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How Does Life Insurance Work?

Life insurance is an important investment to protect the future of your loved ones. It is always a wise decision to buy life insurance before starting your financial planning. When purchasing life insurance, it is important to understand what life insurance is, how life insurance works and how your nominees receive the benefits of your plan. This helps with selecting a payout option that works best while planning your finances. 

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What is Life Insurance Policy?

Life insurance is a contract between a policyholder and an insurer, where the policyholder pays the premium amount and receives a life cover upon the life assured’s death or after a certain period. This life cover (sum assured) can help secure the future needs of your family by paying a lump sum payment in case of policyholder’s death. Also, various life insurance plans pay maturity benefits at the end of the policy term. The life insurance meaning is simp

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 from amongst the best term 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.

one crore term plan
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Term Plans

₹1
Crore

Life Cover

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₹50
LAKH

Life Cover

@ Starting from ₹ 8/day+

₹75
LAKH

Life Cover

@ Starting from ₹ 12/day+

Why Do I Need A Life Insurance Plan?

You need to buy a life insurance plan because of the below mentioned reasons:

  • 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.

How does Life Insurance Work?

Life insurance works by offering your nominees/beneficiaries with a death payout in case of your death, but only if your policy is active when you are not around. This means, you have paid the required premium amounts while you are alive. The death benefit payout can be used to fulfill your family’s life goals. 

How Does Life Insurance Work How Does Life Insurance Work

Before buying a life insurance agreement, the life insurer will determine your required premium amounts. There are various factors that affect the life insurance quotes such as: 

  • 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 better your premium rates will be. Comparing life insurance premium rates with different insurers is the best way to start looking for the best coverage at low premium. 

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.

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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?

Life insurance plan doesn’t cover the following things:

  • Suicide

  • Risky Activities or Adventure Sports

  • Intoxication

  • Exemptions for Natural Disasters

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.

  • Buy life insurance at an early age: If you're in your 20s, you might not have as many financial commitments as you would in your 40s, and therefore, you will have a lower probability of developing health conditions or other chronic diseases. Therefore, the younger you are at the time of buying a life insurance plan, the lower will be your premiums. 

  • 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.

  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. Health and Age:

    • Your age and health can affect the cost of life insurance. Premiums may increase with age and health issues.

  7. Financial Goals:

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

    Consult a Financial Advisor:

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

    *Note: 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 and future earning potential. The formula used to calculate HLV is as follows:

    HLV= (Annual income) X (Number of years left until retirement)

    It helps you in indicating your insurance necessities based on your salary and its future worth, so that you know how much you should invest and for how long.

    Note: You can easily calculate the premium of your life insurance plan using the term insurance premium calculator.

What Are The Benefits of Life Insurance Policy?

The benefits of purchasing a life insurance plan is more than providing financial security to the life assured’s family in tough times. As we have discussed how life insurance works, now let’s take a look at some of the benefits offered by the life insurance policy.

  • Life insurance plan provides life insurance coverage to the life assured and his/her loved ones as financial benefit in exchange of premium amount paid. 

  • Life insurance companies offer a comprehensive range of plans to the life assured depending on the need of life insurance. Life assured gets the benefit of buying insurance plans according to their needs and financial goals. 

  • Insurance plans cover the costs of critical illness treatment and hospitalization. 

  • Life insurance plans help in wealth creation over a long time period. 

  • Insurance plans provide tax benefits as the premium amount is tax deductible u/s 80C of the ITA, 1961. 

  • The policyholder can opt for a loan facility on certain life insurance plans.

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 2024? 

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 the information regarding 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!

Life insurance policy is a beneficial financial instrument for both protection and helping an individual save in a disciplined way so that they can create a financial cushion in the long-term. As the need for the life insurance policy differs from person to person, make sure that you compare the plans online and choose the best plan as per your requirement. Policybazaar helps find and compare best life insurance plans from 15+ top insurance companies. Thus, once you are aware of how life insurance works in India, you will be able to choose the best plan for you and secure your loved ones for the longest time.

FAQs

  • Q: How does life insurance work in India?

    Ans: Life insurance in India works by individuals paying regular premiums to an insurance company. In return, the insurer provides a financial payout (sum assured) to the policyholder's nominee/beneficiaries in case of the policyholder's unfortunate death or sometimes upon maturity of the policy. It offers financial protection and savings benefits, helping families and individuals secure their future.
  • Q: What is the purpose of life insurance in India?

    Ans: Life insurance serves to provide financial protection for families and individuals by offering a payout in case of death or maturity, helping secure their financial future.
  • Q: When does the payout occur in a life insurance policy?

    Ans: The payout occurs either upon the policyholder's death during the policy term or upon policy maturity, depending on the type of life insurance plan chosen.
  • Q: Who receives the payout from a term life insurance policy in India?

    Ans: The payout is received by the policyholder's designated beneficiaries/nominees, such as family members or dependents, as mentioned in the policy documents.
  • Q: How does life insurance work if I do not disclose my information while buying the policy?

    Ans: Non-disclosure can lead to policy cancellation or reduced benefits.
  • Q: What is life insurance and how does life insurance work in India?

    Ans: Life insurance is a contract where you pay premiums, and in return, the insurer provides a payout to your beneficiaries upon your death. In India, individuals buy life insurance policies, pay premiums, and the insurance company provides a payout to beneficiaries upon the policyholder's death.
  • Q: How much life insurance do I need?

    Ans: The amount of life insurance you need depends on your financial obligations, goals, and family's needs. Consider factors like debts, income replacement, and education costs.
  • Q: How does life insurance work in India?

    Ans: In India, life insurance involves paying premiums to an insurer in exchange for a death benefit payout to beneficiaries upon the insured person's death.
  • Q: What are the best life insurance companies in India in 2024?

    Ans:
    • Life Insurance corporation of India (LIC) 
    • SBI Life Insurance
    • ICICI Life Insurance 
    • Max Life Insurance 
    • Tata AIA Life Insurance 

    To get deatiled list of best life insurance plans available in the market, read the article on Best Life insurance plans in India 2024. 

  • What are the benefits of term life insurance?

    Ans: Here are 4 common term insurance benefits:
    • Low premium rates
    • Tax Benefits
    • Death Benefit
    • Long term coverage
  • What is term life insurance?

    Ans: Let's understand what is term life insurance here. Term insurance offers financial protection for a certain period to the policyholder, thereby, offering a lump sum payout if the policyholder unfortunately passes away during the policy term.
  • What are the key features of a best term insurance plan in India?

    Ans: Below mentioned are the key features of a best term life insurance in India:
    • Affordable premium rates
    • Long-tenure life protection
    • Easy to understand and buy
    • Riders availability
    • Whole life protection
    • Tax benefits

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