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Insurance is a financial instrument offered by the insurance companies to protect us from unforeseen future financial losses, against which a policyholder has to pay some money to the insurance company that is called premium. There are two types of insurance policies first is life insurance and second is generic insurance, we will explain life insurance in this article.
Life insurance policy provides a specified amount of money at the time of maturity or at the time of policyholder’s death, it is a most important insurance policy that every individual should have, stay till the end to get the best knowledge about the life insurance.
What is a Life Insurance policy?
It is a legal agreement between the insurance company and the policy taker where the policy taker pays out a fixed amount of money i.e. called premium, to the insurance company and in return the insurance company promises to pay him a specified sum of money after a set period (maturity), or to his policy nominee upon his death during the coverage period of the policy.
Types of Life Insurance Policies
The different types of life insurance policies are as follows:
1). Term Insurance Plan:
It is a type of life insurance policy where the insurance company pays out a sum assured to the nominee of your policy or your legal heirs in case you die within the term period of the policy, but if a policyholder outlives the term period of the policy then no compensation will be provided, Term insurance is a pure protection plan where you can get a big amount of life cover by paying a very small amount of premium.
Example: Mr. Ram is 20 years old and he purchased a term insurance plan from Max life insurance company with the life cover of Rs. 1Cr, he will get a coverage till the age of 60 years, but in return he has to pay the premium of Rs.783 (p.m) to the insurance company, in case he die during the coverage period of his policy then his nominee will receive Rs. 1Cr as a death benefit from the insurance company, but if he outlives the term period of the policy i.e 60 years of age then nothing will be paid.
If you are interested in a term insurance plan and want to know more about it then simply click here.
Note: we are not an insurance company, so there is no greed of conversion, our main purpose is to provide you with the best knowledge so that you can select the best life insurance according to your needs.
2). Whole Life Insurance:
It is a permanent life insurance policy that matures when a person completes his 99 years of age, the sum assured is paid to the policyholder in case he outlives the maturity period but in case the policyholder dies before the maturity period then the amount of sum assured is paid to his nominee.
Policyholders have to pay a fixed amount of premiums to the insurance company till maturity or till death whichever comes first.
A Whole life insurance policy gives an extra benefit called “cash value” which means a part of the premium will be kept aside and interest will be added to it regularly, you can withdraw or borrow this amount in case of emergencies, but not repaying it will reduce your maturity value.
If you are interested in whole life insurance and want to know more about it then simply click here.
3). Unit Linked Insurance Plan (ULIP):
Unit Linked Insurance Plan (ULIP) shows the characteristics of both life insurance as well as an investment because the premium paid by the policyholder is divided into two parts, one part of which goes towards the life insurance and another part of the premium is invested in equity, debt, or in both (hybrid).
If a policyholder dies during the policy term period then the sum assured or current investment value whichever is higher will be paid to his nominee or legal heirs, but in case he outlives the policy’s maturity period then the current investment value at that time will be paid to him. But remember that this policy comes with a lock-in period of 5 years, which means if you withdraw it before 5 years then some extra charges will be deducted but if you withdraw it after 5 years then you don’t have to pay any extra charges.
4). Endowment Plan:
An Endowment plan is a combination of a life insurance policy + savings plan, you have to pay the amount of premium to the insurance company till the maturity or till your death, whichever comes earlier against which the insurance company pays out the sum assured to you if you outlive the maturity period but in case you died before maturity then the sum assured plus bonus will be paid to your nominee.
5). Money-back Policy:
The Money-back policy is a type of life insurance policy where an insurance company pays a percentage of the policy’s sum assured to the policyholder regularly after a fixed duration of time between the policy’s term period, this payout is known as a “survival benefit”, and the remaining sum assured along with bonuses are paid at the time of policy maturity.
But, if a policyholder dies between the term period of money back policy then the whole amount of sum assured will be paid to his nominee or legal heirs, regardless of how much survival benefit is paid to the policyholder before his death.
Premium is to be paid regularly till the year mentioned in the policy or till the death of the policyholder, whichever comes first.
6). Child Insurance Plan:
It is a type of Life insurance policy that helps you secure your child’s future by providing funds at the time of maturity which can be used for his higher education, marriage, or other purposes, here parent is the policyholder and the child is his beneficiary (nominee).
In case the child dies before the maturity of the policy then the whole sum assured + bonus till date is paid to the policyholder parent by the insurance company.
7). Group Life Insurance:
It is a type of life insurance policy that provides a facility of life insurance to a group of people at the same time, which means several people are covered in a single policy and the amount of life cover remains the same for everyone, usually employers provide the facility of group life insurance to their employees.
Guide to buy a life insurance policy
There is no guarantee of anyone’s life and what will happen next moment no one knows, if you are one of the bread earners or the only bread earner for your family then if something unwanted happens to you then your family will not only suffer emotionally but also financially, which will left them broken and their living condition might also get affected.
So, we will guide you in making the best decision regarding your life insurance, step-by-step:
1). Need for life insurance
The purpose of life insurance is to provide financial stability to the family members of the policyholder, not everyone needs a life insurance policy.
You should go for the life insurance if you meet any of the conditions mentioned below:
- If your family has a weak financial background.
- If someone is dependent on you for their bread.
- If your earnings are not very much and you are the only earner for your family or your financial contribution is the highest in your family.
- If there is any unpaid loan in your name.
- If you find any other strong reason for buying life insurance.
Some people also buy a life insurance policy to get tax benefits, if you are among them then you can skip the below points and continue buying the policy that you find best.
2). Amount of sum assured
If there is a need for life insurance then you have to decide the amount of sum assured,
You can easily decide the minimum amount of sum assured you need by simply keeping 3 things in mind, first predict after how many years your family will get another earning member, your average monthly expenses and multiply it by 12 (1 year = 12 months), and the amount of unpaid loan in your name (if any)
(Years after your family will get another earning member * your current expenses per year) + any unpaid loan
By doing the above calculations you will get the minimum amount of sum assured you need.
3). Mode of buying
You can buy a life insurance policy online as well as offline, you have to decide whether to go for online mode or offline mode.
The most preferable is online mode as it saves time, lower premium as compared to offline mode, has no agent’s commission, no transportation cost, etc.
Some of the life insurance providing companies are Tata AIA, Bajaj allianz, Bharti AXA, Max life insurance, HDFC life insurance, LIC, etc.
4). Select the life insurance
Different types of life insurance offer different benefits, some of the types of life insurance are term insurance, whole life insurance, ULIP, endowment plan, etc. You have to select the type of life insurance that meets your need
Then, enter the coverage period and the amount of sum assured you want,
Then compare the available plans based on premium amount, claim settlement percentage, and other factors.
Select the plan that you find the best
5). Need for Riders
Riders are add-ons that provide you additional protection and benefits, you can add any riders available with your policy by paying some extra amount of money.
6). Complete documentation
Fill up the required basic details like your name, your date of birth, education qualification, city where you live, phone number, your PAN number, etc
Also, you have to submit your medical details to the insurance company and you are all set.
7). Payment of premium
You can select either to pay the insurance policy premium in single pay or in installments, you have the option to pay installments monthly, quarterly, half-yearly, or annually.
How to claim a Life Insurance policy?
The life insurance policy can be claimed in 3 ways,
1). In case of policyholder’s death
2). In case of policy maturity
3). In case you want to cancel it
In case of policy maturity or you want to cancel your policy, you have to inform the insurance company, fill up the required form, and submit the required documents, your claim will get settled within 30 days.
But to claim death benefits, the policyholder’s nominee has to follow the below steps:
1). Inform the insurance company about the death of a policyholder, you will be required to fill up a claim form, in case you have purchased your policy offline then you will get the physical claim form from the branch of the insurance company but if you have purchased it online then you have to download the claim form from the website of the insurance company.
2). You should have to submit the documents which are requested by the insurance company, along with the claim form.
Generally, the required documents are a death certificate, insurance policy papers, ID proof, postmortem reports, hospital records, bank account proof, and any other document requested by the insurer.
3). The Claim settlement process will begin and your claim will get settled within 30 days from the date of submitting the claim form, but remember that all the T&Cs should be met otherwise the claim can be rejected.
Advantages of a Life Insurance Policy
The advantages of Life Insurance are:
1). Financial support to family: life is unpredictable and no one knows what will happen next moment. If you are the only bread earner for your family then after your death it might be possible that your family will suffer financially, so your life insurance policy will provide financial support to your family when you are not present.
2). Tax benefits: the premium you pay against your life insurance policy will be exempted from income tax up to Rs. 1.5L per annum under section 80C, also the amount you will receive on maturity will be tax exempted under section 10(10D) which is explained below under the heading taxation on life insurance policy.
3). Other benefits: some of the life insurance policies come with a combination of saving and investment schemes while at the same time providing the life insurance, money-back policy is a type of life insurance policy that pays some percentage of assured value at every fixed interval of time before even the maturity of the policy.
4). Loan facility: you can take out a loan against your life insurance policy.
Disadvantages of a Life Insurance Policy
The disadvantages of a Life Insurance Policy are:
1). Very high premium in some conditions: If you have a pre-existing health issue or you consume tobacco or alcohol then you have to pay high premiums, approx 30-50 % more.
2). Amount of premium may differ based on age: As you grow older the amount of premium rises, it will cost you very low if you are in your 20s.
3). Time-consuming: there are various types of life insurance policies, and their types have types too, so it becomes very difficult and time-consuming to understand life insurance completely.
4). Hidden clauses: sometimes claims get rejected due to the hidden clauses which were not disclosed at the time of policy purchasing, so read all the terms and conditions carefully and gather all the information about the policy before enrolling.
Taxation for Life Insurance policy
- The amount of premium paid against a life insurance policy is exempted from income tax up to rupees 1.5 lakh per annum under section 80C.
- If any health-related rider is added to the life insurance policy then the policyholder can get an additional income tax exemption up to Rs.25,000 (p.a) under section 80D, but if the policyholder’s age is above 60 years then he/she can get income tax exemption up to Rs.50,000 (p.a) under Section 80D.
- The amount of money (maturity benefits) that a policyholder will receive at the time of maturity will be tax-free under section 10(10D) if the amount of premium paid against the life insurance policy is less than Rs. 5 lakhs per annum, but except in the case of unit-linked insurance plan (ULIP) where maximum premium limit per annum is 2.5 L to get exemption from income tax on maturity amount.
Note: If a person has single or multiple life insurance policies whose total premium amount (excluding GST amount) is greater than the above prescribed limits, then the benefit of tax exemption on maturity amount under section 10(10D) will not be applicable and the amount which a person will receive at the time of maturity will be considered as his/her income that year and will be taxed as per the income tax slab he/she falls.
Example: Mr Ram holds 4 life insurance policies,
- Purchased on 10 April 2023 whose premium is Rs. 1,50,000 per annum.
- Purchased on 15 May 2023 whose premium is Rs. 2,00,000 per annum.
- Purchased on 10 July 2023 whose premium is Rs. 1,00,000 per annum.
- Purchased on 20 August 2023 whose premium is Rs. 1,50,000 per annum.
1,50,000 + 2,00,000 + 1,00,000 + 1,50,000 = 6,00,000
The total of the first 3 policies are 4,50,000 which is less than Rs. 5 lakh so Mr Ram will get the benefit of section 10(10D) on his first 3 policies and need not to pay income tax on the amount he will receive at the time of policy maturity.
But, he has to pay income tax on maturity proceeds from his 4 policy.
Note: If the proceeds from the 4 policy of Mr. Ram is received by his nominee or legal heirs due to his sudden death, then in that case his nominee or legal heirs will get the benefit of section 10(10D) and no income tax will be collected from them on that amount.
Important terms
Terms | Meaning |
Sum assured | It refers to the amount of life cover that a life insurance company promises to pay a policyholder at the time of policy maturity or the policyholder’s nominee in case of his death. |
Insurer | The term “Insurer” is used for the insurance providing company. |
Insured | Insured is the person paying the premium to the life insurance company to get life insurance. |
Nominee | A Nominee is a person selected by the policyholder to receive the sum assured in case the policyholder dies. |
Legal Heirs | The person who has the right to take over the wealth and property of the deceased person. |
Maturity benefits | It is the amount that a policyholder himself claims from the insurance company upon the maturity of his life insurance policy. |
Death Benefits | It refers to the amount that is claimed by the policyholder’s nominee or the legal heirs upon his death. |
Riders | Riders are the add-ons that provide additional benefits or safety to the policyholder, there are different riders (e.g.- premium waiver rider, critical illness rider, accidental death benefit rider, etc) you can add riders to your life insurance policy just by paying an additional amount of money along with the base premium. |
Premium | It refers to the amount of money paid by the policyholder to the insurance company as a consideration for providing the service of insurance. |
Grace period | It refers to the extra time provided by the insurance company to the policyholder to pay the insurance premium after the due date. (The grace period is usually 30 days) |
Life cover | Life cover refers to the sum assured that the insurance company will pay to a policyholder at the time of maturity or to his nominee upon his sudden death. |
Surrender value | If a policyholder wants to discontinue his life insurance policy before maturity, then the amount paid to the policyholder by the insurance company is known as surrender value. |
Conclusion
In this article we have explained almost everything about the life insurance briefly upon the demand of many people to explain life insurance. We have covered what is life insurance, its types, a guide to buying life insurance, how to claim for it, advantages and disadvantages of life insurance and taxation, we hope you understand.
FAQs
Q1: Explain the life insurance pure protection policy.
A1: A Pure protection policy is one where the whole premium paid by the policyholder goes towards the life insurance and not for any saving and investment scheme.
Example: Term insurance plan
Q2: Explain the life insurance protection and savings plan.
A2: A Protection and saving plan gives the policyholder benefit of both life insurance as well as savings, one part of the premium paid by the policyholder goes towards the life insurance, and the other part goes towards the savings.
Example: Endowment plan
Q3: Can I buy 2 life insurances at the same time?
A3: yes, you can buy
Q4: What is IRDAI?
A4: IRDAI stands for Insurance Regulatory and Development Authority of India, it is formed by the government of India whose main aim is to protect the interest of the policyholders.
Q5: What is the best age for buying life insurance?
A5: It is good to buy life insurance early in your life because as your age increases the amount of premium also increases.
Q6: Which type of life insurance is considered best?
A6: Term life insurance is the one that is recommended and considered best by lots of financially literate people, as you get a big coverage by paying a small premium.
Q7: How many nominees I can add to my life insurance policy
A7: You can add a minimum of one nominee or if you wish then you can add more than one nominee, in case of more than one nominee the death benefit of a policyholder will be equally divided among the nominees.