In India, life insurance was first introduced more than a century ago.

Even though our country is one of the most populated country in the world, the importance of insurance is not as well recognized as it should be.

Below is a simple guide to life insurance in an effort to spread awareness and educate readers on its importance.

What Is Life Insurance?

A life insurance is a contract that promises to pay the life assured or his nominee upon happening of the "event insured for" occurs.

This promised amount is paid as per the policy conditions, which could be:

• To the policyholder on the date when the policy (contract) ends, or
• To the policyholder on sates specified at regular intervals, or
• To the nominee in the event of unfortunate death of the life assured, during the term of the policy.

However, the life insurance company pays this promised amount to the life insured/nominee in exchange of monthly/yearly fees paid - called premiums.

Universally, life insurance is accepted as an institution to which you can transfer your 'risk'. It cannot eliminate the risk but can compensate the financial impact of the risk. It typically replaces certainty for uncertainty and comes to the family's help in unfortunate events like the death of the sole breadwinner.

Life insurance offers protection against two risks in every person's life:

1. Passing away too soon and leaving behind a dependent family to look after themselves.
2. Living to a ripe old age without having any obvious means of livelihood.

In general, life insurance is a society's partial solution to death-related problems.

Key Terms Used in Life Insurance

Before going further, let us first go through some of the commonly used terms related to life insurance:

• Life Assured– It is an individual who is covered under the life insurance policy.
• Policyholder– It is an individual who buys the life insurance policy as well as pays its premium. However, this individual may or may not be the life assured. It’s vital to understand the difference between a policyholder and life assured. For instance, when a husband buys an insurance policy for his wife, the husband is the policyholder, whereas his wife is the life assured.
• Nominee or Beneficiary– It is the individual who is appointed by the life insured (if s/he is policyholder also) while buying the policy. This individual receives the insurance pay-outs in the event of death of the life insured’s.
• Insurer– It is the life insurance company that offers the life insurance policy (for example, Generali Central Life Insurance).
• Policy Term– The duration/number of years for which the life insurance policy provides coverage.
• Sum Assured– It is the “promised money” that the nominee will get on the unfortunate event of death of the life assured or to the life assured on the end of the policy term or any other event as defined in the policy.
• Premium– It is a pre-decided amount that the policyholder pays periodically (yearly, monthly, half-yearly, or quarterly), to the insurance company, to get coverage for the specified duration.
• Premium Payment Term– It is the number of years for which the premiums are to be paid.
• Life Cover or Death Benefit – It is the promised amount that the insurer will pay to the nominee in the unfortunate event of the life insured’s death.
• Maturity Benefit– It is the promised amount that the insurer pays at the end of the policy term. Maturity benefit is given for life insurance plans that offer savings and/or investment along with life cover. Maturity benefit may have non-guaranteed component as well.
• Rider or Add-on Benefit– It is an optional additional coverage offered along with the core life insurance coverage to enhance the scope and benefits of a life insurance policy at a nominal additional cost.
• Grace Period– It is the extension given by the insurance company to the policyholder to pay the policy premium post the premium payment date has passed. Policy continues with full insurance benefit during this period. In case claim arises within the grace period, the due premium is deducted from the claim amount.
• Lapsed Policy– In case of non-payment of due premiums, the policy can become Lapsed. A Lapsed policy typically will not have any value and will terminate if you do not revive it.
• Paid-up Policy – An insurance policy may continue with reduced benefits upon non-payment of premiums. Paid-up is allowed after one has paid minimum number of premiums as defined in the policy.
• Claim Settlement– It is the process where the nominee or the life assured has to lodge a claim in order to get the death benefit or maturity benefit or any other benefit as covered under a policy.

How does life insurance work?

Here’s how life insurance policies work:

• You decide to buy a life insurance plan from an insurance company.
• You decide the coverage amount or sum assured that you/your nominee will receive.
• You decide the policy term (the duration of the policy) and the premium paying term (the duration of premiums to be paid).
• Based on various factors like your age, health condition, sum assured , policy term, and premium paying term selected, etc., the premium amount to be paid is decided by the life insurance company.
• You buy the life plan from the insurance company and in return you pay premiums.
• Now based on the type of the policy you have purchased one or all of the following benefits will be received:Death Benefit/Life Cover- In the case of the unfortunate event of the life assured's demise during the coverage period (policy term), the sum assured or the death benefit is paid to the nominee of the life assured and policy gets terminated.Maturity Benefit- At the end of the policy term, if the life insured survives s/he is paid the promised maturity benefit. The maturity benefit may be fully/partially guaranteed or non-guaranteed depending upon the type of policy.Survival Benefit- In the case of insurance plans like money back plans or income plans, survival benefit i.e., specific amount/ percentage of the sum assured money etc. is given back to the life assured at pre-decided intervals.

Now, let’s see an example:

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Disclaimer

Life insurance not only covers the risk arising due to an unfortunate event, but also gives you additional benefits like tax benefits, savings and wealth creation over a period of time. The right life insurance plan from a trusted company can help one get long-term risk cover plus savings, i.e. dual benefits from one solution.

Principles of Life Insurance

Life insurance policy is a contract between the policyholder and the insurance company (or Insurer).

Life Insurance in India is based on the four basic principles. They are:

1. Insurable Interest

This principle differentiates an insurance contract from a wagering contract or betting.

• Insurable interest exists if there is a probability of financial loss in case the life insured was to die or become disabled or suffer an illness or any other limitation.
• Some popular examples could be spouse, kids, a business owner in its employees, lender in the borrowers etc. An individual is deemed to have unlimited insurable interest in his/her own life.
• Insurance policy will not be allowed in the absence of insurable interest.

1. Covers Pure Risk

Any company that sells life insurance is getting a "risk" transferred to itself and they promise to pay the defined amount if the covered event happens (like death or critical illness or any other event that is covered).

Insurance will typically cover only pure risk, that is, if there is a deviation from what is expected, it will lead to loss only. For example:

An individual is expected to be healthy and live till certain age – the deviation from the expectation is an early death or disability or disease etc. All these events will result in a financial loss, either to the individual or to the family. Hence, risks like death, disability and diseases can be covered.

An investment in made in stock market to earn certain return – the deviation from the expectation can be either a gain (higher return than expected) or loss (lower or negative return). Such risk is called speculative risk and is not covered.

1. Utmost Good Faith

A life insurance policy, as previously stated, is a contract between the insurance company and the life insured.

• This contract is based on good faith that both parties will provide accurate and relevant information without concealing anything with each other.
• Failure to disclose any information could have severe implications. For example, if the insurance company finds out that the policyholder had a pre-existing cardiac problem but did not disclose it at the time of policy purchase, in such case, the claim may be denied subject to regulatory/statutory provisions.

1. Law of Large Numbers

This is one of most important principle of life insurance, which is based on the statistical theorem that huge numbers tend to balance out imbalances.

How is life insurance different from other savings?

Here’s how life insurance is different from other type of savings and investments.

1. Utmost Good FaithA contract of insurance is formally based on the basic principle of “uberrima fides” i.e., utmost good faith. This principle applies to all parties in all types of insuranceWhen offering an insurance policy, Insurer is expected to make all disclosures related to what is covered and what is not (exclusions)When purchasing an insurance, the policyholder is expected to make sure that all of the questions on the proposal form are addressed accurately and also provide any other information that is relevant to the risk being covered.Any misrepresentation, non-disclosure, or fraud in any document, that leads to risk acceptance, makes the insurance contract invalid.
2. ProtectionLife insurance provides protection against the risk of the life assured's death.In addition, life insurance ensures guaranteed payment of the entire sum assured (plus bonuses or guaranteed additions, where applicable) in the unfortunate event of life assured's death, whereas other savings plans only pay out the amount saved (plus interest, if any).
3. Long Term Saving‘Long Term Savings’ is encouraged by life insurance. The 'small and simple instalment' provision integrated within the scheme provides for long-term savings where payments may be made without difficulty. Insurance premiums are paid monthly, quarterly, half-yearly, or annually. Auto-pay mode for an insurance policy is a handy way to pay monthly premiums by automatically remitting money directly from bank account.
4. Liquidity- In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired surrender value, without losing on the insurance protection or having to actually close the policy. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.
5. Tax Relief– Life Insurance is the one of the popular way to enjoy tax deductions on income tax. This is available for amounts paid by way of premium for life insurance subject to conditions defined in the income tax laws in force. Taxpayers can also avail of provisions in the law for tax relief on the survival or maturity proceeds.
6. Money When You Need It– A policy or a combination of different plans can be effectively used to meet certain monetary needs that are certain and arise from time-to-time.Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of such life insurance saving policies.Alternatively, policy money can be made available at the time of one's retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).It is recommended to buy insurance policy suitable as per the intended need that it should cover.

Who Can Buy A Policy?

Any person who has attained majority and is eligible to enter into a valid contract can insure himself/herself and on the lives in whom he/she has insurable interest.

Policies can also be taken, subject to certain conditions, on the life of one's spouse or children. While underwriting proposals, certain factors such as the state of health of life to be insured, the proponent's income and other relevant factors are considered by the Insurer.

An insurance policy can also be bought by entities like HUF to cover its members or coparceners, employers to cover their employees.

Insurance is also used as a tool to mitigate risk to business arising because of untimely death of key employees (Keyman Insurance) or business partners (Partnership Insurance).

What are the Different Types of Life Insurance?

Now that you have understood what is life insurance you should also understand the important types of life insurance plans :

• Term life insurance plans– It is a pure risk cover that provides only death benefit. It is the most basic form of life coverage. There is no benefit payable upon surviving the coverage term /policy term and hence this is the cheapest form of insurance.
• Traditional Endowment Plan– It is a combination of insurance and savings. It offers two benefits to the life assured under a single plan – long term savings + life cover (death benefit).
• Money-Back Plan– It is similar to endowment plan but offers a specific amount/ percentage of the sum assured as money back to the life assured at pre-decided intervals. This money back benefit is usually called survival benefit.
• Whole Life Insurance Plan– It offers life coverage as long as the insured lives. For ease of administration, insurance companies may define a maturity age which could be 80, 85 or even 100 years.
• Child Insurance Plan– A child plan acts as a tool to provide funds during the important stages of a child's life. Generally, child plans provide benefits as regular payouts at pre-decided intervals or a 1-time payout as defined at the start of the policy.
• Retirement Plan– The plan helps the life assured accumulate a corpus for their retirement. Typically, retirement plans provide steady income, post retirement through an Annuity Policy purchased from the proceeds of a pension plan.
• Unit linked insurance plan (ULIP)– A ULIP offers life cover plus wealth creation (market-linked returns). Here, the life assured pays premium, that gets invested into different funds opted, after deduction of defined charges, including cost of insurance.

How Much Life Insurance Cover Do I Need?

What is the worth of your life? When shopping for life insurance, you need to answer this strange question. The primary purpose of life insurance is to provide financial security for your family if something unexpected happens to you. Hence, the life cover should be sufficient to settle any outstanding debts as well as provide a source of income for your (the life insured’s) family.

The financial planning calculator can help you calculate how much life insurance you need. The amount of insurance cover depends upon what will it take for your family to keep up their current lifestyle in your absence.

Calculator - Financial Planning Calculator

Document Required for Buying Life Insurance Policy

You need to provide the following documents to apply for a policy:

1. A proposal or application for insurance.
2. Age proof
3. KYC documents like - Identity proof, address proof, etc.

Insurance company may ask further documents depending upon the type of insurance plan and the amount of cover opted for. These documents include income proofs

Other Documents

Depending on the amount of coverage requested, the premium you will pay, and your profile—including, but not limited to, your way of life, your medical history, dietary preferences, family history, etc.—the insurance company may request extra information or papers from you like income proof, medical reports etc.

Points to Remember

• There isn't a single, universal insurance policy that can be suitable for everyone or meet all the insurance needs. Your life insurance policy need not be the same as that of a friend, coworker, or family member. Your insurance policy needs to take into account the fact that your demands and objectives are unique.
• It is best to begin as soon as possible because life insurance premiums are lower when you are younger and start to increase as you get older.
• Effectively utilise life insurance riders to increase the value of your policy. A rider is an addition to the main insurance that provides benefits over and beyond the terms of the policy.

Please feel free to discuss the specifics of the life insurance policy with our trusted, knowledgeable, and experienced insurance advisors.