Insurance provides a wide range of benefits to people from different economic backgrounds. However, the basic concept of Life Insurance still remains the same on a universal level. The purpose of Life Insurance is to provide for unforeseen contingencies, such as the death or disability of the policyholder, who may typically be a working or earning member of the family.
Essentially, it acts as a social security tool. But, before we go into detail about this concept, it is important to understand what Life Insurance exactly is. After all, it is a contract between you and the insurance company.
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What is Life Insurance?
Life Insurance can be defined from a financial as well as a legal perspective. The following explanations should help you understand how the product actually works.
Financial Perspective
Life Insurance is a pool of funds that are used to meet the costs of unexpected loss of life among the members of this pool. This is usually formed by a collection of people facing common risks. All members contribute a fixed amount called the premium, towards the pool. In exchange for the premium payment, the person gets an assurance that a certain sum of money will be paid to him or his nominees on the happening of the event insured against.
Legal Perspective
Life Insurance can be defined as a contract between two parties, where one party undertakes to make good or indemnify any financial loss suffered by the other party, for a consideration or a sum of money, on the happening of a specified event.
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The scope of Life Insurance can be broadly stated as below:
- Life Insurance is a risk sharing instrument.
- Life Insurance is essentially a joint process in which a large number of people with common risks contribute to a pool of funds.
- The value of a member’s life has to be estimated in order to estimate the share of each individual. This is done in terms of the premium.
- Payment will happen at death or at the expiry of the policy term, either of which will definitely occur. Thus, this contract is a contract of certainty. However, this is not true for all insurance policies.
- Insurance cannot be considered as gambling because it serves the purpose of eliminating financial uncertainty by providing for unforeseen events.
- As some experts say, it serves to increase the productivity of the community by eliminating worry.
- Insurance is definitely not a form of charity as the sum assured is paid out against regular payment of stipulated premium.
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Now, let us see how and why Life Insurance is a social security tool.
Social Security Tool
Typically, an individual has only three resources to fall back upon when a calamity strikes: savings, charity and insurance.
Saving money can be a slow and tedious process. On average, one saves only 10% of one’s earnings. Also, the exact amount that will be required to take care of sudden emergencies is extremely unpredictable, making savings insufficient at most critical junctures.
For some people, it may take a life time to accumulate a substantial sum of money that can come in handy during a crisis. This list could include those who didn’t invest in avenues such as Fixed Deposits and Mutual Funds.
Charity, on the other hand, could be a demeaning and unreliable resource since you are completely at the mercy of the provider. Thus, insurance remains the only viable option to fall back upon whenever crisis strikes.
Life Insurance is one of the most effective social security tools in use across the globe. It is especially important in India where social security is offered in the form of Employee Provident Fund and Public Provident Fund, which are available only to the working classes.
Unlike any socialist or developed capitalist society, where states are responsible for the deprived and destitute, India is unfortunately not yet equipped to handle social security for such a large populace.
In the absence of a bread winner in a family, there is little that the government or other social agencies can do to look after the welfare of those left behind. Thus, in order to ensure that a family continues to enjoy the same financial status as before, insurance is probably the best social security tool that can help in case of unforeseen eventualities.
It not only provides peace of mind, but also helps secure the future of the entire family. The government is also encouraging people to take up Life Insurance policies by giving policyholders tax benefits under Section 80C of the Income Tax Act.
The concept of Life Insurance has come a long way from its inception and today provides a smart avenue for investment where policyholders can not only secure themselves against unforeseen contingencies but are also able to create wealth over a period of time by allowing the money paid towards insurance to be invested in market oriented instruments.
This is, of course, true only in the case of Unit Linked Plans (ULIP). This offers you security plus returns, along with tax benefits. Isn’t that great? Now that the charges for ULIPs have been capped by the Insurance Regulatory and Development Authority (IRDA), you can be assured that ULIPs are quite affordable. Even if you aren’t particularly interested, Life Insurance today gives you plenty of options.
You can take a Term Life Insurance plan, a Whole Life Insurance plan, an endowment plan, a money back policy, a child plan or even an annuity plan. You can be sure that there is a Life Insurance policy out there that will meet your needs and requirements, such as your kid’s education or your retirement.
Remember, it is important to understand your needs before choosing one, so don’t forget to compare across insurers to get the best rates and terms.