A life insurance policy offers financial protection to your loved ones in the event of your untimely demise. It acts as a safety net and ensures that your family does not suffer financial hardships during an emotionally difficult time. But how does a life insurance policy work exactly, and what should you know before buying one? This article will walk you through how life insurance works, its types, benefits, and more.
Fundamentals of Life Insurance
To understand what life insurance is, think of it as a contract between the policyholder and the insurance company. The policyholder is the person who purchases the policy and pays the premiums. The life cover extends to the life assured. In most cases, the life assured could be the policyholder. However, sometimes the life assured is another person that the policy cover is being bought for. If not mentioned separately, it is safe to assume that the term policyholder covers the life assured as well.
As a policyholder, you pay regular premiums towards the policy cover. In return, the insurer promises to pay a sum assured to your nominee if something happens to you during the policy term. Some policies may also offer maturity benefits if the life assured survives the term.
In its essence, life insurance offers peace of mind. It secures your family’s future by replacing lost income, repaying debts, or covering education and household expenses. This makes life insurance an essential component of long-term financial planning.
Life Insurance – Key Terminology
Policyholder:
The person who buys the policy.
Insured:
The person whose life is covered (usually the policyholder).
Nominee:
The person who receives the death benefit.
Beneficiary:
Legal heir of the policyholder.
Sum Assured:
The amount paid to beneficiaries upon claim.
Policy Term:
Duration for which the coverage is active.
Buying the Right Life Insurance Policy
When it comes to buying the best life insurance policy, you should have a clear understanding of your coverage needs. Ask yourself:
- How much financial support will my family need?
- Do I need a basic cover or a policy with returns?
- Am I looking for lifelong coverage or a fixed-term plan?
Once you identify your goals, you can compare different policies, premiums, claim settlement ratios, and insurer credibility. Choose a policy that aligns with your age, income, liabilities, and dependents. By comparing effectively, you can select the best life insurance policy suited to your profile.
Types of Life Insurance
There are several types of life insurance available to meet different needs. Here's a quick overview.
Term Life Insurance
This is the simplest and most cost-effective type of life insurance. It offers a large sum assured at low premiums. When comparing life insurance vs term insurance, remember that the latter is a type of life insurance. While other types of life insurance may come with some additional benefits, a term plan does not offer a maturity benefit if you survive the term. It is ideal for people seeking high coverage on a tight budget.
Whole Life Insurance
As the name suggests, this covers you for your entire life. It usually includes both a death benefit and a savings component. Premiums are higher, but it builds cash value over time.
Endowment Plans
These offer life cover along with a maturity benefit by combining insurance with savings. If the policyholder survives the term, a lump sum is paid.
ULIPs (Unit-linked Insurance Plans)
ULIPs combine insurance with investment. You enjoy the assurance of life cover while earning potential returns from market-linked funds.
Understanding the various types of life insurance helps you choose the right one for your needs.
Premiums in Life Insurance
Premiums are what you pay to keep your policy active. But how is the premium calculated for your policy?
Several factors can affect your life insurance premium.
Age:
The younger you are, the lower the premium tends to be.
Health:
Pre-existing conditions can increase premiums.
Lifestyle habits:
Smokers may be charged a higher premium.
Sum assured:
Higher coverage usually means higher premium.
Policy term and type:
Term insurance tends to be more cost-effective than whole life plans or ULIPs.
Riders (Add-ons):
Adding riders, although optional, can add to the total premium costs.
Understanding how life insurance works in terms of pricing can help you choose cost-effective coverage that suits your needs.
Benefits of Having a Life Insurance Policy
Life insurance offers numerous benefits that go beyond simple death benefits.
Financial Security
The most significant benefit is the protection it provides to your family. It can help replace lost income, ensure debt repayment, and cover future expenses.
Wealth Creation
Certain policies, such as ULIPs and endowment plans, help grow your savings while offering insurance.
Tax Benefits**
Premiums paid are eligible for deductions under Section 80C of the Income Tax Act, while death benefits are tax-free under Section 10(10D), subject to terms and conditions.
Peace of Mind
Knowing your family is financially protected, even in your absence, can offer emotional and mental relief.
Loan Facility
Many policies allow you to take a loan against the surrender value, which can help in financial emergencies.
Legacy Planning
Life insurance allows you to leave behind a financial legacy for your children or dependents. It ensures that your wealth is passed on smoothly, free from legal complications or tax burdens.
When you understand how a life insurance policy does work in the long term as well as the near future, you realise it is not just a risk cover but can also be used as a long-term asset for wealth building.
Raising a Claim in Life Insurance
Now that you understand what life insurance is and how it works, it is also important to know how to file a claim when needed.
For Death Claim:
Claims for the death benefit are time-sensitive and ought to be filed by the nominee. Hence, it is ideal to share your policy details with your nominee and ensure that they are well aware of the claims process. Here’s what the process broadly looks like.
a) Inform the insurance company about the policyholder’s death as soon as possible.
b) Submit the claim form along with required documents: death certificate, ID proof, policy papers, etc.
c) The insurer will verify documents and settle the claim, usually within 30 days.
Remember to maintain updated nominee details and keep documents ready to ensure a smooth claim process for your loved ones.
For Maturity Claim:
Not all policies offer maturity benefits; hence, this process is not applicable to all policies. The process is relatively simpler and is handled largely by the policyholder.
a) If the life insurance policy includes maturity benefits, submit the relevant form along with the policy bond before the policy term ends.
b) The insurer will process and credit the maturity benefit to your account.
Understanding how does life insurance work can help you in making smart financial decisions. Whether you choose term insurance for pure protection or a whole life policy for lifelong coverage, the right plan can go a long way in securing your family’s future. Compare policies, assess premiums, and pick the best life insurance policy that fits your needs. With tax benefits, financial security, and a host of other advantages, life insurance is a must-have in your financial portfolio.
** Tax exemptions are as per applicable tax laws from time to time.
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