It is common knowledge that life insurance is a crucial part of financial planning. Whenever you think of building a future, you must think about life insurance. However, it can get pretty overwhelming to find the right life insurance policy for yourself. This article will help you understand how life insurance works and how you can go about purchasing a policy for yourself.

Purchasing a Life Insurance Policy

The first step is always the decision to buy a life insurance policy. Usually taken to protect your family and loved ones, life insurance should be bought after considering their financial requirements in the long run. A lot of thought must go into which policy to buy. Some crucial parameters to factor in are policy tenure, cover amount, premium paying options and the claims process. It is equally important to keep in mind your reason for buying life insurance.

Among the options available, which is the right policy for you?

Life insurance plans create a financial safety net for your family in your absence, and hence, buying a policy that fulfils all their needs should be your top priority. Life insurance plans come with multiple options such as pure term insurance, whole life insurance, retirement and pension plans, ULIPs or Unit linked insurance plans, and more. There are riders as well that you can choose. This is why, it is important to consider your current family income, their lifestyle and expenses, any debts or liabilities, and other savings you may have. As a general rule of thumb, your life cover should be at least 10-15 times your annual income¹. Going beyond the thumb rule can also help you in planning for retirement, savings, children’s education and other contingencies like serious ailments.

Types of Life Insurance Plans

As per your financial goals, you can choose between two types of life insurance plans available in the market

• Term Insurance

  Term insurance stays in place for a specific period of time with the premium remaining constant across the policy term. This type of life insurance is highly affordable, offering large covers for low premiums. The sum assured is paid to the nominee if you pass away during the policy term. Otherwise, the policy simply lapses

• Whole Life Insurance

  Whole life insurance offers lifelong coverage. The premiums in this case are understandably on the higher side when compared to term insurance. The sum assured is paid to the nominee on your demise

• ULIP

  ULIP or a Unit Linked Insurance Plan is an insurance plan that offers the dual benefit of investment to fulfil your long-term goals, and a life cover` to financially protect your family in case of an unfortunate event. The premium paid towards a ULIP is divided into two parts, one part contributes to your life cover, and the remaining is invested in the fund of your choice

• Retirement Plans

  Retirement Plans are a category of life/annuity plans that are specially designed to meet your post-retirement needs such as increased medical and living expenses. To ensure that you can enjoy your golden years with financial independence, these plans help cover your expenses and secure your future

• Savings Plans

  Savings plans are financial products designed to enable disciplined savings while delivering steady returns that help you achieve your financial goals. As they are primarily a life insurance product, these plans also ensure the financial security of your loved ones in case something happens to you

• Health Insurance

  Health insurance plans reimburse you for your medical expenses, including treatments, surgeries, hospitalisation and the like which arise from injuries/illnesses or directly payout a certain pre-determined sum to the customer. A health insurance policy offers coverage for any future medical expenses of the customer

Premiums in Life Insurance

The premium is the amount you pay in exchange for the sum assured that the insurer provides. It varies as per your age and health condition as well as the policy type and policy tenure. All insurance policy benefits are tied to the premium payments; hence, the failure to pay can have serious consequences.

How is Premium Decided?

The premium for your life insurance policy depends on various factors that include your sum assured amount, gender, age, occupation, income, medical history and lifestyle habits. The premiums can increase if you have added any riders to the base plan. The life insurance premiums are usually set higher if you’re a smoker or drink alcohol. Additionally, these premiums can vary from insurer to insurer.

Why do you need Life Insurance?

Life insurance provides a crucial financial safety net for your loved ones. It is a proactive step to protect your family from unexpected financial burdens. Life insurance can be tailored to your needs and helps you secure your family's future. Below are some reasons to opt for life insurance:

• Life insurance safeguards your family financially in your absence, helping them cover immediate expenses, outstanding debts and future financial needs
• Life insurance can offer tax^* benefits and helps you save money
• Life insurance is known for its affordability and accessibility, which makes it best suited to fit into all budgets
• Knowing that your loved ones are financially protected after you can offer you peace of mind

Benefits of Life Insurance

Below are some benefits of life insurance:

• Financial Security for Dependents

  Life insurance provides essential financial security for your dependents and ensures that your spouse and children can cover crucial expenses such as healthcare, education and outstanding debts. In the event of your absence, the policy's benefits help your loved ones maintain their standard of living and meet ongoing financial needs

• Tax^* Benefits

  Opting for life insurance provides tax benefits. Premiums paid under the policy are allowed as deduction subject to conditions prescribed under Section 80C of the Income Tax Act, 1961. The proceeds received are also exempt subject to conditions prescribed under Section 10(10D) of the Income Tax Act, 1961

• Flexible Use of Funds

  One of the key benefits of life insurance is the flexibility it offers to your nominee. The funds received by your family can be used as per their needs. This allows your loved ones to address immediate financial concerns, pursue long-term goals, settle debt and more. They have complete autonomy to make financial decisions according to their specific needs

• Peace of Mind

  Life insurance goes beyond financial advantages. It also offers peace of mind and confidence. Knowing that your loved ones are protected financially allows you to live life with a sense of security. This reassurance is an invaluable benefit

• Supplement Retirement Income

  Life insurance is a strategic financial tool to supplement your retirement income. Certain policies offer cash accumulation, which can be accessed during your retirement years. Life insurance plans, such as annuity plans, Unit-Linked Insurance Plans (ULIPs), endowment plans and more, provide an additional source of funds to support your lifestyle and cover any unexpected expenses

What does the Life Insurance Plan cover and does not cover?

In order to understand life insurance and how it works, you must know its inclusions and exclusions. Below is a list of both:

• Covered:

  • Death from natural causes: Life insurance plans typically cover deaths resulting from natural causes, such as an illness or age-related factors
  • Death due to a natural disaster: Life insurance coverage extends to deaths caused by natural disasters such as earthquakes, floods, hurricanes or other catastrophic events
  • Death from accident: Life insurance plans include coverage for deaths resulting from accidents

• Not covered:

  • Death due to driving a vehicle while intoxicated (under the influence of alcohol): Life insurance may not cover deaths resulting from accidents when the policyholder was driving under the influence of alcohol
  • Death due to any pre-existing health condition: Deaths arising from pre-existing health conditions may not be covered by life insurance policies
  • Death due to meeting an accident while driving a vehicle under the influence of drugs: Life insurance plans may exclude coverage for fatalities resulting from accidents where the policyholder was driving under the influence of drugs
  • Death due to participation in any adventure sport: Life insurance may not cover deaths occurring during participation in high-risk adventure sports
  • Death due to participation in any racing event: Coverage may exclude deaths that occur while participating in racing events or competitions
  • Death due to participation in any illegal activity: Death as a result of the policyholder's involvement in illegal activities may not be covered by life insurance policies

Claims in Life Insurance

In case of the unfortunate demise of the insured within the term of the policy, a predetermined sum is paid to the insured's chosen nominee as a death benefit. The process to make the claim for this, is relatively simple. A claim can be made by filing it online, via SMS, e-mail or by calling the call centre of the insurer or physically at a branch office. It is advisable to intimate the insurer as soon as possible when all the necessary documents are ready to help process the claim faster. Documents can include the claim statement form, death certificate, any medical/hospitalisation documents and the claimant’s ID and address proof.

Before purchasing a life insurance policy, do find out about the claim settlement ratio of the insurer. This gives the likelihood of your claim being settled.

Now that you know how life insurance works, choosing one should be an easy task. Remember to factor in all the parameters before finalising the policy and read the fine print for complete understanding.

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