How Does Life Insurance Work?

What is Life Insurance Policy?

Life insurance is a contract between a policyholder and an insurer, where you pay regular premiums. In return, the insurer promises to provide a financial payout, either to your family if you pass away during the policy term or to you as a maturity benefit if the plan offers it. This payout, also called the sum assured, acts as a financial safety net for your loved ones, helping them manage expenses and secure their future. Some life insurance plans return a lump sum at the end of the term if you survive. Let's understand how does term insurance works with an example.:

For Example:

Ravi, a non-smoking male of 30 years age, with yearly salaried income of Rs. 12 Lakhs, bought a term insurance plan (a type of pure life insurance) to financially secure his loved ones. He compared the best term insurance plans on Policybazaar and chose the one that best suits his preferences. He chose 1 Crore life cover for a 30 years policy term, and will now be paying Rs. 948/month for the next 30 years to keep his family secured.

How does Life Insurance Work?

Life insurance works by offering your nominees or beneficiaries a death payout in case of your death, but only if your policy is active at that time. This means you must have paid all required premiums, and your coverage must still be valid when the claim arises. Your family can use the payout to manage expenses like bills, loans, or education costs in your absence. If you're wondering what is term insurance and how does it works, it's the simplest form of life insurance that provides financial protection for a fixed period. If the policyholder passes away during that term, the nominee receives the sum assured; if they survive, there's usually no payout unless extra benefits are added.

Before you buy the best life insurance plan in India, the insurer will require you to provide various details like the following to determine the suitable life insurance premium for your profile. You can 

• Age 

• Gender 

• Health and medical history 

• Amount of coverage you chosen 

• Types of life insurance like term life insurance, whole life insurance, etc. 

The healthier and younger you are, the lower your premium rates will be. You should always compare the available life insurance plans from different insurers to find the one that fits your budget and best suits your needs.

There are two types of life insurance plans: term plan and savings plan: 

• Term Insurance Plans: Term plans provide a lump sum payment to your family or nominee in case of your uncertain death. These plans have the most affordable premium rates in comparison to other life insurance plans. They offer a high amount of coverage for a low cost. For example, Ravi, as mentioned above, had bought a term plan of 1 Crore life cover (sum assured) for a 30 years policy term and will be paying Rs. 948/month to keep the term insurance policy active. In this way, he has financially secured his family for the longer run.

• Savings Plan: These plans offer guaranteed regular payouts to help you achieve your financial goals, like purchasing a house, or paying for your child's education. They also provide life cover benefits. For example, if you want to create wealth and build a corpus after your retirement, savings plans are crucial, such as ULIP. 

**Note: You can also know about life insurance in hindi.

How Will a Life Insurance Benefit Your Family?

Now that you have understood what is term insurance and how does it work, let's look at how life term insurance can benefit your family. A good life insurance plan offers more than just a payout; it provides stability and peace of mind during uncertain times. Here's how it helps:

• Financial Security for Family: Life insurance provides money to support your family financially if something unfortunate happens to you, helping them with daily expenses and future needs.

• Debt Payout: It can cover any loans or debts you might have, preventing your loved ones from inheriting those financial obligations.

• Education for Children: Life insurance can ensure that your children can pursue their education and career even if you're not there to provide for them.

• Long-Term Goals: Some life insurance policies also offer a way to save money for your long-term goals or emergencies, providing additional financial flexibility. You can also plan your retirement with these life insurance plans.

• Tax Benefits: You get tax deductions of up to ₹1.5 Lacs per year u/s 80C & 10(10D) of the Income Tax Act, 1961.

• Peace of Mind: Knowing that your family will be financially secure can give you peace of mind and reduce worries about their future.

What Does Life Insurance Plan Cover? 

Life insurance plans generally cover all types of death i.e., except suicide within the first 2 years of the plan. This means all the following causes of death are covered: 

• Accident such as car accidents 

• Heart attack

• Homicidal death (excluding if the assured is murdered by a nominee/beneficiary )

• Critical illnesses 

• Death due to aging (old age) 

• Terrorism or war

What Does Life Insurance Plan Not Cover?

A life insurance plan doesn’t death due to the following situations:

• Suicide

• Risky Activities or Adventure Sports

• Intoxication

• Exemptions for Natural Disasters

Note: For detailed list of exclusions, please check the policy documents.

What are Life Insurance Payout Options? 

There are various life insurance payout options. These are the options that your nominee/beneficiary will receive depending on the insurer and the policy type. Here is a list of some of them: 

• Lump sum payout: Nominees/beneficiaries receive the full death benefit payout at a single go or one-time. These payments also include bonuses and loyalty additions (if any). 

• Periodic payouts: One part of the benefit amount is paid out as lump sum payment, whereas the rest of the benefits may get converted to annuities or instalments i.e., paid by the insurance company over the tenure of a pre-specified time. 

How to Choose the Right Type of Life Insurance Plan? 

• Determine the financial goals of life: Life goals differ from one individual to another. For example, if securing your family is your prime objective, then buying term plan is the right decision. Because it pays a large amount to your beneficiaries/nominees when you’re not around. But if you are having a long term goal like buying a house or paying for children’s education, then plans like endowment or ULIP can be considered. 

• Assess your life cover: The life insurance cover should be at least 10-15 times of your annual income. You should assess the life cover as per their financial obligations and other financial objectives. Also, it is important to determine the need for family yearly expenses, children’s education, outstanding debts and marriage expenses to reach sufficient life insurance coverage. 

• Choose the right policy term: Always choose the right policy term. The policy term should be the duration that your family is going to be financially dependent on you. 

• Disclose all information from Life Insurer: Always disclose the relevant details such as financial obligations, medical history, lifestyle habits from your insurance company.

• Check the Claim Settlement Ratio (CSR): It refers to the number of claims paid by an insurer for every registered claim. Always choose a company with a high CSR value, that indicates the quick claim paying ability. This also gives you an idea of how life insurance will work in India 2024 as per the regulating authorities. For example, ICICI Prudential Life Insurance has a claim settlement ratio of 97.82% for the financial year 2021-22.

*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply

How Much Life Cover Do You Need?

Now that we have understood how life insurance works in India, let’s discuss how much life cover one needs and what points should be considered before choosing an appropriate life cover.

1. Financial Obligations:

   • Calculate your outstanding debts, including mortgages, loans, and credit card balances before buying a term life insurance.

   • Consider your family's ongoing living expenses, such as utilities, groceries, and education costs.

   • Consider your long-term financial goals, such as retirement planning, and how life insurance fits into your overall financial strategy.

2. Income Replacement:

   • Determine how many years of income replacement your family would need if you were to pass away.

   • Take into account the age of your dependents and the number of years until they become financially independent.

3. Funeral and Final Expenses:

   • Include the cost of your funeral, burial, or cremation, along with any other final expenses.

4. Children's Education:

   • Estimate the cost of your children's education and factor this into your coverage amount.

5. Existing Savings and Investments:

   • Subtract your current savings, investments, and any existing life insurance coverage from your total needs.

6. Consult a Financial Advisor:

   • Seek guidance from an insurance advisor or insurance expert who can provide personalized recommendations based on your specific situation.

As per the insurance experts, it is always advised that an individual should choose the coverage amount 10-15 times of the annual income.
You can use the Human Life Value (HLV) calculator to estimate the amount of life insurance coverage you may need based on your financial obligations.
Note: You can easily calculate the premium of your life insurance plan using the term insurance premium calculator.

User Generated Questions

How do life insurance policies work? Do they always payout, and should I ask to insure my parents?
Life insurance provides a payout (sum assured) to the nominee if the insured person dies during the policy term, as long as premiums are paid and terms are met. Some policies also have maturity benefits if the insured survives the term. They don't always pay out, for example, if the policy lapses or exclusions apply. You can insure your parents if they meet the insurer's eligibility criteria and you have an insurable interest.

How does life insurance work in India, and how many years do I need to pay? Can I get the benefits while I am alive?
In India, you pay regular premiums for the chosen term (could be a few years or the entire policy period). The payment duration depends on the plan; options range from single premium to limited pay to regular pay over decades. Many plans, like endowment or money-back policies, offer benefits. At the same time, you're alive, while pure term plans only pay on death unless they have riders like critical illness or return of premium

How does life insurance work in India, and how many years do I need to pay? Can I get the benefits while I am alive?
In India, you pay regular premiums for the chosen term (could be a few years or the entire policy period). The payment duration depends on the plan; options range from single premium to limited pay to regular pay over decades. Many plans, like endowment or money-back policies, offer benefits. At the same time, you're alive, while pure term plans only pay on death unless they have riders like critical illness or return of premium

What is taxability on life insurance payouts?
Life insurance payouts are generally tax-free under Section 10(10D) of the Income Tax Act if certain conditions are met (like the premium not exceeding 10% of the sum assured for policies issued after 1 April 2012). However, from April 1, 2023, maturity proceeds from non-ULIP policies with annual premiums above ₹5 lakh (for policies issued after this date) are taxable. Death benefits remain fully tax-exempt.

Life Insurance Claim Settlement Procedure And Documents Needed 

The steps of claim settlement process and the documents required are mentioned as follows:

• Claim intimation: The nominees of the deceased policyholder will have to approach the insurer to let them know of the unfortunate event and intimate the claim settlement process.

• Documentation: The nominees will then have to submit the necessary and correct documents to verify the death and claim the payout. The documents required in the process are:

  • Original documents of the policy

  • Copy of original death certificate

  • Nominee/Claimant’s ID Proof

  • Hospital Bills/Physician’s certificate

  • Police Reports (Panchnama, FIR, Police Investigation Report, Charge sheet) if applicable

  • Autopsy/Post Mortem report (PMR) and Viscera Report if applicable

• Claim settlement: The claim process begins after the company receives all necessary documents and forms. The company reviews the documents, makes a decision (subject to terms and conditions), and informs the nominee/claimant.

How to Buy Life Insurance Plan Online in India 2025 from Policybazaar?  

Here are the steps to buy life insurance plan online in India, with the help of Policybazaar:

Step 1: Visit the official Policybazaar website and go to the Term Insurance section.

Step 2: Provide your name, contact details, gender, and date of birth.

Step 3: Enter your job type, yearly income, educational qualifications, and smoking/tobacco consumption habits.

Step 4: Choose your preferred term insurance plan from the available list

Step 5: Pay using your preferred mode to complete the process.

Wrapping it Up!

A life insurance policy offers protection and helps build long-term financial security. To get the most value, comparing different plans and choosing one that fits your needs and goals is important. Policybazaar helps find and compare the best life insurance plans from 15+ top insurance companies. Thus, once you know how does term insurance works in India, you can choose the best plan for you and secure your loved ones for the longest time.

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