Is Your Family Protected? How Life Insurance Secures Their Tomorrow

For many Indian middle-class families, the monthly salary serves as an important lifeline. But what happens to that lifeline in unforeseen circumstances? We Indians are natural savers, investing in fixed deposits, PPF, and gold, all with an eye on securing our future. However, life’s uncertainties can derail even our best-laid plans. Life insurance is not just another investment; it is a specialised tool designed to protect against the unexpected. 

What are the basics of insurance, the various types of life insurance, and the actual life insurance process in India?

Basics of Life Insurance for First-Time Buyers

There are too many terms and too many plans. Life insurance is a must-have for all!

Let’s take a leap forward and understand the basics of life insurance!

What is Life Insurance?

Life insurance is one of the most crucial aspects of financial planning, especially in India. 

Life insurance is a contract between an individual (policyholder) and an insurance company. Under this contract, the policyholder pays a premium over a specified period, and in return, the insurance company provides a lump sum payment (death benefit) to the nominee upon the policyholder’s death. This helps secure the financial future of your family in case of an unforeseen event.

Let us say that you are the breadwinner of the family. By investing in life insurance, you ensure that your family will have financial support if something were to happen to you. The lump sum payment will cover their expenses, such as education, loans, and day-to-day living.

Insured, Assured, Covered: What Do These Life Insurance Terms Actually Mean?

Let us see!

What Does “Insured” Mean?

It refers to the person whose life is covered by the insurance policy. In life insurance, the insured is the individual whose death triggers the payment to the nominee.

Sum Assured Meaning

The sum assured is the amount of money the insurance company promises to pay to the nominee in case of the policyholder’s death. It is the basic benefit amount provided by the policy and remains fixed throughout the term.

If you have a life insurance policy with a sum assured of ₹10,00,000, your nominee will receive ₹10,00,000 in case of your death, regardless of when it occurs.

Life insurance is primarily designed to provide financial protection to your dependents after your death. It can help cover liabilities such as loans, education expenses, and living costs for your family.

You may have commonly heard about the term life insurance. It is a type of life insurance that provides coverage for a specific period (typically 10, 20, or 30 years). If the insured passes away during the term, the nominee receives the sum assured. If the insured survives the term, no benefit is paid out.

Let us say that you buy a 20-year term life insurance policy for ₹20,00,000. If you die during this term, your family will receive ₹20,00,000. However, if you live through the term, no payout is made, but your premium is returned under some policies.

Rules and Characteristics of Life Insurance

1. Life insurance protects your family financially if something happens to you. It covers the risk of death and, in some cases, survival.

2. You need to pay a fixed premium regularly (monthly, yearly, etc.) to keep the policy active.

3. Life insurance plans come with a fixed duration, like 10, 20, or even 30 years. Some are for your whole life (till 99 or 100 years).

4. Some plans return a lump sum if you survive the policy term, like in endowment or money-back policies.

5. Certain life insurance plans offer both financial protection and savings/investment returns (like ULIPs and endowment plans).

6. You can choose a nominee (usually a family member) who will receive the money in your absence.

7. Some policies allow you to take a loan against the policy’s cash value after a few years.

Why Honesty is Key in Life Insurance: Understanding Golden Principles of Life Insurance

Life insurance works on a few basic rules that protect both the company and you. Let’s look at these key principles.

• Insurable Interest: You should have a financial connection with the person you’re insuring. Basically, their loss should impact you financially.
  
• Utmost Good Faith: Both you and the insurance company must be honest and share all important details.
  
• Proximate Cause: The reason for the claim should directly relate to the insured person’s life or death.
  
• Contribution: If you have more than one life policy, the companies will share the claim amount fairly.

These principles make sure everything is fair and clear when it comes to life insurance.

More Than Just Death Benefit: The Surprising Functions of Life Insurance You Didn’t Know

Life insurance isn’t just about protection—it also helps you plan better for the future. Here’s what it does for you:

• Covers Risk: It gives financial help to your family if something happens to you.
  
• Saves and Grows Money: Some plans also help you save for goals like retirement or kids’ education.
  
• Helps with Tax Saving: You can reduce your taxable income by investing in life insurance.

What is the Life Insurance Process

The life insurance process involves:

1. Choosing a Policy

2. Filling out the Application

3. Medical Examination

4. Premium Payment

5. Policy Issuance

How to Claim Life Insurance After Death

To claim life insurance after the death of the policyholder:

1. The nominee must submit the death certificate, claim form, and relevant documents to the insurance company.

2. The insurer verifies the claim documents and may conduct an investigation.

3. After approval, the insurer releases the sum assured to the nominee.

Factors that Affect Life Insurance Premiums

1. Age: The younger you are, the lower your premiums.

2. Health Conditions: Pre-existing health issues may increase premiums.

3. Sum Assured: Higher coverage leads to higher premiums.

4. Occupation: Riskier jobs may lead to higher premiums.

5. Lifestyle Choices: Smoking and drinking can increase the premiums.

History of Insurance in India

The history of insurance in India dates back to ancient times, but modern insurance began in the 19th century. The first life insurance company, The Oriental Life Insurance Company, was established in 1818 in Kolkata. It marked the beginning of a journey that would later lead to the creation of prominent life insurance companies like LIC (Life Insurance Corporation of India).

Advantages of Life Insurance

4 Solid Reasons Why Life Insurance is Not a Luxury – It’s a Necessity:

1. In the unfortunate event of your passing, life insurance provides a lump sum to your family. For instance, if you’re the sole earner, this payout can help your spouse and children maintain their lifestyle.

2. Life insurance can assist your family in paying off any outstanding loans or debts, such as home loans or credit card debts.

3. Premiums paid towards life insurance policies are eligible for tax deductions under Section 80C of the Income Tax Act, and the maturity or death benefits received are usually tax-free under Section 10(10D). 

4. Life insurance plans can help accumulate a corpus for your retirement. This ensures a steady income during your non-working years.

Different Types of Life Insurance

There are several types of life insurance policies that you can choose from!

1. Term Life Insurance: Provides coverage for a specific period (e.g., 10, 20, or 30 years). If the insured dies during this term, the death benefit is paid out. It’s generally more affordable but doesn’t build cash value.

2. Whole Life Insurance: Offers lifetime coverage with fixed premiums and includes a cash value component that grows over time. This type of policy can serve as an investment vehicle, but it comes with higher premiums.

3. Endowment Plans: These policies pay out a lump sum after a specific term or upon the insured’s death, whichever comes first. They’re often used as a savings vehicle for future financial goals.

4. Money Back Policy: Provides periodic payments to the policyholder during the policy term, offering liquidity along with insurance coverage.

5. Child Insurance Plans: Designed to secure a child’s future financial needs, these plans provide funds for significant milestones like education and marriage.

6. Unit Linked Insurance Plans (ULIPs): Combine insurance coverage with investment options, allowing policyholders to invest in equity or debt funds based on their risk appetite.

7. Retirement Plans: Also known as pension plans, these help individuals build a corpus for their post-retirement years, ensuring a steady income after retirement.

Conclusion

Life insurance is an essential tool for financial security in India. It not only provides death benefits but also offers a variety of investment options through products like ULIPs and endowment plans. Whether you’re looking for term life insurance or more complex products, understanding the basics and benefits of life insurance is crucial. By choosing the right policy, you ensure that your family remains financially secure, no matter what the future holds.

New to insurance? Learn what is insurance and why it’s essential for your future

Life Insurance Meaning: FAQs