Life Insurance Benefits and Myths People Should Know Before Buying a Policy

Life insurance is one of the most important financial instruments that individuals can invest in to secure their family’s financial future. Despite its significance, many people either avoid purchasing a policy or delay the decision due to common misconceptions. A well-chosen life insurance policy can provide peace of mind, financial stability, and long-term benefits. However, it is crucial to understand the different types of life insurance available and separate fact from fiction before making a commitment.

This article explores the key benefits of life insurance, the types of policies available, and the myths that often mislead individuals when considering life insurance coverage.

Understanding life insurance

At its core, life insurance is a contract between an individual and an insurance provider, wherein the insurer promises to pay a designated beneficiary a sum of money upon the insured’s death or after a set period. This financial provision ensures that the policyholder’s dependents can maintain their standard of living, settle debts, or cover other expenses in the absence of the primary breadwinner.

Types of life insurance policies

There are several types of life insurance products designed to cater to different financial needs and goals:

1. Term life insurance – Offers coverage for a specified period, such as 10, 20, or 30 years. If the insured passes away during this term, beneficiaries receive the death benefit. Term policies are typically more affordable but do not accumulate cash value.
2. Whole life insurance – Provides lifelong coverage with a death benefit and a cash value component that grows over time. Premiums are generally higher, but the policy can serve as a long-term financial asset.
3. Unit linked insurance plans (ULIPs) – Combine life insurance with investment options, allowing policyholders to invest in equity or debt funds. The returns are market-linked, offering potential for wealth accumulation alongside insurance coverage.
4. Endowment plans – Blend insurance coverage with savings, ensuring a lump sum payout either on death or after a specified period. These plans are suitable for those seeking a combination of protection and savings.
5. Moneyback policies – Provide periodic payouts during the policy term, ensuring liquidity alongside insurance coverage.

For a comprehensive overview of these policies, consider visiting Bajaj Finserv’s guide on the types of life insurance available in India.

Benefits of life insurance

1. Financial security for dependents – The primary advantage of life insurance is the financial protection it offers to the insured’s family. In the event of the policyholder’s demise, beneficiaries receive a lump sum that can cover daily expenses, education costs, and other financial commitments, ensuring they maintain their standard of living.
2. Debt repayment – Life insurance can be instrumental in settling outstanding debts such as mortgages, personal loans, or credit card balances, preventing the burden from falling on surviving family members.
3. Tax benefits – Policyholders often enjoy tax deductions on premiums paid, and the death benefit received by beneficiaries is typically tax-free, enhancing the overall value of the policy.
4. Wealth accumulation – Certain policies, like whole life insurance and ULIPs, offer investment components that accumulate cash value over time. This feature can serve as a savings avenue or provide funds for future financial needs.
5. Coverage for chronic and terminal illnesses – Many life insurance policies offer riders or endorsements that provide benefits if the policyholder is diagnosed with a chronic or terminal illness. This feature allows access to a portion of the death benefit while still alive, aiding in covering medical expenses.
6. Supplemental retirement income – Permanent life insurance policies, such as whole life or universal life, accumulate cash value over time. Policyholders can borrow against this cash value or make withdrawals, providing a source of supplemental income during retirement.
7. Business continuity – For business owners, life insurance can ensure the continuity of the business in the event of their death. The death benefit can be used to cover business debts, buy out a deceased partner’s shares, or hire new personnel, thereby stabilising the enterprise during a challenging period.
8. Estate planning – Life insurance can play a pivotal role in estate planning by providing liquidity to pay estate taxes, ensuring that heirs receive their intended inheritance without the need to liquidate assets.
9. Peace of mind – Beyond financial aspects, possessing a life insurance policy offers intangible benefits like peace of mind, knowing that one’s loved ones will be financially protected in unforeseen circumstances.
10. Charitable contributions – Policyholders can designate charities as beneficiaries, ensuring that their philanthropic goals are met even after their passing.

Debunking common life insurance myths

1. Life insurance is unaffordable – Many individuals overestimate the cost of life insurance. In reality, premiums can be tailored to fit various budgets, and starting a policy at a younger age can lock in lower rates.
2. Only breadwinners need life insurance – While income replacement is a significant aspect, non-working spouses or stay-at-home parents also contribute economically through their services. Life insurance can cover costs like childcare or household management in their absence.
3. Employer-provided insurance is sufficient – Relying solely on employer-provided life insurance may be inadequate, as coverage amounts are often limited and may not transfer if you change jobs.
4. Young and healthy individuals don’t need life insurance – Purchasing life insurance at a younger age can be more cost-effective, as premiums are typically lower, and it safeguards against unforeseen health issues that could arise later.
5. Life insurance is only for covering funeral expenses – Beyond funeral costs, life insurance can replace lost income, pay off debts, fund children’s education, and more, providing comprehensive financial support to beneficiaries.
6. I can’t get life insurance due to health issues – While certain health conditions can affect premiums, many insurers offer policies catering to various health statuses, ensuring coverage is accessible to a broader population.
7. Life insurance payouts are taxable – Generally, life insurance death benefits are not subject to income tax, allowing beneficiaries to receive the full amount intended.

Conclusion

Life insurance is an essential financial tool that offers security, long-term financial planning, and peace of mind. While myths and misconceptions often deter individuals from purchasing a policy, understanding the true benefits and available options can help make informed decisions. Whether it is protecting your loved ones, accumulating wealth, or planning for the future, life insurance is a valuable asset that everyone should consider as part of their financial strategy.