Life insurance is defined as a legally binding contract between a policyholder and an insurer in which the insurance company provides financial protection to the policyholder and pays a death benefit to the nominee when the insured dies. For a life insurance policy to remain in force, the policyholder must pay regular premiums over the period of time or pay a single premium upfront.
In a nutshell, all the benefits of a life insurance policy are tied to the payment of premiums, which is why one should opt for a premium that can be easily serviced. A life insurance policy works only if the policyholder has paid all premiums regularly.
As you have understood the meaning of life insurance policy you will find it easier to know how life insurance works.
How does a Life Insurance Policy Work?
Life insurance is a legal contract where you pay a small sum as a premium for ensuring a large protective sum. The insurer will make the large sum available to your family and dependents in the case of your untimely demise.
Usually, the life insurance is available for a limited period. Thus, if your death occurs within this period the life insurer is bound to pay a death benefit, which is also called sum assured. However, in the case of your surviving the term, you may reciveve a maturity benefit depending on the type of life insurance.
Whole life insurance plans however, are more likely to pay the death benefit than maturity benefit.
Let’s understand this with an example:
Mr. Shah bought a life insurance policy from Canara HSBC Life Insurance. The 20 year policy has a sum assured of Rs 10 lakhs and an annual premium of Rs 25,000 payable for 20 years, i.e., premium payment term = policy term.
The sum assured of the policy is also payable as maturity benefit if Mr Shah completes the policy term. Here’s how this life insurance policy will work for Mr Shah:
- Mr Shah Completes the Policy Term
- Mr Shah dies in the 10th policy year
- If Mr Shah opted for Premium Protection in the policy, upon his death in the 10th year the policy will
Benefits of Life Insurance Plans
Life insurance plans are long-term investment and protection plans with several benefits. A few of the most prominent benefits of life insurance plans are:
1. Financial Protection
A major benefit of any life insurance plan is that it provides financial security to your family members. Life insurance policies include a death benefit. If you die during the term of the policy, then a pre-defined amount, known as the sum assured is given to your family members.
This ensures that your family members are financially secured even after you are not present with them.
2. Builds Saving Habit
To keep your life insurance policy active, you are required to pay regular amounts known as premiums. Without the payment of premiums, your policy can get canceled. Thus, by investing regularly, you inculcate a habit of savings which benefits you in the long run.
3. Helps in Tax-Savings
To promote savings and investment, the government has made many investment instruments eligible for tax savings. Life insurance is one such instrument. You can avail of a tax deduction of up to Rs 1.5 lakh towards the premium you pay in a year u/s 80C of the Income Tax Act 1961. Thus, you have the benefit of investment as well as tax savings.
4. Achieve your Big Financial Goals
Some life insurance policies build a cash value over time. Life insurance policies such as ULIP, have an investment component as well. Your premium is invested in marketable securities and earns a return. With time they build into a large corpus that can be used to achieve goals such as your child’s education, child marriage, etc.
5. Wealth Protection & Distribution
Life insurance plans are one of the safest long term investment options. Thus, a life insurance will mean you can preserve your wealth for a long time against tax and inflation. This feature means that a life insurance plan is also a great instrument for retired investors to generate long-term pension.
Different Types of Life Insurance Plans in India
Now that you know what is a life insurance policy, let us understand how many types of life insurance policies are available. Life insurance plans are based on your discretion. There are various types of life insurance policies that you can choose from. Remember that it is important to consider your financial goals when you are planning to buy the best life insurance plan. Listed below are the different types of life insurance plans that are available:
1. Term Life Insurance Plan
Term insurance is the most popular one in life insurance category. It has a specific period and expires at the end of the term. The best things about a term plan are the premiums are quite affordable. These plans can be bought by people who have just started their career as the premiums are low. Some of the best term life insurance plans offer critical or terminal illness cover – that means the policyholder will be paid a lump sum amount on diagnosis of life-threatening diseases to help them cover the medical expenses.
2. Whole Life Insurance Plan
As the name suggests, it is a policy that covers you till you turn 99. That means, you can be protected till you are 99 years of age. Whole life insurance plans have a death benefit along with cash value. The life insurance policy’s cash value will grow over time and can be withdrawn by the policyholder when it accumulates enough value. Or, it can also be withdrawn if the policyholder opts for a loan on the life insurance policy.
3. Unit Linked Insurance Plans
ULIPs are investment plus insurance plans so that you can enjoy best of both the worlds. This is a type of life insurance policy that offers life cover along with investment opportunities. Most of the ULIPs have a lock-in period of 5 years, hence, it can be considered as a long-term investment plan. It function as per market dynamics and you should understand your risk appetite before buying a ULIP.
4. Endowment/ Saving Plans
This is a type of life insurance policy that offers you a life cover along with an avenue for savings. If you buy the best saving plan, you can save regularly over a period and this will lead you to get a lump sum amount at maturity. Buying an endowment or saving plan is beneficial if you have long-term financial goals such as funding your child’s education, buying a new house, or spending a carefree retirement life.
5. Money Back Policy
Money back policy is a type of life insurance policy that gives money-back at regular intervals. A percentage of the Sum Assured is paid back at intervals during the policy tenure. These life insurance plans offer Survival Benefits, which are paid out during the plan tenure and at maturity. If the policyholder passes away when the policy is in force, the entire Sum Assured is paid to the beneficiaries irrespective of the Survival Benefits already paid.
6. Child Insurance Plan
Child insurance plans are life insurance policies that are opted to safeguard the future of your child. Along with providing a life cover, it helps in building an education fund to support your child’s dreams and aspirations. Child plans are investment plus insurance plans designed to assist you in creating wealth for your child’s future needs. You can invest in these plans right when your kid is born to build a strong financial cover.
7. Retirement Plans
These life insurance policies help you build a retirement corpus so that you can enjoy your post-retirement life. You can make your spouse the beneficiary to your life insurance plan. So, in case, something happens to you, they can be financially independent. Also, having the best life insurance plan will help you pay for medical expenses during retirement.
How to Buy Life Insurance Policy Online?
Now that you know what is a life insurance policy and how it works, let us move to the buying process. Buying a life insurance policy has got simpler with time, thanks to the online channels that allow purchasing a policy easily, without any hassles. Applying for a life insurance plan is easy in India. You can either contact the nearest branch of an insurance company. Or you can buy a life insurance plan online. Canara HSBC Life Insurance has optimized its procedure by taking it online. You can ditch the unnecessary paperwork and choose the convenience of buying a life insurance plan from the comfort of your home. Life insurance companies conduct a verification of all the details provided by the buyer before issuing a policy. One has to fill out an application form with details like medical history and family health history. The insurer may even ask you to undergo a medical examination, if required.
Earlier, Life Insurance policies could be purchased only offline via an agent. But advancements in technology have made it possible for you to buy insurance online with just a few clicks.