Insurance is a contract of indemnity in which an individual or entity receives to hedge against the risk of financial losses from an insurance company from damage to the insured property, or from liability for damage or injury caused to a third party.
How does Insurance Policy Work in India?
Insurance is a way of protecting from a financial loss whereby the insurance company will pay out the insured amount to either the insured person or the nominees in case of any unforeseen conditions except under the act of God. The insurance company guarantees of providing a high cover for a small premium because very few insured people can succeed in getting the claimed amount. The decision to provide an insurance policy is at the discretion of the insurance company. The insurance company will evaluate the number of risks before allotting the insurance to any individuals.
Types of Insurance Policies
Life insurances are categorized on the amount of risk covered. Insurance policy can be either purely insurance and a combination of insurance and investment component.
The different types of life insurance policies available in the market are
- Term Life Insurance: Term insurance is a pure risk cover plan that offers high coverage at low premiums. These types of plans provide risk of death for a specified period. In case the insured passes away during the policy period, the life insurance company pays the death benefit to the nominee. The benefit can be payable in lump sum, monthly, or a combination of both.
- Unit Linked Plans (ULIPs): A unit linked plan is a comprehensive combination of insurance and investment which is partly used as insurance and partly is invested in funds. There are different types of ULPIs offered by the insurance company depending on the coverage of risk. The insurance company can invest the accumulated amount in the capital market such as bonds, equities, debts, market funds, or hybrid funds.
- Endowment Plans: Endowment plan is a type of life insurance plan, where a certain amount is kept for life insurance, while the rest is invested by the life insurance company in various types of funds. Moreover, the company may also offer bonuses periodically, which are to be paid either on the maturity of the policy or to the nominee on the death of the policyholder.
- Whole Life Insurance: A whole life insurance policy as its name suggests, covers the life assured for the whole life of the policyholder. The sum assured or the coverage is decided at the time of purchase of the policy and is paid to the nominees at the time of death along with bonuses if any. However, the company also offers partial withdrawals after the completion of premium payment terms.
- Child Plan: A child plan helps to build corpus funds for a child’s education and marriage. The Child Plan provides annuity annual installments or one-time payout after the completion of the age of 18 years. In case of an unfortunate event, if the insured parent passes away before the maturity of the policy, immediate payment is payable to the child by the insurance company.
- Retirement Plan: A retirement plan helps to build a corpus of funds that help you to live independently financially and without any financial crisis. Most retirement plans provide coverage up to the age of 60 years. However, in case of an unfortunate event, if passes away during the policy term, immediate payment is payable to the nominee by the insurance company at a higher of coverage or fund value or 105% of premiums paid.
Benefits of Having Insurance Policies
Key Advantages of Life Insurance Policy in India
- Death Benefits: Life insurance plans enable individuals to protect themselves and their families, in case of death of the insurance holder. The insurance company pays an amount equivalent to the sum assured to the nominee of the insured.
- Investment Components: Certain insurance policies such as ULIPS or endowment plans provide benefits of both insurance and investment. While one-half of your premium is paid toward coverage of risks of financial losses, the other half is invested in equity, debt, or combinations of both.
- Maturity Benefits: Life insurance policies can also be used as savings instruments by offering maturity benefits. If the insured survives the policy term and no claims have been made, the total premiums paid are paid along with the interests at the time of maturity of the policy.
- Coverage Against future supports: Having a life insurance policy ensures your family financial support to meet basic financial stability, in event of unfortunate death or physical or mental disability.
- Tax deductions: Apart from the above benefits you can also avail various tax benefits of having insurance policies
- Section 80C: Individuals can reduce their tax liabilities by investing term insurance up to maximum tax deduction for up to Rs. 1.5 lakh.
- Section 80D: Individuals can claim up to Rs. 50,000 (that can be extended up to 75000 in specific cases) by investing in health insurance. Whereby up to Rs. 25000 can be claimed for self, child, and spouse and Rs. 25000 if the parents are under 60 years of age and up to Rs. 50000 if the age is above 60 years of age.
- Section 10(10D): Any amount received from the insurance company is completely tax-free (provided your premium does not exceed 10% of your Sum Assured, annually.
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The author Sushant Gangurde is a legal analyst @Taxblock India who aims to educate people about various tax laws and financial planning.
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