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.

What are the Details Required to Buy a Life Insurance Plan?

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.

Why Do You Need Life Insurance?

• Life insurance secures your family members financially in case of your absence, allowing them to cover unpaid debts, future financial needs,and immediate expenses.

• Life insurance helps you save money by offering tax benefits.

• Life insurance is mainly known for its availability and affordability, which make it fit right into your budget.

• Knowing that your family members are protected financially when you are not there, it offers you peace of mind.

What are the 2 Types of Life Insurance Plan?

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.

What are the Benefits of Life Insurance Policy?

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 Your Family: Life insurance provides your family with financial support in the event of an unexpected tragedy, helping them cover everyday expenses and plan for the future.

• Debt Payout: It can pay off any loans or debts you have, so your loved ones won't have to take on those debts when you die.

• Long-Term Goals: Some life insurance policies also let you save money for your long-term goals or emergencies, which gives you more financial freedom.

• 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.

• Acts as Retirement Income: Life insurance is a financial tool that supplements your retirement income. Certain life insurance plans provide cash accumulation which can be available during your retirement years. Life insurance plans like Unit-linked insurance plans (ULIPs), endowment plans, annuity plans, and more, provide an extra fund resource to support your desires and cover any expenses which are unexpected.

• Flexibility in using funds: One of the main benefits of life insurance is the flexibility that is offered to your nominee. The funds which are received can be utilized according to their financial needs. This helps your loved ones in pursuing long term goals, instant financial help, settling of loans/debts, etc.

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

What Does a Life Insurance Plan Cover and Does Not 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

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

• Suicide (if committed within the 1st year)

• Risky Activities or Adventure Sports

• Intoxication

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?

Once you understand how life insurance works, the next step is figuring out the right cover for your family. Start by listing your financial responsibilities. Add up any loans, home finance, credit card dues and other commitments that would fall on your family. Then look at your household’s monthly expenses, rent, groceries, utilities, school fees—and think about how long your family would need support.

Also, consider your long-term goals, such as ensuring your spouse has sufficient funds for retirement or covering the costs of major events you want to attend. If you have kids, guess how much their education will cost in the future and add that to your calculations. Don't forget about end-of-life costs, which can be even more of a burden if you don't plan for them.

Next, find out how much money your family would need to make up for and for how long. Younger children may require a larger financial cushion than older children. Take away your current savings, investments, and life insurance from the total amount you come up with.

If you're unsure, consult a financial advisor who can review your situation in detail. Most experts recommend obtaining life insurance that is worth approximately 10 to 15 times your annual income. 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 to File a Life Insurance Claim?

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: Go to the official Policybazaar website and click on the Term Insurance link.

Step 2: Give your name, phone number, gender, and date of birth.

Step 3: Tell us what kind of job you have, how much money you make each year, what type of education you have, and how much you smoke or use tobacco.

Step 4: Pick the term insurance plan that you like best from the list of options.

Step 5: Use the preferred payment method to complete the process.

Wrapping it Up!

A life insurance policy protects you and helps you build long-term financial security. It's essential to compare different plans and select one that aligns with your needs and goals to maximise value. Policybazaar enables you to find and compare the best life insurance plans from more than 15 of the best insurance companies. So, once you understand how term insurance works in India, you can pick the best plan for you and your loved ones will be safe for the longest time.

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