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What is Life Insurance?
Life insurance is a contract between the policyholder and the insurance company in the which the insurer provides financial coverage to the insured over the premium paid for a certain period. If the policyholder dies during the policy period, the insurance company will offer compensation amount to the nominee. This compensation amount which the nominee gets after the death of the policyholder is called death benefit or sum assured on death. After the completion of the policy period, the policyholder will receive maturity benefit or sum assured on maturity along with some bonuses from the insurer.
Why Life Insurance is important?
Loan security:
Life insurance policies can be used as loan security. Based on the life insurance policy type and surrender value, policyholders can avail loan from bank or Non-Banking Financial Companies (NBFCs) according to the terms and conditions.
Financial security:
In the case of unfortunate death of the policyholder, life insurance policy provides financial security to his/her family members.
Assured income:
As the policyholder pays premium over a period of time, life insurance policy will offer assured income to the policyholder after retirement.
Health cover:
All life insurance policy providers offer financial security by covering critical illnesses and medical expenses. The increase in health expenses arises the need for health insurance policies since the policy ensures that the policyholder will have to deal with less health expenses.
Long-term investment:
Life insurance policy serves as a long-term investment plan as it helps to fulfill children's education, marriage, construction of house and to pursue peaceful life after retirement. Most of the traditional life insurance plans offer in-built guarantees and maturity benefits to the policyholders.
Loan repayment:
Life insurance policies help the policyholder to repay his/her loan. If the policyholder is not able to repay his/her loan due to unfortunate situation, the policyholder's family can use this policy to repay the loan.
Tax benefits:
Under Section 80C of Income Tax Act 1961, the policyholder is exempted from tax for the premiums paid. This tax benefit is offered by both public and private life insurance companies.
Under Section 10(10D) of the Income Tax Act 1961, the maturity benefit of the life insurance policy also qualifies for tax deduction.
What are the types of Life Insurance Plans?
There are different types of life insurance plans available. They are,
- Term Life Insurance Plan
- Endowment Policies
- Unit Linked Insurance Plans
- Money Back Policies
- Whole Life Policy
- Annuity/Pension Plans
Which Life Insurance Plan is better?
As many insurance companies are offering different life insurance schemes, choosing the best life insurance plan is a big challenge for the customers. By comparing different life insurance plans given below, you can able to choose the best one.
| Parameter | Term Life Insurance Plan | Endowment Policies | Unit Linked Insurance Plans | Money Back Policies | Whole Life Policy | Annuity/Pension Plans |
| Nature of the plan |
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| Term | 5-30 years | 10-35 years | 10-20 years | 5-25 years | 40 years | No fixed terms |
| Death benefit |
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| Maturity benefit | No maturity benefit upon the survival of the policyholder. | Maturity benefit will be provided upon the survival of the policyholder at the end of the policy period. | Maturity benefit will be provided upon the survival of the policyholder at the end of the policy period. | Maturity benefit will be provided on maturity period. | Maturity benefit will be provided once the policyholder attains certain age. | No maturity benefit in itself. Policyholders will get regular pension for specific period. |
| Cost of premium | Premium costs are low | Premium costs are high | Premium costs are high | Premium costs are low | Premium costs are usually high | Premium costs are moderate |
| Extra benefits |
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Accumulated profits are paid as bonus. |
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Bonus as well as sum assured will be paid on maturity or death. | Assured income source after retirement. |
| Suitable for | People who wish to get financial security in low premiums and looking for short term protection can choose this plan. | People with high income who want to protect themselves and looking to increase their investment can opt this plan. | People with high income who have interest in investment can opt for this plan. | People who want to protect their life and need to get some money at regular intervals are suitable for this plan. | People who wish for financial security of the family in future can choose this plan. | People who are constantly worried about post-retirement life and want to earn assured income are suitable for this plan. |
How Life Insurance Premium is calculated?
In order to calculate life insurance premium, insurance companies consider certain factors for each individual. As life insurance is a form of investment, just a low premium will yield you high returns. You need to fulfill some requirements of the insurer in order to avail life insurance policy with low premium.
Some of the factors which are considered by the insurer to calculate life insurance premium are listed below.
Age: Age is an important factor in determining the premium rate. Young people receive low premiums whereas old people receive high premiums. The reason for young people receiving low premium is that there is only less chance of death for them. On the other hand, chance of death and illness during the policy period is high in older people. So, the premium calculation differs according to the age of the individual.
Gender: Gender may affect premium calculation as the life expectancy of women is five years higher than men. Due to this reason, many insurance companies offer life insurance policy at lower premium rate for women.
Health and Medical records: Before offering insurance policy, many insurance companies thoroughly check the health condition of the individuals. Those with clean medical and health records with no life-threatening disease avail insurance policy in low premium rates.
Smoking/Drinking: Individuals without smoking and drinking habits avail life insurance policies at good premium rate. There is a high risk of contracting disease due to smoking/ drinking habit. This is the reason why life insurance companies ask whether you smoke or drink.
Policy type: Policy type is also a factor which affects the premium rate. If the policy period is long, death benefits and maturity benefits will be high.
Profession: For individuals who undertake dangerous professions such as mining, oil and gas, fisheries, etc., the premium rate is high. As there is a high risk of death and disease, the rate of premium is high.
Obesity: As obesity leads to diseases like cancer, blood pressure, heart disease, etc., the premium rate for obese individuals are high as the risk of disease is high.
What are the documents required to buy Life Insurance Policy?
In order to buy life insurance policy, you need to possess the following list of documents.
- Recent passport size photographs
- Age proof - Driving License/ Passport/ PAN card/ SSC certificate
- Address proof - Utility bills/ Ration card/ Voter ID/ Passport
- Identity proof - Driving License/ Passport/ PAN card/ Ration card/ Voter ID
- Income proof - Salary slip/ Pension Passbook/ Form 16/ Income Tax Returns.
How to claim Life Insurance?
You can claim life insurance in two cases.
- Death of the policyholder
- Maturity of the life insurance policy
Death of the Policyholder:
In the case of death of the policyholder, the nominee or the policyholder's close relative can claim life insurance in the following way.
Inform the insurer immediately about the policyholder's death by giving details such as the time, place and cause of death.
To claim life insurance after the death of the policyholder, the nominee has to submit some proofs and documents to the insurer such as,
- Death certificate of the policyholder along with the insurance company's claim form.
- Policyholder's original policy certificate and insurance agreement.
- Discharge form bearing the signature of the witnesses.
- If needed, post-mortem reports and doctor's reports.
- If claiming process is done by a person other than the nominee, the claiming person should submit legal proof.
- Inquest report needed in the case of police inquiries.
- If the policy was allotted, the nominee has to offer the deed.
Maturity of the Life Insurance Policy:
If the policyholder survives till the end of the policy term, he/she can avail maturity benefits for the policy. In order to claim, the policy term should be ongoing and premiums should be properly paid.
To file maturity claim, you need to perform simple paperwork.
- If the policy is about to mature, the insurer will intimate the policyholder before 1 or 2 months. All details such as maturity date, maturity amount and discharge voucher will be provided to the policyholder.
- The policyholder should sign the discharge voucher in the presence of witnesses. The discharge voucher along with the original policy certificate should be sent to the insurer to avail maturity benefits.
- If the policyholder has nominated another one for the policy, the nominee should sign the discharge voucher to get the claim amount.
What are the exclusions for Life Insurance Plans?
Though life insurance plans cover a list of events, there are certain exclusions which the life insurance policy does not cover. The exclusions for life insurance plans are,
- Death due to diseases like HIV and STDs
- Death due to illegal activities
- Self-made injuries
- Participating in extreme sports activities
- Consumption of alcohol and drugs.
What are Life Insurance Riders?
Life insurance riders are add-on benefits offered by the life insurance company which helps to enhance the base premium. You should be careful while choosing the best rider for your life insurance policy. It is better to seek expert's advice before choosing life insurance rider.
Types of Life Insurance Riders:
Some of the life insurance riders offered in the insurance companies are,
Critical Illness Rider:
- Critical illness rider covers major diseases such as heart attack, cancer, coma, stroke, kidney failure, paralysis, etc.,
- As the coverage differs for each insurance company, you need to check the illnesses covered by the company.
- Upon diagnosis of critical illness, the insurer will provide sum assured for the treatment of the insured.
- The policyholder should have to survive till the waiting period to receive the benefit.
- This rider suits for chain smokers, person with unhealthy lifestyle and officers in extreme work stress.
Waiver of Premium Rider:
- If the policyholder is unable to pay the premium due to disability and with no income, the insurance policy will be closed.
- In such cases, the life insurance policy will be closed and the policyholder would not be offered any compensation.
- In such situation, the waiver of premium rider will waive off all the future premiums of the life insurance policy and the policy will continue.
- As this rider can be chosen along with accidental total and permanent disability rider and critical illness, the policyholder can choose for it separately.
- This rider is suitable for those who do physical work.
Accidental Death Benefit Rider:
- In the case of accidental death of the policyholder, the nominee will receive additional accidental death benefit with the basic sum assured.
- Most of the insurance companies fix time after the accident of the policyholder to extend the coverage provided as in most of the cases, the policyholder does not die on the spot.
- This rider is suitable for those use car, bike, commercial vehicle or public transport on daily basis and for those who frequently go for business trips or job involving physical work.
Accidental Total and Permanent Disability Rider:
- If the policyholder is unable to earn regular income due to accident, this rider offers financial aid to the policyholder's family by providing monthly income.
- As this rider is offered for a pre-decided term, it may vary for each plan.
- This rider is suitable for those use car, bike, commercial vehicle or public transport on daily basis and for those who frequently go for business trips or job involving physical work.
Term Rider:
- In the case of premature death of the policyholder, this rider provides monthly income or total amount to the nominee.
- This rider offers additional death coverage with the basic sum assured, pre-decided by the insurer.
Hospital Cash Rider:
- In the case of planned/emergency hospitalization, this rider offers a fixed amount to the policyholder.
- The terms and conditions, benefit amount and sum assured may differ for each insurance company.
- This rider is useful for policyholders who need coverage for emergency hospital expenses.
Surgical Care Rider:
- If the policyholder undergoes unavoidable surgery in India, this rider offers lump sum.
- The rider benefit may differ according to the plan and surgery.
- This benefit can be opted by those who need coverage for surgery expenses.