If you have dependants, you need life insurance
If you have people depending on you for financial support you need life insurance so that they do not have to suffer financial hardships when you are no longer around to support them. If you have a spouse and children who depend on your income, you should buy term insurance so that it can offer them income replacement when you are no longer around to help them financially.
Life insurance is a contract
The life insurance policy that you hold is a contract between yourself and the life insurance company wherein the company offers to pay your family a fixed sum in the event of your untimely demise in exchange for the promise that you would pay regular premiums.
The parties to the contract
There are essentially four parties to the contract. The insurer is the insurance company who covers the risk to life. The owner or the policyholder is the one who is responsible for paying premiums on the policy. The insured is the person on whose life the policy is based. In other words, the policy covers the risk of the insured’s life. The beneficiary or the nominee is the person who will receive the benefits of the policy in the event of death of the insured.
There are some other terms also that you need to keep in mind. Sum Assured is the fixed sum of money that will be paid to the beneficiary of the policy in the event of the untimely demise of the Insured. Premium payment term is the length of time till which you have to make premium payments. Policy term is the time till which the policy will remain in force. The premium payment term and the policy term can be the same or different depending on the policy make-up. Maturity period is the time when the policy matures, after which all the benefits in the policy, if any, are paid off and the policy terminates.
Life insurance offers income replacement
Life insurance offers income replacement for the family of the person whose life is covered. In other words, since the family loses it’s income source after the insured dies, a life insurance policy provides a source of funds and income to the bereaved family.
Life insurance is basically a risk management plan
The purpose of life insurance is to cover risk unlike what most people feel. Most people either treat it as an investment tool or as a tax-saving one. It is basically a risk coverage plan. It minimises the risk of losing financial independence after the untimely demise of the breadwinner. It ensures that the family in it’s bereavement is not further disturbed by lack of financial support. Although there are ULIPs and endowment plans which offer a return on investment, the same is not the primary purpose of life insurance. The primary purpose of life insurance is management and coverage of risk.
Life insurance is not expensive
A 25 year old non-smoking male can avail of a term insurance plan for a Sum Assured of Rs.1 crore for a policy term of 30 years at an annual premium of Rs.6172/-*. This is less than three cups of tea a day. If you factor in the tax savings, it will be cheaper than a couple of cups. Hence, it’s not expensive. It is just a perception that life insurance is expensive. On the contrary, not buying a term insurance is expensive. This is because following your untimely demise, your family will have to depend on either borrowings or sustain themselves by selling off the family assets, both of which will deplete the savings.
*This is for illustration purpose. Refer https://www.edelweisstokio.in/term-insurance-plans/total-secure-plus for exact quote.
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