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Life insurance is an agreement of protection, and sometimes even wealth creation, between the insurance company and the customer. Under this agreement, the insurer guarantees to pay the beneficiary or nominee of the assured life a pre-decided amount of money in the unfortunate event of the assured/policyholder’s demise during the term of the life insurance plan. In return for this promise, the policyholder pays a predefined sum of money called premium on a regular basis, the frequency and duration of which can be chosen by the policyholder. The policyholder is also free to decide the quantum of sum assured under the policy. This will be the sum paid out to his or her beneficiaries and it also determines the amount of premium that will be required to be paid. In addition to that, as the policyholder, you can also get additional riders to your policy, such as the critical illness rider or the terminal illness rider, which will protect you from specific contingencies. Apart from the death benefits, some types of life insurance plans also provide maturity benefits. These benefits are payouts provided to the assured if he or she survives the entire term of the life insurance policy.
The policyholder is the individual who purchases a life insurance plan. The nominee or beneficiary as listed in the policy is the individual who receives the insurance plan benefit amount which is referred to as the sum assured, after the death of the life insured. The nominee is usually a family member or a dependent. Life insurance is a long-term financial step in saving and creation of your wealth. It can help safeguard the future in financial terms. Thus, it fundamentally provides both saving as well as protection. Depending on the life stage you are at, the kind of financial goals you plan to serve, and the risk appetite you carry, you can choose a life insurance product that aligns with your requirements. It can be a term insurance product if you want a pure protection product or a hybrid product like ULIPs or moneyback plans if you seek steady returns for funding your kid’s education or a pension plan that can bring you steady income post-retirement. As mentioned before, life insurance plans feature high on the list of tax-saving mechanisms. The premiums that you pay for your life insurance plan is eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C, 80CC, 80CCE of the Income Tax Act, 1961. As per Section 10 (10D) of the Income Tax Act, 1961, the maturity and death benefits are also exempt from taxation. Life insurance premium is heavily determined by the age of the policyholder, which is why it is advised to get life insurance policy early in life. If the potential policyholder is young, the premium rates of the policy will be low as compared to the premium rates for an older individual. This is because young people are considered less prone to life-threatening diseases and the possibility of death.
In order to understand how life insurance plans, work, you need to look at two critical points. One is the purchase of the policy, and another is when the claim settlement must take place. Let’s look at them one by one. Purchase of policy, premium and lump sum payments: Under the life insurance agreement, the insurer promises financial protection by paying out death benefits in a lump sum or as regular payouts to nominees/beneficiaries in the unfortunate event of the demise of the life assured. These beneficiaries are designated in the policy documents itself and are usually family members or dependents of the life assured. The sum assured can be decided by the policyholder and should be enough to help your family maintain their lifestyle in your absence. Hence, a multiplier with your monthly salary is a good way of arriving at this figure. In return for this promise, the policyholder is supposed to pay an amount called premium. The amount of premium to be paid is defined at the time of purchase of the policy. To calculate the premium under a life insurance policy, the insurer takes your lifestyle and finances into consideration. Claim settlement process with the insurer: Upon the happening of the event for which the policy is drawn, the insurer will pay the beneficiary the entire coverage amount. Instead of a lump sum, if you want you can be paid in the form of instalments to the beneficiary/beneficiaries after your sudden death. The insurance company may also pay bonuses, based on the amount that has been accumulated over the policy tenure. In order to acquire this money, the beneficiary/relative of the deceased policyholder has to get in touch with the insurer to intimate them of the situation. You have to provide the policyholder’s death certificate as a proof, along with other necessary documents as required by the company. After reviewing the documents, the insurer will either accept or reject the claim. Following that, an arrangement would be worked out for the payment of regular payouts or the lump sum.
FAQ
When should I buy a life insurance policy?
You can buy life insurance anytime between 18 to 90 years of age, but the sooner you get it, the better. Getting life insurance at a younger age ensures lower premium rates.
What is Claim Settlement Ratio?
A claim settlement ratio is the percentage of the number of insurance claims settled against the number of claims filed in a financial year. You should opt for an insurer with a high claim settlement ratio.
Does smoking affect my eligibility for life insurance?
Even if you are a regular smoker, you can be eligible for a life insurance policy. However, you will have to pay a higher premium than a non-smoker.
Life insurance is a legal contract that binds the insured policyholder and the insurance service provider. You, the insured, are required to pay premiums to the insurance company in return for which the insurer promises a protective financial cover. The financial cover can be in the form of an assured sum that’s paid out to your beneficiaries/nominees in the event of your demise. Alternatively, if you survive the tenure of the policy, some life insurance plans also give you a maturity benefit.
The unequivocal answer is yes. Life insurance is an extremely essential part of financial planning, particularly if you’re the breadwinner of your family and if you have financial dependents. In the event of your death, the financial benefits of a life insurance policy can help the surviving members of your family cope with the sudden loss of the main source of income. Additionally, it also equips them to pay off any debts or liabilities you may have left behind. The monetary cushion offered by a life insurance policy can help your family and beneficiaries significantly.
How do I decide on the amount of life insurance I need?
The purpose of life insurance is to help your family or your financial dependents survive the loss of revenue, at least until they can find an alternative source of income. So, the estimates will typically vary depending on your family’s average levels of spending. One way to approach this is to follow the general rule of thumb and opt for life insurance that is at least 7 to 10 times your annual income. Alternatively, you can also calculate the amount of income required for your family to survive after your demise. Subtract any other sources of income from that amount, and the balance is the insurance cover you need.
How much does life insurance cost?
The cost of life insurance is directly proportional to the death benefits and maturity benefits offered by the plan. Other factors such as your age at the time of application and your medical history also play a significant role in determining the cost. The premium charged also varies from one policy to another. Depending on these factors, you can purchase a life insurance policy for as low as around Rs. 2,000 per month or for as high as Rs. 10,000.
Do I have different options to pay my premium?
You have the option to choose the scheme of paying your premiums. Depending on what’s convenient for you, you can opt to pay a single premium and purchase the cover, or you could choose to pay monthly, quarterly, semi-annual, or annual premiums. In addition to this, you also have the freedom to choose the mode of making these payments. If you prefer offline transactions, you can pay your premium using bank challans, demand drafts, or checks. Alternatively, you can also make the payments online using direct bank transfers or head to the insurer’s web portal to pay the premium.
What if I don't pay my premium on time?
If you do not pay your premium on time, you run the risk of your policy lapsing. Most insurers generally offer you a grace period within which you can catch up on the payments you’ve missed. However, once the grace period is up, your life insurance policy lapses. This means that you will no longer be eligible to enjoy the protective cover of death benefits or maturity benefits. If you find yourself in this situation, you can reinstate your policy by contacting your insurer and paying all the outstanding premiums along with the interest and penalties charged on them, if any.
What are the advantages of investing in a life insurance policy?
The primary benefit of a life insurance policy is protective financial cover it offers. In case the policyholder dies, the beneficiaries or the nominees receive a lump sum payout to help them through tough times. Additionally, with a life insurance policy, you can also enjoy tax benefits on the premiums paid to purchase the policy. If you survive the tenure of the policy, you may even receive maturity benefits, depending on the kind of plan you opted for. Life insurance policies also allow you to take a loan against the plan in case you need to borrow funds to meet your life goals.
What about tax benefits on Life Insurance premiums?
In addition to offering you a life cover, these insurance policies also provide tax benefits. According to section 80C of the Income Tax Act, the premiums you pay in each financial year can be claimed as a deduction from your total taxable income for that year. This has the effect of reducing your income, and therefore, also brings down the taxes you are liable to pay. The maximum amount of deduction you can claim is Rs. 1.5 lakhs each year.
What happens when my life insurance policy matures?
If your insurance policy “matures,” it essentially means that cash value of the policy has grown to equal the death benefits. If you survive the term of the policy and live to see it reach maturity, the insurance provider generally pays out a lump sum amount, known as the maturity benefit. It includes the value of all the premiums you paid during the policy’s tenure, over and above which a bonus is added. In some cases, the insurer may extend the maturity date and make the lump sum payment only on the policyholder’s demise.
Most people generally purchase insurance policies from insurance representatives employed by the insurer. These third-party agents help people understand the features and benefits of various policies offered by the insurance company. On the other hand, if you prefer dealing directly with the insurer, you can simply visit a branch office, submit the necessary documentation, and purchase the policy of your choice. In recent years, with increased digitization, it’s also possible to buy life insurance online. If you’re tech-savvy and prefer online transactions, you can always head to the insurer’s web portal and purchase the policy of your choice from their site.
How do I claim the death benefits offered by a life insurance policy?
If the policyholder passes away, the nominee or legal heirs need to claim the death benefits offered by the policy. To file a life insurance claim, the first thing you’ll need is multiple copies of the death certificate. If you’d purchased the policy through a representative, you can then reach out to your agent, who will help you fill out the necessary forms and submit the claim on your behalf. Another way to do this is to directly visit the branch office, fill out the forms yourself, and submit the claim to the insurer. Some companies also offer the option of filing a claim online.
Why should I buy Life Insurance for my family?
If you’re the primary breadwinner in your family, it’s evident that they depend on you for their financial requirements. In the event of your unfortunate demise, your dependents will need a monetary safety net to fall back on. A life insurance plan can help your spouse, kids, parents, or other financially dependent relatives meet their essential expenses in the immediate aftermath of your demise. Additionally, it can also help them repay any debt you may have left behind or pay for important needs like healthcare and education.
What are the benefits of Life Insurance Plan?
A life insurance policy can be beneficial to the policyholder in more ways than one. Here are the main advantages of investing in this instrument.
A guaranteed death benefit
Lifelong coverage
Tax benefits under section 80C
An option to avail a loan against your policy
Wealth creation in the form of maturity benefits
How long does life insurance last?
The term of life insurance policies varies from one provider to another. Typically, most insurers offer different plans with varying tenures. You can invest in life insurance that lasts for 10, 20, or even 30 years, depending on your age when you purchase the policy. Ideally, the younger you are when you invest in life insurance, the longer your policy can be. Shorter policies may mean higher premium payments. Some insurers providers also offer the option of 5-year or 10-year increments on the original policy term.
What kind of things does life insurance cover?
Most life insurance policies generally offer death benefits in case of natural deaths, such as those caused by a heart attack or old age. Life insurance also almost covers the deaths caused by accidents. In addition to death benefits, you can also opt for enhancer coverage with additional covers like a critical illness rider or a disability rider, which can help your family cope with financial distress in case the policyholder is diagnosed with a critical illness like cancer, or in case they’re unable to continue earning on account of any disability. In such situations, the rider on your policy may either offer a lump sum payment or ensure that you receive a steady sum of money periodically.
Are my life insurance premiums tax deductible?
Yes, they are. As per the provisions of section 80C, the premiums you pay for your life insurance are deductible from your total taxable income. The maximum amount of deductions you can claim is Rs. 1.5 lakhs per financial year. If your premium payments add up to less than Rs. 1.5 lakhs, then the entire amount of premiums paid are deductible.
How can life insurance be more affordable?
The earlier you invest in a life insurance plan, the more affordable it gets. When you’re younger, you have years of earning income ahead of you. You’re also healthier and generally more fit. So, insurance providers will charge you a more affordable premium in this case. Another way to make premiums fit better into your budget is to buy only the amount of coverage you actually need. You could also opt for a term plan that offers a pure protective cover, since these plans typically charge premiums that are relatively lower.
What are some basic life insurance terms I should know?
Here’s a quick look at the most commonly used life insurance terms.
Premium: Premium refers to the periodical payments made by the policyholder to the insurance company in exchange for purchasing the policy. Premiums can be one-time payments, limited-term payments, or regular outlays made over the entire tenure of the policy.
Sum assured: This is the amount that the insurance service provider will pay to the nominee in the event of the policyholder’s death.
Maturity benefit: This term refers to the sum that the insurer pays the policyholder if the latter survives the policy tenure. Term insurance plans do not offer any maturity benefits, but life insurance plans do.
Surrender value: In case the policyholder decides to discontinue premium payments before the policy matures, there’s always the option of surrendering the policy back to the insurer. On doing this, the insurance company pays the policyholder the surrender value, which is typically a certain percentage of the total basic premiums paid till surrender.
How many years should I choose for my policy?
If you opt for a single premium policy, it means you’ll only need to make one payment. So, in this case, you can opt for the longest term offered by the insurer. On the other hand, if you opt to pay premiums periodically, ensure that you spread the payment period across your working years. By doing this, you can rest assured that you have the earning capacity to make all your premium payments on time. Keep in mind that policies that spread over a shorter period may often mean higher premiums.
Can I change my Life Insurance Plan nominee? If yes, how?
You can change the nominee in your insurance plan either online or offline. In either case, you need to fill out the relevant nomination form and submit it to the insurance company. Depending on the particulars submitted, your insurance provider will update the nominee’s details in your insurance plan.
What KYC documents are required for buying a life insurance policy online?
To purchase a life insurance policy online, you’ll need to submit various KYC documents to verify your age and address. Among these documents are your PAN card, Aadhar card, passport, voter ID, ration card, birth certificate, driving license, and marriage certificate if you’re married.
