Life is uncertain, while death is unavoidable and certain, its time is not. In case of premature death of the breadwinner and the family suffers a financial loss because their source of income is lost. It becomes difficult to meet the lifestyle expenses and the financial goals when the breadwinner dies unexpectedly, and the family might face a financial crisis. A life insurance policy comes in handy in this context. The policy covers the risk of premature death and provides financial assistance to the family to face the loss suffered due to the breadwinner's death.
What is a Life Insurance Policy?
A life insurance policy is a contract between the policyholder and the insurance company. Wherein the insurance company promises to cover life risk of the policyholder. Life insurance policies cover the risk of dying too young and the risk of living too long. Moreover, there are health-oriented plans also, which cover the financial loss suffered in a medical contingency.
The life insurance policy is taken for a specific tenure, and a particular level of coverage called the sum assured. You are required to pay a premium for availing of the coverage offered by the policy. After that, in case of premature death during the policy tenure, the stipulated death benefit is paid. If, on the other hand, the tenure comes to an end and the life insured is alive, a maturity benefit is paid under some saving based life insurance plans. The life insurance policy, therefore, protects you against the risk of premature death and also, in some plans, pays a maturity benefit if you survive the policy term.
Therefore, the life insurance policy protects you against the risk of premature death and in some plans, pays a maturity benefit if you survive the policy term.
Why do I Need a Life Insurance Policy?
The need for a life insurance policy stems from the fact that death cannot be predicted. In the case of early death, you and your family might suffer a financial loss, if you have not made any financial provisions for them.
In life, you may have different types of financial goals like –
- Buying a car
- Buying a house
- Education of your child
- Marriage of your child
- Planning for retirement, etc.
All these financial goals require funds, and so you save and invest in creating the needed funds to fulfil them. However, in the unfortunate case of premature death, your savings are cut short, and these goals remain unfulfilled. If you buy a life insurance policy, your family will fulfil these goals even when you are not around. The life insurance policy would give your family a financial pay-out in case of your untimely death, and this pay-out would provide your family with the necessary funds to fulfil their goals. As such, a life insurance policy is important for creating financial security for yourself and your family.
Benefits of Life Insurance Policy:
Life insurance plans provide you with many benefits. Let’s have a look at what these benefits are –
- Financial Security: This is the underlying benefit of a life insurance policy and one for which the policy is actually taken. The death benefit paid under a life insurance plan helps your family financially in your absence. As such, when you buy life insurance plans, you essentially invest in financial security. Your family is secured of financial assistance in your absence, and you are also secured in the knowledge that any untimely contingency would not cause financial loss to your family.
Fulfilment of Financial Goals: The benefit received from a life insurance policy, whether on death or maturity, can help you to fulfil your financial goals. There are types of life insurance plans available in the market, and every plan comes with its own set of benefits structure. These plans can help you to meet every financial goal of your life.
For example, if you buy a term insurance plan, you can fulfil the need for income replacement. On the other hand, child plans create financial security for your child’s future and pension plans can help you plan for your retirement. As such, life insurance plans can aid in the fulfilment of financial goals and are recommended.
Creation of a Corpus: If you are looking at life insurance from an investment point of view, there are plans to help you do that. Endowment and money back plans are traditional life insurance plans which help you create a guaranteed corpus for your financial needs. Similarly, unit-linked plans are market-linked plans which help you create a market-linked corpus with inflation-adjusted returns. Therefore, you can invest in these plans, and besides availing life coverage, you can create a corpus.
Tax Saving: Lastly, life insurance plans help in tax saving. The premiums you pay for a life insurance policy are allowed as a tax-free deduction, under Section 80C and 10D of the Income Tax Act. Under section 80C, premiums that you pay towards a life insurance policy qualify for a deduction up to ₹1.5 lakh, while Section 10(10D) makes income on maturity tax-free if the premium is not more than 10% of the sum assured or the sum assured is at least 10 times the premium. In case of death, the benefit received from the life insurance policy is completely tax-free. For more details, you can consult your tax advisor.
Types of Life Insurance Plans in India:
As mentioned earlier, life insurance plans come in different variants, and each variant has its own specific set of benefits. So, let's have a look at the different types of life insurance plans in India which are available in the market –
1. Term Insurance Plan:
A term insurance policy is the most basic life insurance policy that encompasses life insurance's true essence. The plan covers the risk of premature death within the policy tenure. In case of death during the policy tenure, the death benefit is paid. If the plan matures, however, no benefit is paid under basic term plans. In case someone wants survival/maturity benefit in a term plan, they can choose the return of premium option.
For example, say Mr. A buy a term insurance plan with a sum assured of Rs.50 lakhs and a term of 30 years. After 20 years of purchasing the policy, Mr. A die. In this case, the sum assured would be paid to the nominees, and the plan would be terminated. However, Mr. A survives the policy term of 30 years; then no benefit will be paid to the policyholder on maturity.
Term insurance plans come in different types which are as follows –
- Level Term Plan – These are the simplest types of plans where the sum assured remains fixed throughout the policy duration.
- Increasing Term Plans – Under these plans, the sum assured increases after every policy year.
- Decreasing term plans – Under these plans, the sum assured reduces after every policy year.
- Return of Premium Plans – Under these plans, the premiums paid during the policy tenure are returned if the plan matures and the insured is alive.
2. Whole Life Insurance Plans:
Whole life insurance plans are plans which continue till you reach 99 or 100 years of age, i.e., your entire life. These plans have no fixed policy tenure as the tenure is calculated based on your age. If you are 30 years old and buy a whole life plan covering 100 years, the tenure would be 70 years. For a 35-years old individual, the same plan would provide a term of 65 years.
Whole life plans pay a death benefit in case of death before reaching 99 or 100 years of age. However, if you survive till 99/100 years of age, the plan will pay a maturity benefit. Thus, whole life plans pay either a death benefit or a maturity benefit and provide lifelong protection.
3. Endowment Insurance Plans:
Endowment plans are savings-oriented life insurance plans. Under these plans, either a death benefit is paid on death within the policy tenure, or if you survive the policy term, a maturity benefit is paid.
The death or maturity benefit is guaranteed, so endowment plans help you create a guaranteed corpus for your financial goals. Endowment plans offer guaranteed additions or loyalty additions on the sum assured to help boost your corpus. Moreover, many plans are also offered as participating plans where the bonus is added to the sum assured depending on the insurance company's profit experience.
For example, say Mr. A buy an endowment plan with a sum assured of Rs.10 lakhs and a coverage duration of 20 years. And Mr. A dies within the plan tenure, Rs.10 lakhs + bonus earned till death would be paid to the nominee. Alternatively, if Mr. A survives till the end of the term, Rs.10 lakhs + bonus earned during the policy duration would be paid as maturity benefit.
4. Money Back Plans:
Money-back plans are like endowment plans but with liquidity benefit. Under money back plans, the sum assured is paid in instalments at specific intervals over the policy tenure. These benefits are called money back benefits or survival benefits. In case of death during the plan tenure, the full sum assured is paid irrespective of the money-back benefits already paid by the policy. If, however, the plan matures, the remaining sum assured is paid after deducting the money-back benefits which already paid. Money-back plans also earn bonus and so they help in increasing your corpus.
For example, Mr. A buys a money-back plan with a term of 20 years and a sum assured of Rs.10 lakhs. The plan pays 20% benefits as the money-back of the sum assured after every 4 years. Thus, Mr. A would receive Rs.2 lakhs in the 4th policy year, 8th policy year, 12th policy year and 16th policy year. If the plan matures, the remaining sum assured of Rs.2 lakhs and the term's bonus would be paid as maturity benefit. However, if Mr. A dies in the 13th year of the policy, Rs.10 lakhs + bonus earned till death would be paid to the nominee as death benefit even though he has already received money back benefits worth Rs.6 lakhs in three instalments.
5. Unit Linked Insurance Plans (ULIP):
Called ULIPs in short, these plans work like mutual funds in addition to offer risk cover. The premium which you invest is allocated to different types of funds based on your choice. There are equity funds that invest in the equity market and debt funds to invest in the debt market. The sum assured depends on the premium you pay. Moreover, applicable charges are deducted from your premium before it is allocated to the selected fund. After that, as the market performs, the fund grows, and you earn returns. In case of death, the higher the sum assured, or fund value is paid. When the plan matures, you get the fund value as the maturity benefit. ULIP plan allows you the flexibility to withdraw money from the fund value after 5 years.
Moreover, you can also change between the investment funds through switching. ULIPs provide the dual benefit of insurance and investment returns and are quite popular among individuals.
6. Child plans
A child insurance plan is a combination of insurance and investment; these plans aimed to create a secured corpus for the child even if the parent is not around. Child plans can be offered as endowment, money back or ULIP plans. Under these plans, A parent buys this plan with the child being the nominee. Suppose the parent dies during the policy tenure. In that case, the policy's premiums are waived off, and the maturity value would be paid at the time of maturity, ensuring that your children's future dreams are fulfilled.
For example, Mr. A buys a child plan for his child. Mr. A is the life insured, and the plan is bought for 20 years with a sum assured of Rs.10 lakhs. Mr. A dies in the 9th year of the policy. The sum assured of Rs.10 lakhs is paid on his death, but the plan does not stop. Future premiums waived off, and the plan continues for the next 11 years. When the plan matures, the maturity benefit is paid to Mr. A's child who can benefit from funding his/her higher education, marriage, or other financial need.
7. Annuity/Pension Plans
Annuity/Pension plans are designed to create a retirement corpus by making a regular or a lumpsum investment. Once the corpus is created, the insurance company pays fixed or regular payouts immediately or at a future date. There are two types of pension plans which are as follows –
- Immediate Annuity: An immediate annuity plans, you’ll start receiving monthly or annual annuity immediately after you invest. The annuity payments can continue for a limited duration or a lifetime.
- Deferred Annuity: In a deferred annuity, you invest a lump sum amount or annual/monthly premiums for a fixed duration. The annuity payment begins after a particular term.
If you are nearing retirement, you can opt for deferred annuity plans and build up a retirement fund. If, however, you have retired, you can use your retirement corpus to secure lifelong incomes through immediate annuity plans.
8. Health Insurance Plans
Nowadays, life insurance companies have also started offering plans to cover the financial loss suffered in a health contingency.
Health insurance plans offered by life insurance companies cover specific illnesses. If you are diagnosed with the covered disease during the policy term, a lump sum benefit is paid, which helps you meet such illness's medical costs. Health insurance plans pay a benefit only if you suffer from a covered illness. These plans do not have a maturity benefit.
For example, Mr. A buy a health plan covering critical illnesses for a sum insured of Rs.15 lakhs and a tenure of 10 years. In the 7th policy year, he/she suffers a stroke which is covered under the policy. In this case, the plan would pay the sum insured of Rs.15 lakhs when Mr. A is diagnosed with stroke even though he is alive. If Mr. A had not suffered any illness during the coverage tenure, no benefit would have been paid on maturity.
What Documents do You Need to Buy a Life Insurance Policy?
To buy a life insurance policy, you would have to submit some documents. These documents generally include the following –
- Recent coloured photographs
- Identity proof like Voter ID Card, PAN Card, passport, Aadhaar card, driving licence, etc
- Age proof like PAN Card, Aadhaar Card, Voter’s ID Card, birth certificate, etc
- Address proof like driving license, rent agreement, property deed, utility bills, Aadhaar card, passport, etc
- Proof of income like salary slips for last 3-6 months, ITR for last 2-3 years, last 6 months bank statements, form 16, etc
Moreover, if you are buying a life insurance policy on the life of another individual, like your spouse or child, the above-mentioned documents of the life which is being insured would be required in addition to your documents.
How Much Life Insurance Cover do I Need?
When you buy a life insurance policy, choosing the appropriate amount of coverage is essential so that your family gets adequate funds in your absence. Thus, choosing the right sum assured is necessary. The choice of the coverage depends on a lot of parameters which include –
- Your lifestyle expenses.
- Number of dependents
- Existing assets and liabilities
- The financial goals that you have
- Existing value of investments
Essentially, your financial goals and the average lifestyle expenses play an important role in the coverage needed. The range should be such that it should meet your family’s living expenses and provide the desired funds required to meet your goals.
There are different formulas which help in determining the sum assured which you should choose. Some of the most commonly used procedures include the following –
1. Basic Thumb Rule:
It is the most basic method of calculating the sum assured which you should choose. As per this rule, your sum assured should be at least 10 to 12 times your annual income. So, if your annual income is Rs.10 lakhs, your sum assured should be at least Rs.1 crore to Rs.1.20 crores. This method is basic because it does not account for inflation and the possible increase in your future income.
2. Underwriter’s Thumb Rule (Income Multiplier):
A more advanced version of the thumb rule is the underwriters’ thumb rule where the multiple depends on your age and annual income. According to this rule, the eligibility of insurance reduces with age, and so the multiplier decreases as age increases. Under this rule, if you are aged between 20 and 30 years, you can take the coverage s of 15 times the annual income. For ages between 31 and 40 years you will be eligible to take the coverage of 14 times the annual income, for 41 to 45 years it is 12 and so on.
All these methods give you the coverage you should take, but they do not consider your existing assets and liabilities. It would be best if you considered such assets and liabilities to arrive at the coverage required. Life insurance companies have coverage calculators which calculate the sum assured which you should opt for. You can use these calculators and find out your coverage requirements with ease.
Important Life Insurance Policy You Should Know:
Life insurance is a technical concept, and so there are many technical terms in your policy which you might not understand. Let’s have a look at some of the most important life insurance terms and simplify them for your understanding –
|Life assured/insured/ Policyholder||Individual whose life is insured by the life insurance policy|
|Proposer||An individual who pays the premiums of the life insurance policy. The policyholder can be the life insured if he takes the policy on his own life. If, however, the policyholder buys a policy on the life of another individual, he would be the proposer while the individual would be the life assured/insured|
|Nomination||Appointment of an individual or entity who would receive the death benefit when the life assured dies|
|Assignment||Transferring the right of ownership of the policy to another individual|
|Nominee||A person or an entity who receives the death benefit when the life assured dies|
|Grace Period||An additional period which is allowed to pay the premium of the life insurance policy after the expiry of the due date|
|Paid-up value||Value attained by the life insurance policy if the premiums are discontinued. The paid-up value is the reduced value of the sum assured which is calculated using the following formula – Paid-up value = [(number of premiums paid / total number of premiums payable) * sum assured] + bonuses added to the sum assured|
|Surrender||Surrendering the life insurance policy before the completion of the policy term. When you surrender you get a surrender value|
|Endorsement||If you make any changes in an existing policy, such changes are recorded through endorsements. For example, change in the address, contact information, nominee, etc.|
|Claim||When the event against which the policy was taken occurs, the life insurance company pays the promised benefit. This is called claim|
What is Life Insurance Premium?
A life insurance premium is a consideration you pay in the life insurance contract for the insurance company's coverage. The premium of your life insurance policy is calculated using different factors. Moreover, life insurance plans allow you to pay premiums regularly throughout the policy tenure, for a limited period or in one single instalment.
The factors on which life insurance premiums depend include the following –
|Factors||How They Affect Life Insurance Premiums|
|Age||The older you are the higher would be the premium|
|Sum Assured||The higher the sum assured you choose the higher would be the premium|
|Type of policy bought||The premium rate is different for the different types of life insurance plans. So, depending on the policy that you choose the premium rate would be determined|
|Coverage benefits||The coverage features of a policy also determine the premium. If the policy has inbuilt and comprehensive coverage benefits, the premium would be higher.|
|Height and Weight||Your height and weight determine your BMI. If your BMI is higher or lower than the ideal, the premium might be increased for the increased health risk|
|Medical History||If you have any existing medical complication or illness, the premium might rise|
|Family History||If you have a family history of illnesses or diseases, the premium might rise because such illnesses or diseases might be genetic and increase your mortality risk|
|Occupation||If you are engaged in a dangerous occupation, the premium would be high. For example, people in the defence forces, police, politics, etc. are charged higher premiums|
|Location||If you live in an area which is prone to natural disasters, the premium would be high|
|Lifestyle Habits||Premiums are higher for individuals who smoke and/or consume alcohol and other intoxicating substances|
|Riders selected||Life insurance plans allow optional coverage benefits called riders. Each rider incurs an additional premium and so if you opt for any rider, the premium would increase|
|Policy Discounts||Life insurance plans also allow premium discounts for different reasons. If you qualify for the discounts, the premium would be reduced|
How to Choose the Best Life Insurance Policy?
The choice of a life insurance policy should depend on your coverage needs. A term insurance plan is the most basic life insurance policy that you should avail to provide financial security to your family. After a term plan, you should assess your needs and then choose the other life insurance plans. If you have a child and want to plan for his/her future, you can invest in child plans.
Similarly, to plan for a comfortable retired life, pension plans are ideal. If you are looking for tax-saving investment avenues and want returns, ULIPs would be the best life insurance plans for your needs.
Once you have selected the type of life insurance policy you need, you need to choose the best plan. About 24 companies provide life insurance in India, and every company offer all types of life insurance plan you need. To select the best life insurance policy among multiple choices, here are some pointers which you should check –
- The sum assured offered: Look at the sum assured levels across the available plans and choose a plan which offers the best sum assured that you need.
- Coverage benefits offered: Compare the different life insurance plans based on their coverage benefits. Insurance companies have revolutionized their policies and are offering value-added features that enhance the policy's scope. Check for these value-added benefits so that you can choose a holistic plan.
- The premium charged: After considering the coverage, compare the premium rates. The premium should be proportionate to the coverage benefits and sum assured of the policy. Compare premiums of different plans vis-à-vis their coverage and then choose the most competitive rate without compromising the coverage benefits.
- Premium discounts: Premium discounts can go a long way in reducing your premium outgo and so you should look for the discounts offered under different life insurance plans. Choose a plan which offers the maximum discounts for maximum savings.
- Claim Settlement Ratio of the insurance company: The last thing you should check is the insurance company's Claim Settlement Ratio. Companies with a high ratio should be favoured as they are better placed to settle your claims when the time comes.
- To choose the best life insurance plan comparison is necessary, and you can compare online. The online marketplace has made it easier for you to look through different life insurance plans and choose one which is the best. So, the next time you buy life insurance, go online and compare the available plans and then pick one of the best plans.
What is the Claim Process of Life Insurance Policy?
The claim process of life insurance companies depends on the type of claim that you incur. So, let’s understand in details –
1. Maturity or Money Back Claim:
If your policy matures or if there is a money-back benefit payable, the claim process is as follows –
- The insurance company would send you a discharge voucher for releasing the claim.
- Fill-up the voucher and submit it to the insurer before the maturity or money back claim date.
- The company would verify the voucher's details and pay the claim, directly in the bank account.
- If you do not provide bank account details, the insurance company will issue a cheque in your name.
2. Death Claim:
In the case the insured dies, the nominee is required to inform the company of the death so that the claim process can begin. The steps are as follows –
- The nominee should notify the company of the insured's death by filling and submitting the death claim form.
- The death certificate of the insured would also have to be submitted as proof of death.
- The insurance company would verify the details and then settle the claim by crediting the claim amount directly to the nominee's bank account or issuing a cheque in the nominee's name.
3. Health Claim:
If you have a health insurance policy and you suffer a claim, the process is as follows –
- Inform the insurance company by filling up the relevant claim form.
- Submit all the relevant medical documents supporting your claim.
- The company would verify the details and then settle the claim.
For all the claims mentioned above, you would have to submit a set of documents which include the following –
- Claim form.
- Policy bond
- Identity proof of the policyholder
- Identity proof of the nominee in case of death claims
- Death certificate of the insured
- Police FIR, post-mortem report, police inquest report, panchnama, etc., 'In case of accidental deaths'.
- Medical bills and reports in original in case of health claims.
What are the Insurance Riders & Its Benefits?
Life insurance riders are additional coverage benefits that enhance the coverage offered by the base policy. There are different types of riders offered by life insurance companies, and each rider comes at an additional premium rate. You can choose to add the desired riders by paying an additional premium and make your coverage comprehensive. Some of the most common riders available with life insurance plans are as follows -
|Name of the Rider||Coverage Offered|
|Accidental Death Benefit Rider||The policyholder receives benefits on an accident leading to death If the life assured dies in an accident, the rider sum insured is paid in addition to the plan benefits|
|Accidental Total and Permanent Disability Rider||In case of total or permanent disability due to accident, all future premiums are waived off, and the life cover continues for the remaining policy duration|
|Critical illness Rider||This rider covers specific critical illnesses. If the insured suffers from any of the critical illnesses covered by the rider, a lump sum benefit is paid|
|Term Rider||This rider offers monthly income to nominee on death of life assured. covers the risk of death during the policy period. If the insured dies, the rider pays an additional sum insured along with the death benefit paid by the plan|
|Waiver of Premium Rider||This rider waives off the future premiums if the insured suffers permanent disablement due to an accident or if the policyholder dies during the policy tenure and the policyholder and the insured individuals are different|
Claim Settlement Ratio of Life Insurance Companies
The Claim Settlement Ratio of all the Life Insurance Companies in India is a ratio of the percentage of claims settled by the insurance company against the total claims that were registered in a financial year. The IRDAI publishes this ratio in their Annual Report, which helps you compare and pick the best insurance company. Here is the latest CSR data of all the Life Insurance Companies in India for FY 2018-19.
|S.No||Life Insurers||Claim Settlement Ratio (%)|
|1||TATA AIA Life Insurance||99.07|
|2||HDFC Life Insurance||99.04|
|3||Max Life Insurance||98.74|
|4||ICICI Prudential Life Insurance||98.58|
|5||Life Insurance Corporation||97.79|
|6||Reliance Nippon Life Insurance||97.71|
|7||Kotak Life Insurance||97.4|
|8||Bharti Axa Life Insurance||97.28|
|9||Aditya Birla Sun Life Insurance||97.15|
|10||Exide Life Insurance||97.03|
|12||Star Union Daichi Life Insurance||96.74|
|13||Aegon Life Insurance||96.45|
|14||PNB MetLife Insurance||96.21|
|15||Aviva Life Insurance||96.06|
|16||Edelweiss Tokio Life Insurance||95.82|
|17||IDBI Federal Life Insurance||95.79|
|18||Future Generali Life Insurance||95.16|
|19||SBI Life Insurance||95.03|
|20||Bajaj Allianz Life Insurance||95.01|
|21||Canara HSBC OBC||94.04|
|22||India First Life Insurance||92.82|
|23||Sahara India Life Insurance||90.16|
|24||Shriram Life Insurance||85.3|
Frequently Asked Questions:
1. How much does life insurance cost per month?
The cost of a life insurance policy depends on the type of policy that you buy, the sum assured chosen, your age, gender, policy tenure, etc. It might cost as low as Rs.500 per month and there is no upper limit. So, you need to, first, assess the plan and coverage required and then you can use premium calculators to find out the life insurance cost per month.
2. Can life insurance be cashed in before death?
Yes, you can surrender your policy before death before the completion of the policy tenure. When you do so, you get a surrender value, which is calculated as a percentage of the total premiums that you have paid. The percentage depends on the policy tenure after which you surrender, the later you surrender the higher would be the percentage and the subsequent surrender value. Surrendering terminates your coverage and the surrender value is also very low. So cashing in your life insurance policy before death is not recommended.
3. Who can claim life insurance after death?
In case of death of the life insured the nominee can claim the death benefit.
4. What coverage amount is sufficient for a Life Insurance Policy?
The choice of the coverage amount depends on your financial goals, income level, expected expenses, dependents, assets and liabilities and other factors. There are ways to calculate the ideal level of sum assured and you should use such calculators to find out the coverage amount which is sufficient for a life insurance policy.
5. What would happen if I fail to pay the premium within the due date?
Life insurance plans require you to pay the premium within the due date to enjoy continued coverage. If you fail to do so, the policy would allow you an extended period for premium payment. This period is called the grace period. A period of 15 days is allowed if you are paying premiums monthly else you can avail a grace period of 30 days for other modes of premium payment. If you pay the premium within the grace period, your policy would not lapse. However, if you do not pay the premium even within the grace period, your policy would lapse.