What Is Life Insurance - Life Insurance Defination, Meaning & Types

Human life is uncertain. Even though the risks to human life have reduced with the advancement of technology, hundreds still meet a premature death on a daily basis. The loss of a bread-winning member can deal a body blow to the entire family. The loss is emotional as well as financial and many families fail to recover from the financial impact. The emotional loss cannot be compensated but the financial loss can be mitigated to an extent. Life insurance plans can help one secure the financial future of his/her family. The pay-out from life insurance plans can be used for income replacement, which can be of immense importance for the financial well-being of the family.

What is life insurance?

Life insurance is a contract between an individual and a life insurance company under which the insurance company is legally bound to pay out an amount to the person nominated by the policyholder in the event of his/her death. The insurance company will have to honour the contract and pay the amount only if the policyholder pays all the premiums on time. The premiums can be paid as a lump sum or in equal instalments, depending on the policy terms and conditions and the chosen premium payment frequency. A typical life insurance plan pays the nominee of the policyholder only after his/her death, but some policies also pay if the insured outlives the policy. There are hosts of life insurance plans available in India. Some just provide death benefits, while some offer maturity benefit along with the life insurance cover.

Features of life insurance

While life insurance plans are of different types, the basic features of all policies are similar.

• Policyholder

The individual, who purchases the insurance policy, pays the premium, and signs on the policy document is known as the policyholder. A life insurance policy is issued in the name of the policyholder.

• Premium

The policyholder has to pay the insurance company a pre-decided amount as consideration for covering his/her life. The amount is known as the premium. It can be paid as a lump sum amount or at regular intervals.

• Maturity

A life insurance policy has a fixed tenure, which means the insured is covered for a specific time. The time when a life insurance contract ends is known as maturity. Some types of life insurance plans simply terminate at maturity without paying anything, while others pay a benefit at maturity.

• Insured

The individual whose life is secured by the life insurance policy is known as the insured. The sum assured is paid at the death of the insured or at the maturity of the policy.

• Sum assured

The mutually decided amount payable on the occurrence of specific incidents as mentioned in the policy is known as the sum assured. When the sum assured is paid after the death of the insured, it is known as the death benefit and if the sum assured is paid on maturity of the policy, it is called maturity benefit.

• Nominee

The individual/individuals who are due to receive the sum assured after the death of the insured are known as the nominee.

• Investment component

Some life insurance policies like unit-linked insurance plans have an investment component along with the basic protection. The policyholder is provided with an option to choose from different ULIP funds. One can choose the ULIP fund depending on his/her risk profile and investment horizon. At maturity, the accumulated corpus is paid out to the policyholder.

Benefits of life insurance

• Flexible investment option

Life insurance plans can be used in a variety of ways by the policyholders. One can use a simple term plan to protect his/her family. On the opposite spectrum, you can invest in a ULIP to accumulate funds for life goals like children’s education or buying a house. ULIPs offer market-linked returns, but if you are a conservative investor, you can also invest in life insurance plans that provide guaranteed returns.

• Market-linked returns with adequate protection

Investing in market-linked products provide a better opportunity for generating returns. However, investing in a market-linked instrument comes with a certain level of risk. One of the biggest risks of investing in financial markets is the volatility in the market. Market-linked returns are known to deliver substantial returns over the long term. Life insurance policies also offer a number of portfolio management strategies that help in investing the premiums according to life goals.

• Tax benefits

Along with protecting your family, investing in a life insurance plan can also help you save taxes. The premiums paid for a life insurance policy are eligible for a tax deduction of up to Rs 1.5 lakh in a year under Section 80C of the Income Tax Act, 1961. Additionally, the benefit paid at the time of maturity is tax-exempt under Section 10(10D) of the Income Tax Act, subject to the provision stated therein. Tax benefits as subject to provisions of Income Tax Act, 1961, as amended from time to time.

• Enhanced coverage

The basic coverage of a life insurance plan can be enhanced by opting for optional riders at nominal extra cost. The death of the breadwinner is not the only incident that can threaten the financial stability of the family. Total or partial disability can lead to loss of income or critical illness and can result in substantial expenses, threatening the financial well-being of the family. While purchasing a life insurance plan, you may opt for riders that cover disability or critical illness.

Types of life insurance

• Term insurance plan

The simplest and the most affordable life insurance products is the term insurance plan. It guarantees the payment of sum assured in the event of the insured’s death during a fixed period. A term insurance plan terminates at the end of the tenure.

• Unit-linked insurance plan

Along with protecting the insured, ULIPs also provide a host of market-linked fund options. ULIPs help in channelling money into the financial markets through an array of funds. At the time of maturity, the accumulated fund value is given to the policyholder,

• Endowment plans

Also known as traditional life insurance plans, endowment plans offer an opportunity to save money along with insurance protection. Endowment plans contain certain features of both ULIPs and term plans. The returns of an endowment plan are not market-linked as it guarantees fixed returns or offer additional bonuses, if any as declared by the Company that can be utilised to achieve life goals. If the policyholder survives the policy term, he/she receives the amount at maturity and in case of death; the nominees receive the death benefit.

• Whole life policy

All life insurance policies have a fixed tenure. A whole life policy covers the individual until the age of 100 years.

• Annuity Plans

These plans are targeted at people seeking a regular income after retirement. The accumulated corpus of the policy is distributed as regular income after retirement.

How to buy a life insurance plan?

With the advent of the internet, life insurance policies can be bought online as well as offline. Buying life insurance online offers a host of advantages like convenience and comparison. It is easy to compare life insurance policies in the case of online plans. Online life insurance plans are also slightly cheaper when compared to policies bought offline. Offline plans are sold by sales executives or insurance agents, who guide you through the application process, which makes it more suitable for people not familiar with the internet or the insurance products and need an expert to guide them.

• The usual process to buy a life insurance plan online starts with filling up the application form. The applicant has to provide basic details like name, contact number, date of birth, income, expected life cover and smoking habit if any. After the details are submitted, a number of plans and their benefits are displayed for the applicant to choose.
• After finalising the policy, the applicant has to provide the relevant KYC documents.
• Once the documents are uploaded, the applicant has to pay the first premium. The premium can be paid through a variety of online payment options depending on the payment options provided by the insurance provider.
• After the approval of the application, the policy document is mailed to the policyholder. Some life insurance companies have made a medical test mandatory for policy issuance of certain types of plans. Based on the result of the test, the application is accepted or rejected. One has to be aware of these conditions and accordingly take a call.

The process to buy a life insurance policy is not very different, just the entire process has human interaction.

Step 1. To buy life insurance offline, you will have to visit the nearest branch of the insurer or get in touch with an insurance agent.

Step 2. The insurance agent or sales executive of the insurance company will inform you about the different policies of the company. He/she will explain the benefits and the overall cost of the policy as applicable to you.

Step 3. Once the policy is finalised, you will have to fill an application form with your basic details like name, address, etc.

Step 4. Attach the relevant KYC documents with the application form. The insurance agent will help you throughout the process.

Step 5. The duly filled application form and the documents are submitted to the insurance company for verification along with the premium.

Step 6. The policy document is issued on the successful verification of the documents and handed over to the rightful policy owner.

Conclusion

The wide variety of life insurance options available in the market is a boon for customers. Depending on his/her needs, an individual can opt for a specific life insurance plan. The option to buy a life insurance policy online has become extremely easy and convenient for individuals as it can happen at just a click of a button by sitting at home.