Definition: Life insurance is such a contract between an insurer and an insured whereby the insurer agrees to pay a certain sum of money on the maturity of the policy or on the death of the insured, against a lump-sum premium or an installment based premium.
You pay a monthly premium for life insurance. Your age, health, lifestyle, and how much cover you need, as well as the type of policy you have, will all determine how much you pay.
Types of Life Insurance Policies:
1. Whole Life Policy:-
In the case of whole Life Policy:
- The insurance premium is payable regularly for a fixed period(say, 20 or 30 years) or throughout the life of the inured; and
- The sum assured (i.e., policy money) is payable only on the death of the insured to his nominee or legal heir.
It is mentionable in this context that if the insurance premium is payable throughout the life of the insured, the policy is called Ordinary Life Policy. On the other hand, if Premium is payable for a fixed period, the policy is called Limited Life Policy.
2. Endowment Life Policy:-
In the case of endowment life policy-
- The sum assured (policy money) is payable to the insured after the expiry of a fixed period, or
- It is payable to the nominee or legal heir of the insured on his death.
3. Joint Life Policy:-
When two or more persons simultaneously take a policy on their lives, it is called Joint Live Policy. In the case of such policy-
- The insurance premium is paid jointly either in installment or lump-sum: and
- On the death of any person, the sum assured(policy money) is paid to the other survivor.
Generally, these types of policies are taken by husband and wife or the partners of a partnership firm.
4. Annuity Policy:-
When the sum assured of a policy is payable monthly, quarterly, half-year, or annually after the insured attains a certain age, the policy is called Annuity Policy. This type of policy is taken by those who prefer a regular income after a certain age.
5. Children’s Endowment Policy:-
The policy which is taken to meet the expenses of education or marriage of children is called Children’s Endowment Policy. In the case of such policy, the sum assured is payable by the insurer when the children attain a particular age.
Importance of Life Insurance:
The remarkable points in the context of the importance of Life Insurance are-
- Protection to the family: Life insurance provides financial protection to the family at the premature death of the insured.
- Financial Support: Life insurance provides financial support to the insured at old age when the earning capacity of the insured reduces.
- Encouragement in Savings: Life Insurance develops a habit of savings among people; because they have to pay premiums regularly.
- Income tax exemption: According to section 80(C) of the income tax Act, the insured persons get income tax exemption on the amount of premium paid by them.
- Loan Facility: People can take loans easily from the insurance company or bank against the security of life insurance premiums.
- Capital Formation: The life insurance premium received by the insurance company facilitates capital formation in the country.