consider while buying life insurance

Following are the key factors that you must consider when purchasing life insurance:

  • Assess your financial needs: Determine the financial support your family would need in your absence. Consider daily expenses, outstanding loans, and future goals like children’s education or retirement.
  • Choose the right policy type: Select a policy based on your needs—term insurance for affordable coverage or whole life insurance for lifelong protection and savings.
  • Evaluate the coverage amount: Ensure the sum assured is sufficient to cover expenses, liabilities, and future financial goals. Experts recommend coverage of at least 10-15 times your annual income.
  • Check the policy tenure: Choose a policy duration that aligns with your financial responsibilities. Term insurance should ideally cover you until retirement or until major liabilities are cleared.
  • Compare premiums and benefits: Compare policies from different insurers to find the most suitable balance between affordability and benefits. Look for a plan that offers maximum coverage at a reasonable premium.
  • Look for additional riders: Riders like critical illness cover, accidental death covers, and waiver of premium can enhance your policy’s protection. Assess if adding riders aligns with your needs.
  • Check claim settlement ratio: A high claim settlement ratio indicates a reliable insurer. Choose a company with a good track record to ensure your family gets the payout without hassle.
  • Understand policy exclusions: Read the policy terms carefully to know what is not covered. Awareness of exclusions prevents surprises when filing claims.
  • Review tax benefits: Life insurance premiums qualify for tax deductions under Section 80C, and the maturity benefits are usually tax-free under Section 10(10D), making it a tax-efficient investment.
  • Assess the insurer’s reputation: Check customer reviews, service quality, and financial stability of the insurance provider before purchasing a policy. A trustworthy insurer ensures smooth claim processing.

Life insurance covers final expenses

One of the primary benefits of life insurance is its ability to cover final expenses. Funerals, burial costs, and related services can be expensive. Life insurance ensures that these costs are covered without imposing a financial burden on your family during an already difficult time. This coverage can include:

  • Funeral and burial costs: These can range from basic services to more elaborate ceremonies, and life insurance ensures that these expenses are met according to your wishes.
  • Medical bills: If there are any outstanding medical expenses at the time of death, life insurance can help cover these costs.
  • Legal fees: Settling an estate often involves legal expenses, which can be covered by your life insurance policy.

How life insurance ensures financial support for your dependents’ living expenses

Ensuring that your dependents are financially secure is one of the core benefits of life insurance. This is especially crucial if you are the primary breadwinner. Life insurance can provide a steady income stream to cover:

  • Daily living expenses: These include food, utilities, and other household costs.
  • Education costs: Life insurance can ensure that your children's education is not disrupted due to financial constraints.
  • Major life events: Funds can be set aside for significant milestones such as weddings or starting a business.

Also, read: Cash value in life insurance

Pro Tip

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Tax benefits of life insurance: Key deductions and exemptions you should know

One of the often-overlooked advantages of term life insurance and other types of life insurance policies are the tax benefits they offer. In India, life insurance payouts are generally non-taxable under Section 10(10D) of the Income Tax Act. Additionally, you avail the following benefits of life insurance:

  • Premium deductions: Premiums paid for life insurance policies are eligible for tax deductions under Section 80C, up to a specified limit.
  • Maturity benefits: The maturity proceeds of certain life insurance policies can also be exempt from tax, providing a significant financial advantage.
  • Loan against policy: Loans taken against the cash value of a life insurance policy are not considered taxable income, offering a tax-efficient way to access funds.

Also read: Life insurance policy with maturity benefits

How life insurance covers chronic and terminal illness: What you need to know

Modern life insurance policies often include riders or add-ons that provide coverage for chronic and terminal illnesses. This means that if you are diagnosed with a severe illness, you can receive a portion of the policy’s death cover to cover medical costs and other expenses. Benefits of life insurance include:

  • Medical treatment costs: These can be substantial and life insurance can provide the necessary funds to access the best care.
  • Home care and hospice: Coverage can extend to at-home care or hospice services, ensuring comfort and support during critical times.
  • Loss of income: If an illness prevents you from working, life insurance can supplement lost income, maintaining your family’s financial stability.

Also, read: Whole life cover in life insurance

How can life insurance secure your retirement savings?

Life insurance is not just about protection; it can also be a valuable tool for retirement planning. Certain policies, like whole life or endowment plans, come with a savings component that grows over time. This accumulated cash value can be used in various ways to enhance your retirement. Know more about the benefits of life insurance:

  • Supplemental income: The cash value can be withdrawn or borrowed against to provide a steady stream of income during retirement.
  • Emergency fund: Life insurance can serve as a financial backup, offering liquidity in case of unexpected expenses.
  • Long-term care: Policies with living benefits can be used to cover long-term care costs, preserving your retirement savings.

Also, read: Savings plan

Why do so many people ignore life insurance?

Despite its numerous benefits, life insurance remains an underutilised financial tool. Many people overlook the importance of having adequate coverage, often due to misconceptions or lack of understanding. Know the further benefits of life insurance and why life insurance deserves more attention:

  • Affordable protection: Term life insurance, in particular, is highly affordable, providing substantial coverage for a relatively low premium.
  • Financial planning: Life insurance should be a cornerstone of any comprehensive financial plan, offering protection and peace of mind.
  • Versatility: Life insurance offers different types of policies and riders. This allows it to be customised for individual needs and situations

How to maximise the benefits of your life insurance?

To maximise the benefits of life insurance, consider the following strategies:

  • Choose the right policy: Select a policy that aligns with your financial goals and coverage needs. Whether it’s term life insurance for temporary coverage or a whole life policy for lifelong protection, make sure it fits your requirements.
  • Regularly review your coverage: Life circumstances change, and so should your insurance coverage. Regularly review and update your policy to ensure it meets your current needs.
  • Add riders: Enhance your policy with riders that provide additional coverage for critical illness, accidental death, disability, and more.
  • Leverage tax benefits: Take full advantage of the tax benefits available under Indian law by strategically planning your premium payments and coverage.
  • Consult a financial advisor: Professional advice can help you navigate the complexities of life insurance and select the most suitable options for your situation.
  • Stay informed: Keep yourself updated on new products and changes in regulations to ensure you are getting the most out of your life insurance policy.

What are the things life insurance covers?

Following are the features that life insurance covers:

  • Financial support for dependents – Provides a lump sum to your family, ensuring they can manage daily expenses and future needs.
  • Debt repayment – Helps pay off loans, mortgages, and other liabilities, preventing financial burdens on loved ones.
  • Final expenses – Covers funeral costs, medical bills, and other end-of-life expenses.
  • Income replacement – Acts as a financial cushion by replacing lost income after the policyholder’s death.
  • Critical and terminal illness cover – Some policies provide financial assistance for medical treatments.
  • Retirement planning – Policies with savings components help build a retirement corpus through annuities.
  • Business protection – Offers funds to settle business debts or ensure continuity.
  • Child’s education and future – Ensures that children’s education and important life events are financially secure.

The benefits of life insurance go beyond just financial protection. It provides security to your family, ensures debt repayment, and offers tax benefits. One major advantage of life insurance is its ability to act as both protection and investment, helping you save for future goals like retirement, home ownership, or your child’s education.

Is a life insurance policy right for you? Here is what you should know

Life insurance is a crucial component of financial planning that offers numerous advantages and benefits. It serves as a protective shield for your loved ones, ensuring their financial security in case of your unexpected demise. However, not everyone may feel the need for life insurance. Here is a look at who should consider getting a life insurance policy:

  1. Primary breadwinners: If you are the main source of income for your family, a life insurance policy is essential. The benefits of life insurance ensure that your family can maintain their standard of living, cover daily expenses, and pay off debts even after your passing.
  2. Parents with young children: Parents, especially those with young children, should consider life insurance. The policy can fund your children's education, upbringing, and future needs. The advantages of life insurance here include providing for your children's future even in your absence.
  3. Individuals with outstanding debts: If you have significant debts like a home loan, car loan, or personal loans, life insurance can prevent these liabilities from falling on your family. The insurance payout can be used to clear these debts, ensuring your loved ones are not financially burdened.
  4. Business owners: Business owners should have life insurance to safeguard their business interests. The policy can be used to cover business debts, support business continuity, or provide financial support to partners or stakeholders.
  5. Young professionals: Young professionals with long-term financial goals should consider life insurance as part of their financial strategy. The advantages of life insurance include not only protection but also the potential for savings and investment growth, depending on the policy type.

Key factors to consider when buying life insurance

When buying life insurance, it is essential to make an informed decision to maximise the benefits it offers. Life insurance is a long-term commitment that provides financial security to your loved ones, so considering the right factors ensures you choose a policy that aligns with your needs and financial goals. Here are key factors to consider when buying life insurance:

  1. Purpose of the policy: Understand why you need life insurance. Whether it's to provide for your family, pay off debts, or leave a legacy, the purpose will help you decide the type and amount of coverage. The benefits of life insurance can be tailored to meet specific needs, such as income replacement or funding your child’s education.
  2. Type of insurance: Choose between term and permanent life insurance. The advantages of term life insurance include affordability and simplicity, providing coverage for a specified period. In contrast, permanent life insurance offers lifelong coverage with an investment component, which can accumulate cash value over time.
  3. Coverage amount: Determine the amount of coverage needed based on your income, liabilities, and future financial goals. The right coverage ensures that your family can maintain their lifestyle, cover expenses, and achieve financial objectives even in your absence.
  4. Policy duration: Consider how long you need the coverage. Term life insurance is ideal for temporary needs, like covering a mortgage or providing for dependents until they become self-sufficient. Permanent life insurance suits those looking for lifelong protection.
  5. Premium costs: Evaluate your budget to ensure you can afford the premiums over the long term. Term life insurance generally offers lower premiums, making it accessible for many. However, permanent policies come with higher premiums due to the additional investment benefits.
  6. Insurer's reputation: Choose a reputable insurance provider with a strong financial background and good customer service. This ensures reliability when it comes to claim settlement, which is critical for your beneficiaries.

By carefully considering these factors, you can select a life insurance policy that offers the advantages of life insurance tailored to your specific needs, providing peace of mind and financial security for you and your family.

Read more: Life insurance vs. general insurance

Conclusion

Life insurance is a multifaceted financial tool that offers a wide range of benefits, from providing financial security for your dependents to offering significant tax advantages. Understanding the benefits of life insurance policies, including the advantages of term life insurance and the term life insurance tax benefits, can help you make informed decisions that secure your family's financial future.

In an ever-changing world, securing your financial future and that of your loved ones through life insurance is a wise and necessary step. It is not just about protection; it is about ensuring peace of mind, financial stability, and a legacy for future generations.

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Frequently asked questions

What are the life insurance benefits?
Life insurance provides financial security for your loved ones, covering expenses like daily living costs, education, and final expenses. It also offers tax benefits, helps repay debts, and can serve as a tool for savings and investment, ensuring a stable financial future for your dependents.
What are the benefits of getting a life insurance policy?
A life insurance policy offers peace of mind by ensuring that your family's financial needs are met after your demise. It covers final expenses, provides for dependents, offers tax advantages, and can include savings components to support retirement planning and long-term financial security.
How do I benefit from a life insurance policy?
You benefit from a life insurance policy by securing financial protection for your family, covering debts and final expenses, and leveraging tax advantages. Additionally, policies with savings components can provide retirement income and financial support in case of chronic or terminal illness.
What are the benefits of owning an insurance policy?

Insurance provides financial security, covering unexpected events like illness, accidents, or death. It protects your assets, ensures your family’s financial stability, and offers peace of mind. Additionally, insurance policies may provide tax benefits, making them a crucial part of a comprehensive financial plan.

What is the main objective of life insurance?

The primary purpose of life insurance is to provide financial protection to your beneficiaries in the event of your death. It ensures that your loved ones are financially secure, covering expenses such as living costs, debts, and future needs like education or retirement.

What are the pros and cons of life insurance?

Life insurance offers benefits like financial security, income replacement, and tax advantages. However, it can also have disadvantages, such as high premiums for certain policies and the complexity of understanding different types of coverage. Weighing these pros and cons is essential for making an informed decision.

Which is the most suitable age of getting life insurance?

The suitable age to get life insurance is in your 20s or 30s when premiums are lower, and health is typically better. Starting early ensures long-term financial security and affordable coverage for your loved ones.

Can I buy riders without a base policy?

No, riders cannot be purchased separately; they must be added to a base life insurance policy. Riders enhance coverage by providing additional benefits like critical illness cover, accidental death covers, or premium waivers.

What is an advantage and a disadvantage of life insurance?

Advantage: Life insurance provides financial security to your family, ensuring they can manage expenses in your absence.

Disadvantage: Some policies, especially whole life plans, can have high premiums, making them expensive compared to term insurance.

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