How Does Life Insurance Work?

Life insurance works as a financial contract in which you premiums regularly to an insurance company. In exchange, the insurer promises to pay a tax free sum assured (death benefit) to your appointed nominee/beneficiary in case you die during the policy term. This amount helps provide financial help for expenses such as higher education, daily living, or loans/debts. Some of the plans offer extra maturity benefits in case you outlive the policy term, or build cash value. It acts as a protective shield and tool for long term planning. Let’s discuss ‘how does life insurance work’ and how you can buy a plan for yourself:

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What is Life Insurance?

Life insurance policy is an agreement between you and an insurer in which you pay regular premiums. The insurance company promises to pay you money if you die during the policy period or to your family if you die during the policy period. This payment, which is also known as the sum assured, is a financial safety net for your loved ones that helps them pay their bills and plan for the future. If you live through the term, some life insurance plans will pay you a lump sum. Let's look at an example to see how term insurance works.

For Example:

Ravi, a 30-year-old man who doesn't smoke and makes Rs. 12 Lakhs a year, bought a term insurance plan (a type of pure life insurance) to make sure his loved ones are financially safe. He looked at the best term insurance plans on Policybazaar and picked the one that fit his needs the best. He chose a 30-year policy term with 1 Crore life cover. For the next 30 years, he will pay Rs. 948 a month to keep his family safe.

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How does Life Insurance Work?

The primary step is to make the decision to buy a life insurance plan. This plan should always be purchased after considering your family’s financial requirements in the future. Then after a thoughtful buying, life insurance works by providing a death benefit to your nominees or beneficiaries in case of your demise only if the policy is active. This simply means that you have to pay all your premiums on time so that your coverage still remains valid in case of filing the claim. Your loved one can use the money to manage various expenses such as loans, bills, and child's education fees. Term insurance is a simple form of life insurance that provides financial protection for a specific time. If the policyholder dies during the policy term, the nominee gets the sum assured and in case of surviving the policy term, there is no payout unless opted for term return of premium (TROP). 

How Does Life Insurance Work How Does Life Insurance Work

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. 

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What are the 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, retirement plan. 

What are the Benefits of Life Insurance Policy?

When you think about the people who depend on you, the real value of term insurance becomes clear. There is more to life insurance than just the amount of the claim. It's about making sure your family stays financially stable when things don't go as planned. This is how it helps:

  • Financial help to your family: Even if you lose your job, a life insurance policy makes sure your family has money to pay for things like school, rent, and other necessities.

  • Protection from an unpaid loan: Life insurance helps pay off these debts so that your family doesn't have to deal with them.

  • Help with long-term needs: Some life insurance plans can help you save money for future goals or give you a financial cushion in case of an emergency. This gives you more control over your long-term planning.

  • Tax Benefits: Section 80C lets you deduct premiums you pay, and Section 10(10D) usually lets you get the payout tax-free, as long as you meet the conditions set by 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 okplans (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.

Life Insurer Details

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

Note: All these conditions should be disclosed and checked during underwriting. 

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 2026 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.

Why Should People Buy Life Insurance? 

  • Pays off loans, debts

  • Replaces lost income 

  • Funds the education of children 

  • Provides financial stability for dependents 

  • Cover the funeral expenses 

User Generated Questions

  • Q: How do life insurance policies work? Do they always payout, and should I ask to insure my parents?

    Ans: If the insured person dies during the policy term and premiums are paid, the nominee will get a payout (sum assured). Some policies also have maturity benefits if the insured lives through the term. For example, if the policy lapses or exclusions apply, they don't always pay out. If your parents meet the insurance company's requirements and you have an insurable interest, you can insure them.
  • Q: 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?

    Ans: 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.

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 a Life Insurance Plan Online in India 2026 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 keeps you safe and helps you build wealth over time. To get the most out of your money, you should look at a number of plans and pick one that meets your needs and goals. You can use Policybazaar to find and compare the best life insurance plans from more than 15 of the best insurance companies. You can now choose the best term insurance plan for you and your family that will keep them safe the longest.

FAQs

  • What is life insurance, and how does it work in India?

    Life insurance is a contract in which you pay premiums, and the insurance company pays your beneficiaries upon your death. People in India buy life insurance policies and pay premiums. When the policyholder passes away, the insurance company pays out the benefits to the beneficiaries.
  • What is term insurance, and how does it work?

    Term insurance is a type of life insurance that provides financial protection for your loved ones in the event of your passing. If you die during the policy term, your nominee will get a large sum of money at a low cost. You maintain coverage by paying premiums on time, and most plans don't have a maturity benefit unless you choose one that does.
  • What is the purpose of life insurance in India?

    Life insurance helps families and individuals protect their finances by providing financial support in the event of death or maturity. This allows them plan for their financial future.
  • Who gets the money from a term life insurance policy in India?

    The policyholder's designated beneficiaries or nominees, like family members or dependents, will get the payout, as stated in the policy documents.
  • What happens to my life insurance policy if I don't disclose my information when I buy it?

    Not telling the truth can lead to the cancellation of your policy or lower benefits.
  • How much life insurance do I need?

    How much life insurance you need depends on what your family needs, what you owe, and what you want to do. Think about things like how much money you need to live on, how much school costs, and how much debt you have.
  • What is the process for getting life insurance in India?

    In India, life insurance means paying premiums to an insurance company in exchange for a death benefit that goes to the insured person's beneficiaries when they die.
  • What are the best life insurance companies in India in 2026?

    Life Insurance corporation of India (LIC)
    SBI Life Insurance
    ICICI Life Insurance
    Axis Max Life Insurance
    Tata AIA Life Insurance
    To get detailed list of best life insurance plans available in the market, read the article on Best Life insurance plans in India 2026

Premium By Age

˜The insurers/plans mentioned are arranged in order of highest to lowest Sum Assured(SA) offered by Policybazaar’s insurer partners offering term insurance plans on our platform, as per ‘first year premium of life insurers as at 31.03.2025 report’ published by IRDAI.

Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the IRDAI website www.irdai.gov.in

Rs. 400/month is starting price for a 1 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age, rounded off to nearest 10.

Rs. 400/month (Rs.13/day) is starting price for a 1 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 230 is starting price for a 50 lakhs term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age, rounded off to nearest 10.

+Rs. 8/day is starting price for a 50 lakhs term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age, rounded off to nearest 10.

+Rs. 12/day is starting price for a 75 lakhs term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age, rounded off to nearest 10.

+Rs. 497/month is starting price for a 1.5 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 487/month is starting price for a 2 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 626/month is starting price for a 3 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 905/month is starting price for a 5 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. ₹361/month is the starting price for a ₹1 crore loan cover with an 8% interest rate for an 18-year-old male, non-smoker, with no pre-existing diseases, loan tenure up to 20 years, rounded off to the nearest 10

+Rs. 1,267/month is starting price for a 7 crore term life insurance for an 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

*The full refund of premium is available on availing the one-time option of refund of premium. Total premium paid for policy (paid for add-ons) will be the special exit value, payable on availing the one-time option of refund of premium if you wish to completely exit the policy.

+Rs. 447/month is starting price for a 1 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs.679/month is starting price for a 2 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 910/month is starting price for a 3 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 1,374/month is starting price for a 5 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

+Rs. 1,924month is starting price for a 7 crore term life insurance for an (NRI) 18 year-old male, non-smoker, with no pre-existing diseases, cover upto 30 years of age.

Women

+Rs. 400/month is Starting price for a 1 crore term life insurance for an 18 year-old Female, non-smoker, with no pre-existing diseases, cover upto 30 years of age, rounded off to nearest 10.

Rs. 461/month is the starting price for a 1 crore term life insurance for an 24 year-old female, non-smoker, with no pre-existing diseases, cover upto 54 years of age.

1,642/month is the starting price for a 1 crore term life insurance for an 44 year-old female, non-smoker, with no pre-existing diseases, cover upto 74 years of age.

Prices offered by the insurer are as per the approved insurance plans | #All savings and online discounts are provided by insurers as per IRDAI approved insurance plans | Standard Terms and Conditions Apply | **Tax Benefits are subject to changes in tax laws.| Policybazaar Insurance Brokers Private Limited

We will respond in the first instance within 30 minutes of the customers contacting us. 30-minute claim support service is for the purpose of giving reasonable assistance to the policyholder in pursuance of the claim. Settlement of claim (including cashless claim) is the responsibility of the insurer as per policy terms and conditions. The 30-minute claim support is subject to our operations not being impacted by a system failure or force majeure event or for reasons beyond our control. For further details, 24x7 Claims Support Helpline can be reached out at 1800-258-5881

For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale

Policybazaar Insurance Brokers Private Limited | CIN: U74999HR2014PTC053454 | Registered Office - Plot No.119, Sector - 44, Gurgaon, Haryana – 122001 | Registration No. 742, Valid till 09/06/2027, License category- Composite Broker Visitors are hereby informed that their information submitted on the website may be shared with insurers. Product information is authentic and solely based on the information received from the insurers.

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˜ Policybazaar Promise reflects the guarantee offered by insurers. Price assurance is based on certifications shared by insurers with us.

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