Life insurance can be defined as a contract between insured (policy holder) and insurer (insurance company), in which insurance company provides financial support (a sum of money) in exchange for a certain amount of premium upon the death of policy holder or after a maturity period. It is a legal agreement in which insurer takes entire risk of the insured person.
Benefits Or Advantages Of Life Insurance
The main advantages of life insurance can be highlighted as follows:
1. Provides Financial Security
One of the major benefits of life insurance is that insurance companies provide compensation (death benefit) to the nominee in case of untimely death of insured person. It helps beneficiaries to cover daily living costs. Therefore, life insurance provides financial security to policyholder's loved ones.
2. Provides Tax Advantages
Another advantage of buying life insurance policy is tax benefit. In many countries, premium amount can be deducted from taxable income that helps to lower the tax liability. On the other hand, in case of untimely death of the policy holder, beneficiaries get full death benefit because it is tax free.
3. Encourages Saving
Policy holder should pay premium on time to avoid life insurance policy being inactive (policy lapse). So, he/she tries to cut unnecessary expenses that promotes saving.
4. Self-respect
Life insurance helps to improve the self-respect of insured and his/her family.
5. Affordable And Flexible
Life insurance is more flexible and customizable than non-life insurance policies. There are several types of life insurance plans short-term, long-term, expensive ones cheaper ones etc.) that one can choose suitable plan according to his interests and financial capacity.
6. Loan Facility
Insurance companies provide loan facility to the policy holders on the basis of insured amount. It helps the insured to take loan in case of emergency.
7. Gives Peace Of Mind
It helps to reduce stress and provides peace of mind to both insured and his/her family members.
Drawbacks Or Disadvantages Of Life Insurance
The main disadvantages of life insurance can be pointed out as follows:
1. Too Expensive Premium
Life insurance is useful for young people with good health. Premium will be too expensive for older people or individuals with health issues.
2. Lower Rate Of Return
Return on life insurance is generally lower than other investment options like stocks or mutual funds.
3. Lengthy And Complex
It requires more paper works and time to buy life insurance policy. Different documents like age proof certificate, health report, income proof report etc. required while filing a form. Therefore, it is complex and lengthy process.
4. Misunderstanding And Confusing
There are wide range of life insurance policies in the market. A single company offers different types of policies such as term insurance, endowment policy, whole life insurance policy, money back policy etc. that makes misunderstanding and confusion among the buyers
5. Difficult To Settle Claim
Another disadvantage of life insurance is that it is difficult and complex to settle insurance claim. It requires several papers (legal reports such as death certificate, doctor's report, police report etc.) and long time to settle death claim. Therefore, there exists a chance of claim being rejected.
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6. Possibility Of Policy Lapse
Missing premium payment leads to policy lapse and in this situation it may become very expensive to revive the life insurance policy.
Pros And Cons Of Life Insurance In Brief
Pros:
- It provides financial protection to the nominee
- It gives suitable returns after maturity period
- It provides loan facility
- It gives tax benefits
- It is flexible, customizable and affordable
- It gives peace of mind
It promotes saving and investment
Cons:
- It is complex and takes long time to purchase life insurance policy
- It is not suitable for old individuals and people having health issues
- It is difficult to settle claim
- It has limited returns compared to other options
- There are several charges and hidden fees
