Life insurance

What is Life Insurance?

Life insurance is a contract between two parties - an individual (the insured or policyholder) and a life insurance company (the insurer or insurance provider).

The insurance provider assures the policyholder of financial coverage for their family until the end of the policy tenure. In case of the individual’s demise, the financial protection by the insurer is extended to the insured’s family in the form of a lump sum payout or monthly income.

In the case of policies where a maturity benefit is payable, the policyholder can claim the benefits if they survive until the end of the policy tenure. These benefits, too, can be paid out as a lump sum or as regular income.

To keep the life insurance cover active, the insured pays a premium to the insurer on a monthly, quarterly, half-yearly, or annual basis. The premium amount payable is determined on the basis of various factors, including the life insurance coverage.

How does Life Insurance work?

Life insurance plans provides financial protection to your family in case of your unfortunate and untimely death during the policy term. In return for regular premium payments, the insurance company commits to pay a fixed amount to your nominee in case of death, known as the sum assured.

For example, a person buys a life insurance policy with a sum assured of ₹1 Crore for 20 years and pays an annual premium of ₹8,000. If the person passes away within those 20 years, the nominee receives ₹1 Crore from the insurer. This amount can help cover household expenses, pay off loans, or secure the family’s future. 

If the person survives the policy term and has chosen a plan with maturity benefits (like an endowment or money-back plan), a lump sum amount is paid at the end of the term. 

Let’s understand common types of life insurance and how it works with the help of an example: 

1. Term Insurance 

Term insurance is a pure protection plan. It provides life cover for a specific period. If the policyholder passes away during the term, the nominee receives the sum assured. No maturity benefit is provided if the policyholder survives, unless a Return of Premium option is chosen. 

Example: 

Ravi buys a 30-year term insurance policy with a sum assured of ₹1 Crore. He pays an annual premium of ₹10,000. If he passes away within 30 years, the nominee receives ₹1 Crore. If he survives the term, there is no payout, unless he opted for a term plan with return of premium option. 

2. Endowment Plan

An endowment plan offers life cover along with savings. The policyholder receives a lump sum amount on maturity if they survive the policy term. If they pass away during the term, the sum assured is paid to the nominee. 

Example: 

Neha purchases a 20-year endowment plan with a sum assured of ₹30 Lakh. She pays regular premiums during the policy term. If she passes away within 20 years, the nominee receives ₹30 Lakh. If she survives, she will receive a maturity benefit. 

3. Money-Back Plan 

A money-back plan provides periodic payouts during the policy term along with life cover. The policyholder receives a percentage of the sum assured at regular intervals. The remaining amount and any bonuses are paid on maturity or to the nominee in case of death. 

Example: 

Rahul buys a 10-year money-back plan with a 25-year income period and a sum assured of ₹15 Lakh. He shall receive a fixed income every year from the 11^th year till the 35^th year. If he passes away during the policy term, the nominee receives the sum assured. 

4. Unit Linked Insurance Plan (ULIP) 

ULIP combines life cover with investment. A part of the premium is invested in market-linked funds (equity or debt), and part is invested in life cover. The payout depends on market performance and the sum assured. 

Example: 

Deepak buys a 15-year ULIP with a sum assured of ₹25 Lakh. He chose to invest in a mix of equity and debt funds. If he passes away during the policy term, the nominee receives ₹25 Lakh or the prevailing fund value, whichever is higher. If he survives, he will receive the fund value based on market performance. .

What are the benefits of life insurance?

Here are the key advantages of a life insurance:

• Financial Protection

  A life insurance plan ensures that your family will be financially secure in your absence. The life insurance coverage pays out the sum assured to your family or beneficiary if you meet an untimely demise during the policy term.

• Wealth Creation

  In the case of savings plans or Unit-Linked Insurance Plans, you can invest in the policy through your premium payment over the long term. This financial corpus is paid out as the maturity benefit if you outlive the policy term.

• Assured Returns

  Savings plans or retirement savings plans offer guaranteed and assured returns on maturity. You can save your money over the years as you pay your premiums. On maturity, this amount can be availed of either as a lump sum or as a regular income.

• Tax Benefits

  Along with financial protection, life insurance offers multiple tax benefits8. Premiums paid towards life insurance policies attract 0% GST. Besides this, under section 80C of the Income Tax Act, you can claim a tax deduction of up to ₹1.5 Lakh on the premiums paid. In addition, death benefit and maturity benefits/bonuses/loyalty additions are tax-exempt (subject to policy conditions) under Section 10(10D).

• Low Premiums

  If you plan to get life insurance, purchasing the policy at a younger age ensures lower premiums, owing to lower health risks. The premium amount is higher if you buy life insurance later at an older age.

• Long Term Coverage

  Some term insurance plans offer a long coverage, with some plans offer cover up to 100 years of age²⁰. With this, you can ensure that you and your family are protected for your whole life.

 

Who needs Life Insurance?

Life insurance is important for everyone, irrespective of age, profession, and lifestyle. These are the broad categories of individuals who should have life insurance:

• Working Professionals

  At a young age, when you just begin working, you can avail lower premiums. Salaried individuals with life insurance can provide extensive financial coverage for their loved ones with affordable premiums that don’t affect their other expenses.

• Newly-Weds

  Married couples tend to have greater financial responsibilities, such as loans for buying a new home, car, or household items. A life insurance policy with joint coverage covers both partners under a single plan for better management.

• Working Parents

  Life insurance safeguards a family’s financial future if a working parent passes away unexpectedly. It ensures income for dependents, covering essentials like education, housing, and daily expenses and also helps clear any outstanding debts.

• Homemakers

  Life insurance is important for stay-at-home moms and homemakers. In case of the death of the lady of the house, the life insurance coverage should be able to help the rest of the family sustain themselves and find help to manage the home.

• Retired Individuals

  During your retirement years, a life insurance plan can help replace your salary. Here, retirement insurance plans can offer regular income, which makes it easier for you to take care of yourself and your family.

• Business persons

  Starting a business venture can utilise your savings and you may also need to take out a loan. Life insurance can help you secure your business and your family’s needs so that any unpaid debts do not burden them in your absence. Additionally, the Married Women’s Property Act (MWPA) in term insurance ensures that payouts go to your intended nominee and is safeguarded from creditors.

 

How much Life Insurance cover do you need?

Calculating your life insurance coverage can be a simple process once you know more about it. Here is what you need to consider when estimating the life insurance coverage needed:

• Family’s Needs

  Life insurance can help cover major financial events in your life. Hence, even when you are not around, your family should be able to meet all their goals and fulfil their dreams. Also decide on a coverage that will handle their smallest needs.

• Financial Capacity

  Your current income will decide the life insurance coverage your family needs. The coverage should be at least 10 to 20 times your annual income. Your financial capacity is also important when it comes to making reasonable premium payments.

• Income Replacement

  If you are the sole earning member of your family, your income supports your family. When you cannot provide for them, your life insurance should offer financial assistance to them at least equal to your monthly income.

• Loans and Debts

  Unpaid loans can eat into life insurance coverage. Hence, it is better to pay them off as early as possible. But in the event of your death, life insurance can ensure that your family does not suffer under the burden of these unpaid debts.

• Medical Emergencies

  It is always prudent to set aside some life insurance coverage for future medical emergencies for your family. This will enable them to get the quality healthcare required in your absence. Also, consider future inflation rates when considering this amount.

• Changes in Life Stage

  Your life insurance cover should meet your long-term financial requirements. As you enter a new life stage, such as marriage or childbirth, it should provide adequate support in case of any unfortunate events.

 

Why do you need Life Insurance?

These are some reasons why life insurance is a must:

• Long-term Financial Stability

  A life insurance plan helps create a safety net for your loved ones. In the event of your untimely death, the sum assured can help your family manage living expenses, maintain their lifestyle, and achieve long-term financial stability

  Moreover, you can opt for a savings-oriented plan, such as an endowment plan or ULIP. It helps systematically build a corpus that can support future financial goals like buying a house or planning for retirement.

• Secure your Child's Future 

  Every parent aspires to provide their child the best education and a secure future. Life insurance, particularly child education plans or savings plans, ensures that even if something happens to you or your spouse, your child’s educational needs remain protected.

  The payout from a life insurance policy can fund your child’s education, extracurricular activities, and other major expenses. This provides peace of mind as their future is not compromised by life’s uncertainties.

• Financial Liabilities

  Many families rely on loans for home purchase, education, or business needs. In the absence of the primary earner, these financial liabilities can become a major burden for the family.

  Life insurance helps prevent such situations by ensuring that outstanding debts like home loans, personal loans, or education loans can be paid off using the sum assured. This keeps your family protected from additional stress and prevents legal or financial complications arising from unpaid debts.

• Spouse’s Retirement

  While you may be planning for your retirement through savings or pension plans, an unexpected death can leave your spouse vulnerable, especially if they depend on your income.

  With life insurance, you can ensure that your spouse has access to a retirement corpus, even in your absence. The sum assured or maturity benefits from certain plans can help them meet living expenses, healthcare costs, and other retirement needs, maintaining their financial independence.

• Tax Benefits

  Apart from protection, life insurance also offers tax advantages. Premiums paid towards life insurance policies qualify for tax² deductions under Section 80C of the Income Tax Act, up to ₹1.5 Lakh in a financial year.

  Additionally, the death benefit and maturity payouts from eligible life insurance plans are tax-free under Section 10(10D). This means your family receives the entire sum assured or maturity amount without any tax deductions, creating a tax-efficient financial legacy for their future security.

 

Factors That Affect Life Insurance Premiums

The following factors can affect your life insurance premiums:

• Sum Assured

  Sum assured determines the premium amounts as it will be higher if you choose a higher life cover. However, this does not mean you should opt for inadequate life insurance coverage. Select a coverage amount to help you pay manageable premiums.

• Age

  Many people buy life insurance when they start working. By purchasing a policy at a young age, you can ensure affordable premium payments. Buying life insurance at an older age means higher premiums.

• Gender

  Life insurance premiums vary as per your gender, as men and women tend to have different health risks at different stages of their lives. For instance, women have higher longevity due to lower health risks and hence pay lower premiums for term plans.

• Medical History

  Your medical history or any previous illnesses in your family can influence your premiums. If you still have any health conditions due to any past illnesses, it is likely that you will be paying a higher premium than someone with no medical history. Note that correct disclosure is mandatory at the time of application. Claims may get rejected in case incorrect medical history is shared during application.

• Lifestyle Habits

  People with healthy lifestyles tend to have healthier bodies and fewer illnesses. This means their life insurance premiums are also lower. But if you have smoking or drinking habits, your life insurance provider will charge a higher premium rate for you.

• Occupation

  If you have an in-office job involving no physical risk, this factor will be considered for your premium calculation. However, your premiums will be higher if you work in high risk jobs like mining, construction, etc.

 

How to claim Life Insurance?

You can follow these simple steps to file a claim:

• Claim Intimation
  

• Documents Required

• Submission of documents

  The claims process can only begin once all necessary documents have been submitted. When filing the claim online, upload soft copies of the documents. For offline submission, visit any of our office branches.

• Claim Settlement

  As per IRDAI regulations, the claim settlement timeline is 30 days from receiving all the documents, including any clarifications from our end. However, in case of further investigations for the claim settlement, this regulatory timeline can be extended up to 90 days from the day of the claim intimation.

What are the types of death not covered in Life Insurance?

Though life insurance covers natural deaths and accidental deaths, here are some of the common causes of death that cannot be covered under life insurance:

• Death due to criminal/high-risk activities

  Life insurance will not cover your death caused by your involvement in illegal or criminal activities. Also, death caused by high-risk sports will not be covered.

• Pre-existing illnesses

  Inform your insurer about any pre-existing condition during the policy purchase. The benefits can only be paid out if this information is already available with the insurer.

• Death due to intoxication

  The use and overdose of drugs and alcohol can lead to death. But your life insurance policy cannot cover this type of death.

• Death due to natural calamities

  Life insurance cannot cover damages to the insured’s life arising from natural disasters or calamities.