What is Life Insurance? – Meaning & Benefits

What is Life Insurance Policy?

To understand the life insurance definition, we need to understand its core meaning. Let us take a look at what is life insurance in simple words below:

Life Insurance is defined as a contract between an insurer and a policyholder, where the insurance company promises to pay an amount in exchange for a premium amount upon the life assured’s death or after a set time. This amount i.e., life cover, protects the future of your loved ones by paying a lump sum amount in case of an unforeseen event. Some plans also pay an amount called maturity benefit at the end of the policy tenure.

There are 2 simple types of life insurance plans available:

• Protection Plan (Term life insurance)

• Savings Plan

What is Term Life Insurance?

A protection plan, like a term insurance plan, is specifically designed to protect your loved one’s future by offering a lump sum amount in case of your absence. These plans provide a high amount of coverage at low premium rates.

Let’s understand this with the help of an example:

A 20-year-old non-smoking, healthy male can secure a life cover of Rs. 1 Crore for his family members for the coming 30 years if he buys a term plan worth Rs. 525 per month.

What is a Savings Plan?

A savings plan is a financial tool that helps in planning for long-tenure goals such as buying a house, funding the higher education of your children, while providing the benefits of a sum assured (life cover).

Note: You can also read what is life insurance in hindi.

How Does a Life Insurance Policy Work?

As per the life insurance meaning, the policyholder pays premium until a fixed term for the plan that he/she has chosen for his/her loves to secure their lives when the policyholder is dead. Let's understand ‘what is life insurance meaning’ with the help of an example:

Mr. Mukesh, a 30 year old, non-smoking male, with a salaried annual income of Rs. 12 Lakh, buys a life cover of Rs. 1 Crore until 60 years of age. Therefore, he will have to pay Rs. 923/month for 30 years, as a result of which, his family will be secured if he dies during the policy period.

What are the Types of Life Insurance Plans?

Now that we have understood what is life insurance, let us understand the meaning of life insurance types. There are various types of life insurance policies available to aid you in meeting the needs of various life stages.

1. Term life insurance

   Term Life Insurance is the most affordable and efficient way to cover your life. You get coverage for a tenure that you specifically choose. These policies could be availed by people who find it difficult to pay a lump sum amount for an endowment assurance policy or whole life policy. However, certain variants of term insurance plans also provide payouts on maturity, like TROP (Term plan with return of premium) and 100% refund of premiums at no cost term insurance if the policyholder survives the policy term.

   *Note: You can calculate the premiums easily for term insurance using an online term insurance calculator.

2. Whole life insurance

   This policy covers you for your entire life, i.e. till the age of 99 or 100. And thus, this plan is named as a whole life policy.

3. Endowment Policy

   Endowment policy offers the combined benefits of insurance cover and savings. Risk is covered for a specific period and at the end of the period sum assured, along with the accumulated bonus, is paid back to the policyholder. Endowment policy pays back the face value of the amount on the insured person's death or after a stipulated number of years. Some policies also make payments in case of critical illness.

4. Money back Policy

   This policy repays survival benefits periodically during the term of the plan. The benefits offered under the plan may or may not be guaranteed depending on the performance of funds (if any).

5. Retirement plans

   Retirement plans help employees collect funds throughout their employed years in order to financially support themselves and their family post retirement. This plan is a retirement solution plan and does not cover life insurance.

6. Unit Linked Insurance Plans (ULIPs)

   ULIPs offer dual benefits, in which a part of the investment goes towards providing life cover, while the residual portion is invested in mutual funds. It is a goal-based financial product, which is designed to provide both life insurance and wealth creation opportunities.

7. Child insurance policy

   Child Insurance Policies are a mixture of insurance and investments that are designed to meet the rising education and other needs of children. These plans offer a lump sum amount on the death of the policyholder, but the policy doesn’t end. All future premiums are waived, and the insurance company continues investing money on behalf of the policyholder. The child gets the money at the specified tenure as planned.

8. Group Life Insurance

   Group Life Insurance is a policy provided to a group, often through employment. Its main purpose is to financially support an employee's family if they pass away during their employment. It's not limited to employers and employees but can also include other organizations like banks, NGOs, and professional groups. Some policies may cover outstanding loans and offer disability and critical illness benefits.

9. Retirement/Pension Plans

   Retirement or pension plans are tailored for building a substantial fund to support your post-retirement life. They involve long-term saving and investing, potentially yielding a significant sum. These plans also provide insurance benefits, offering financial security for your family. You can choose how to access your funds, including a lump sum, regular income, or a mix of both.

How to Choose the Right Life Insurance Plan?

Here are some of the points that you must keep in mind when you choose the right life insurance plan:

• Know Your Goals: Different life insurance plans serve different purposes. Figure out what you want to achieve with your life insurance to choose the right type.

• Check the Coverage: Think about how much money your family needs for daily expenses and future plans. Usually, it's best to pick a coverage that's 10 to 15 times your yearly income. You can also use a human life value calculator to see what's right.

• Policy Length: There are many types of life insurance with different time limits. Choose one that matches your goals.

• Extra Protections: Some life insurance plans let you add extra protections to the basic plan. These can increase your coverage and protect you in case of accidents, critical illnesses, or more.

• Insurer's Reputation: Before you decide, make sure the insurance company is known for settling claims, being financially stable, and understand what's not covered.

• Expert Advice: If you're not sure, talk to a financial advisor. They can help you choose the best life insurance for you and your family. You can contact Policybazaar’s Insurance Advisors to solve any insurance query or for customized suggestions. 

What are the Benefits of Life Insurance?

Life insurance is specifically designed to minimise the effect of the financial crisis your loved ones might incur upon your death. To help you understand the meaning of life insurance better, here is a list of benefits of buying life insurance in India:

• Financial Security: The most important benefit of life insurance is that it provides financial security to your loved ones after your death. The insurer provides the required life cover in exchange for premiums paid on a regular basis. The death benefit can help your family pay for funeral expenses, outstanding debts, and living expenses.

• Wealth Creation: The life insurance plans provide protection against an eventuality along with the chance to create wealth in the long term. With these plans, you can take care of your future expenses, retirement, and beat inflation.

• Free from Liabilities: A life Insurance plan gives your loved ones the power to be self-reliant and independent. A right life insurance plan helps them repay the liabilities such as home loans, personal loans, auto loans, or credit card loans. The term insurance plan also covers charges of hospitalization, treatment of critical illness, providing a comprehensive package of protection.

• Acts as an Income Replacement: If you are the sole earning member of the family, a life insurance plan can provide you with a guaranteed income for your loved ones every month, thus, making sure that their daily lifestyle does not get disturbed and they remain financially stable.

• Education and other expenses of dependents: The payouts from these plans help you to fund the educational costs of your children and also the expenses for their marriage or medical costs.

• Tax Benefits: With life insurance plans, you can get life insurance tax benefits as per the prevailing tax laws under sections 80C, 80D, and 10(10D) of the Income Tax Act, 1961.

• Immediate expenses after death: It helps your loved ones cover a part of important expenses instantly after your death, such as medical bills or funeral costs.

• Peace of mind: Knowing that your loved ones will be taken care of after your death can provide peace of mind for you and your family.

What are the Factors that Affect Life Insurance Premium Rates?

Now that we know the definition of life insurance and life insurance meaning, let’s discuss the factors that can affect the premium rates of life insurance plans:

1. Age:

   The life insurance premium rates are lower for younger individuals, and it gradually increases with age.

2. Gender:

   As per various studies, females live longer than males. Thus, the life insurance premium rates are lower for females in comparison to males.

3. Medical Conditions:

   Your past and present health status can determine the premium amount for your life insurance policy. In case you have any pre-existing diseases or have suffered from a disease in the last years that may affect your current health, you would be charged a higher premium rate.

4. Health history of family:

   The probability of suffering from an illness that runs in your family is considerably higher. So, in case of any pre-existing diseases in your family history, you may have to pay a higher premium.

5. Drinking alcohol and smoking:

   Lifestyle practices such as drinking alcohol and smoking can affect your health and lead to various health issues. Thus, insurers charge a high amount of premium for persons who drink alcohol or smoke.

6. Coverage type:

   The type of life coverage you avail of can decrease or increase the premium of a life insurance plan. If you add term riders to your life insurance plan, the premium amounts would increase. A longer policy tenure also results in a higher amount of premium compared to a shorter policy tenure. Additionally, the type of plan you select also affects the premium rates like term insurance plan is the most economical and cost-effective form of life insurance.

7. Coverage amount:

   What is life insurance coverage directly depends on the cover amount on your life insurance policy. This means, in life insurance meaning, a high amount of life cover would result in a higher premium amount.

8. Occupation:

   Working in a high-risk job results in an increase in premium rates. For instance, if you work in a construction site or your work puts you at some risk, like chemical exposure, the insurer will charge a higher amount of premium.

How to Buy Life Insurance Plans From Policybazaar?

Now you may be wondering what is life insurance purchase process is. You can buy the most suitable life insurance plans from Policybazaar. Policybazaar provides a series of the best life insurance plans depending on the customer’s needs and situation. You can compare from top 15+ insurers and buy directly from the Policybazaar website and be assured of choosing the most appropriate plan for you. The steps to buy life insurance from Policybazaar are easy and mentioned below:

• Step 1: Visit the Life Insurance page of Policybazaar

• Step 2: Fill in your details, like Name, Phone Number and DOB

• Step 3: Next, fill in your Annual Income, Educational Qualification, Smoking Preferences, Occupation Type and Pin code

• Step 4: Choose your most preferred plan among all the available plans from various insurance companies

• Step 5: Fill in your details to buy the policy

• Step 6: Proceed to payment with your preferred payment option

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

Following is a list of documents required to buy life insurance plan:

**Note: The list of documents required to buy life insurance can differ for different plans and insurers.

How to Claim Life Insurance after the Policyholder’s Death?

Below mentioned are the ways to claim the life insurance after the death of the policyholder.

1. Intimation

   The nominee/claimant of the deceased policyholder intimates the claim process by submitting the death claim form and ID and address proofs to the bank branch/head office/nearest offices.

2. Documentation

   The nominee/claimant also has to submit the documents along with the death claim form and Address/ID Proofs. The documents include the original policy documents, death certificate of the life assured, FIRs (if applicable), etc.

3. Settlement

   After the company gets all the required documents and forms, the claim is processed and the information is communicated to the nominee/claimant.

What is the Meaning of Life Insurance Common Terms?

Here is a list of common terms and their definition in life insurance:

• Insurer: In life insurance meaning of insurer is the insurance company that sells the life insurance policies.

• Life Assured: The individual whose life is covered under the life insurance is called the life assured.

• Life Cover: In life insurance meaning of life cover is the sum assured or the death benefit payable to the nominee of the policy, in case of the policyholder’s untimely death.

• Maturity Benefit: The definition of life insurance maturity benefit is the amount payable to the policyholder in case they outlive the policy term.

• Nominee: In life insurance meaning of a nominee is the person who is eligible to receive the life insurance benefit amount in case of the policyholder’s untimely death.

• Policyholder: The Policyholder is the person who purchases the plan and regularly pays the premiums to keep the plan active. For example: If you purchased the plan for your mother, then you would be the policyholder, and your mother would be the life assured.

• Policy Term: In life insurance meaning of policy term is the tenure for which the insurer promises to cover the life assured.

• Premium: The amount paid by the policyholder to receive the required coverage for the entire policy term.

• Premium Payment Term: In life insurance meaning of the premium payment term is the duration for which the policyholder needs to pay the premiums. The premiums can be paid in regular, limited, or single premium payment terms.

Wrapping It Up!

Now that we have understood what is life insurance and the meaning of life insurance, let us take a look at the importance of life insurance. Due to the innumerable benefits of life insurance like life protection, financial security, tax benefits, etc., it is one of the better decisions in life to purchase a suitable policy. Hence, you must firstly understand the definition of life insurance and then consider purchasing a life insurance policy so you can protect your loved ones against death and disability and secure them for a happy future.

FAQ's