The primary or most important benefit that life insurance provides is security. It allows the applicant to provide for his/her financial obligations in case of death. A person may want to provide for the future of his/her children, their education or marriage expenses, provide for the repayment of borrowed loans, or look after his/her aged parents.
Life insurance is primarily meant to mitigate risk. Life insurance policies that provide only this role are referred to as pure “risk” policies.
In life insurance, the applicant pays a premium amount in exchange for which the insurance provider guarantees to pay a particular amount of money in case of death of the insured person. The amount that is paid in case of death is referred to as a “pay-off” or “assured sum.
The secondary benefit that an insurance policy can provide is investment. There are a number of insurance policies, referred to as whole life, universal life, cash back, investment plans that allow for the policy holder to earn a guaranteed sum on maturity. This is in addition to any amount that may be paid on the death of the insured person. These insurance policies are for a longer duration. They serve the dual purpose of security and investment. As a particular amount is guaranteed on maturity, the premium paid is generally higher.
A third and important benefit of insurance is tax relief. In most cases, the premium being paid, the payoff in case of death, and the assured sum on maturity all enjoy tax benefits. In certain instances these amounts are entirely exempt from tax (Please consult a qualified tax consultant for details and applicability).
Another benefit of life insurance is security. A life insurance policy can act as an instrument of security against which lending institutions can forward funds. This is particularly true in the case of whole life insurance policies, where banks are willing to forward up to 90% of the assured sum to borrowers against such policies. In certain instances, such as education and personal loans, the bank may require borrowers to insure themselves and nominate the lending institution as nominees. This secures the banks and permits them to lend.
Depending on the need of an applicant, insurance can provide a number of benefits. The basic requirement should first be analyzed and the appropriate solution sought. A need-based approach saves money and provides the right solution.