How Does Life Insurance Work?

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.

Types Of Life Insurance Plans 

• 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, Mr Nilesh, a 35-year-old non-smoking male, with an annual income of 12 Lakhs, bought a term plan worth Rs. 1 Crore to financially safeguard his family. If he passes away, his family will receive the death claim amount.

• 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.

Why Do You 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?

It is important to know how life insurance work in India before you plan on buying one. Here are the steps to know how life insurance works:

• Firstly, the individual should choose a life insurance policy as per their requirement and suitability. If a person is married or has children and dependents to look after, then a term insurance policy will be an ideal plan to go for. Term plan is a pure protection plan and provides higher coverage at an affordable premium rate.

• These plans also help in fulfilling the financial objectives of individual and his/her family such as:

  • Financial security against the loss of life

  • Children’s education

  • Children’s marriage

  • Purchasing a home

  • Regular income or Post-retirement pension

• Under the life insurance policy, if the life assured dies an unfortunate death, then a death benefit equal to the total sum assured amount is paid to the beneficiary of the policy. The beneficiary will have to file a claim to receive the benefit. 

• To file the claim, the nominee will have to submit the death certificate along with the other required documents to the insurance company. The insurer will verify the claim form and documents submitted by the beneficiary of the policy and after the completion of the verification process, the death benefit will be paid to the nominee of the policy.

• Some life insurance plans also provide maturity benefits to the policyholder if he/she survives the policy term.

Let’s take an example to understand how life insurance works.

Shanti Lata Singh (Life Assured) pays Life Insurance (Insurer) a yearly sum (Premium) over a five-year period (Premium Payment Term) to ensure that her 19 year old daughter, Komal (Nominee), receives an assured amount of money (Life Cover) in case there is an unfortunate event during the ten years or a lump sum amount upon maturity on survival when the policy term ends.

• 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 at 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 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 work in India 2023 as per the regulating authorities. 

*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. The amount of life insurance coverage one needs depends on the financial objectives of an individual in the long-term. As per the insurance experts, it is always advised that an individual should choose the coverage amount 10-15 times of the annual income. This is because, with the increase of age, the liabilities and responsibilities of an individual also increase and so does the risk factor. Thus, After considering all aspects related to financial planning, you should choose the life cover that will be sufficient to take care of your family’s financial future even in your absence and also help them to maintain a good lifestyle.

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.

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.

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