Before knowing what is life insurance, we should understand what is insurance. Insurance is a way of transferring all the financial risks of an individual to the insurance company. In this process of transferring the Risk to the insurance company, the company pays an lump sum amount on happening of some specified event (eg. death of a person, fire accident, theft, etc..) in return for a premium from the customer. There are few points which are worth to be known.
- Insurance covers only uncertain events
- Only the financial loss is compensated through insurance
- There is no profit/ loss in a insurance- the main objective of taking an insurance policy is to compensate the financial loss of a specific event.
Now coming on to Life insurance, many people have this questions in mind- what is life insurance, why is it needed and how much insurance does one need. lets understand clearly all the answers for the above 3 questions.
1. what is life insurance
What is life insurance? Life insurance is a contract between the life insurance company and the customer. In this contract, the customer/ consumer pays premium to the company for which in-turn the company offers a life coverage(sum assured) for the customer in the event of some specified events. Here the event may be any kind of death(accident, Natural, Murder or even suicide) or maturity. On the happening of these events, the insurance company is liable to pay the agreed amount to the family of the life insured.
For Eg.:Mr.X has taken a policy for a sum assured of Rs 1 crore and pays a premium of Rs 50000 in return. In case Mr. X dies, the company is liable to pay Rs 1 crore to the X's family members or legal heirs.
2. Why is life insurance needed?
life insurance is a must to have product for each and every person who thinks to secure his family in his absence. This is because each and every family has a main income earning person and the loss of such persons will be of great loss both emotionally,economically and financially. The sad part is that we cannot compensate the emotional role of the life lost. But here the financial loss of the life lost can be calculated and can be compensated to some extent.
Insurance is needed to compensate the salary/income of the lost life
Life insurance is needed to secure the family financially from uncertain events.
Life insurance is required to take care of your child's future education needs.
life insurance is needed to protect our family from the financial burden we leave behind.
Life insurance is a safety measure taken to protect our beloved family who are dependent on us.
3. How much life insurance do i need?
From the above question on what is life insurance, you can understand the meaning of insurance and in the second question you learnt about why life insurance is needed. while reading this 3rd question, you may ask the below questions.
1. Is there a limit up-to which one can take life insurance on his life?
Ans: yes. There is a limit prescribed for each individual life
2. How much life insurance coverage do i need?
Ans: It depends on your age and income. To know more please read HLV(HUMAN LIFE VALUE).
3. is life insurance a investment tool or savings tool?
Ans: life insurance doesn't come under both the categories. Insurance is itself a separate category.
You will study the above questions in detail in the coming posts.