How Does Life Insurance Work?

Life insurance gives your family a safety net in case of your untimely death. It helps ensure that your loved ones are financially stable even in your absence. You regularly pay premiums to an insurance company. In return, the company provides a sum assured to your nominee. Understanding premiums, coverage features, benefits, and exclusions enables you to choose the right plan. This article explains how does life insurance work.

What is a life insurance policy?

Life insurance policy is a contract between the company and the insured. When the insured dies within the policy term, the company pays a sum assured to the nominee. If the life insurance policy comes with maturity benefits, the life insurance companies need to make the due payment to the insured only in case they outlive the policy term. Moreover, for the life insurance policy coverage, the premium must be paid by the insured on a monthly, quarterly, or yearly basis. You can also make a lump sum payment to the life insurance company.

What does life insurance cover?

Death due to various reasons like accident, sickness and old age is covered by life insurance. Furthermore, the policy also insures death due to cancer, stroke, or heart disease. Many policies also include a suicide clause, but this usually applies after the first two years of buying the policy. Proper disclosure of sickness while underwriting is necessary to prevent future claim problems.
 

NOTE: The insurance pays only if all the conditions are disclosed and assessed during underwriting.

How does life insurance work?

Life insurance makes sure that your family members are financially secured in case of your absence. You pay regular premiums, and the insurance company provides a sum assured to the nominee if you die during the policy term.
 

Example
 

For instance, Raj is a 35-year-old working professional, and he buys a 20-year policy with a cover of ₹1 crore. He pays an annual premium of ₹20,000. If Raj suddenly dies during these 20 years, the insurance company will pay ₹1 crore to his family. This amount helps the family cover daily expenses, or they can even use the funds to clear outstanding debts.

Types of life insurance plans

There are various types of life insurance plans; you should choose one which aligns with your needs and financial capacity.

Term insurance

Term insurance is a relatively affordable and popular type of life insurance. It provides coverage for a specific term, and the premium does not change until the end of the term. The plan offers high cover with a low premium. If the policyholder dies during the policy term, the nominee gets the sum assured. Else, the policy will lapse at term end.

Whole life insurance

This type of life insurance provides lifetime coverage. The premium is more compared to term insurance policy. Additionally, a death benefit is paid to the nominee if the policyholder dies during the policy term. This policy contains a savings feature in the form of cash accumulation that supports long-term financial planning.  

ULIP

A ULIP, i.e., a unit-linked insurance plan, has both insurance and investment components. Insurance provides financial protection for your family, while the investment component helps your funds grow to fulfil future financial goals. A part of the premium paid contributes to life cover, while the remaining amount is invested in market-related assets of your choice.

Retirement Plans

Retirement schemes help cover your living and medical costs and other retirement requirements. Pension schemes such as Public Provident Fund (PPF), National Pension System (NPS), Deferred Annuity, Immediate Annuity, etc., are retirement schemes. This helps build retirement corpus as well as recurring income flow to live a financially independent retired life.

Savings plans

Savings plans help build a habit of regular saving and ensure secure returns that enable you to achieve your financial objectives. Since these are life insurance plans, for example, ULIP, they also offer life coverage, making sure that your family is financially secure even in your absence.

Health insurance

A health insurance policy provides financial coverage for medical expenses. This includes hospitalisation, consultation with a doctor, surgery and nursing fees, prescribed medicines, ambulance charges, etc., This policy helps you get quick and quality treatment without financial burden.

Benefits of a life insurance

Life insurance provides many benefits, some of which are as follows:

Financial security to the family

A life insurance plan provides financial security to the family in your absence. The death benefit helps ensure that your family is able to fulfil their daily needs and financial goals even in you absence. This is one of the important benefits of a life insurance plan.

Creation of wealth

Along with life insurance coverage, a life insurance plan can also act as an essential instrument for the creation of wealth. If you wish to save for a longer period, you can opt for a savings plan.

Tax savings

Life insurance plans also allow you to avail tax* benefits. The premium paid for keeping the policy active allows you to save tax* under Section 80C. Moreover, the death benefits that your loved ones will receive are exempt from taxes under Section 10(10D).

Helps clear outstanding debts

In case of your untimely demise, your family may face a financial burden to pay off all the outstanding loans. In such cases, the family can use the sum assured to pay outstanding loans. Also, some life insurance plans allow you to take a loan against the policy, depending upon the terms and conditions applicable.

Retirement planning

Insurance companies offer retirement and pension plans to ensure that you do not have a financial burden during the golden years of your life. With annuity-based pension plans, you can ensure that you have a regular flow of income so that you can maintain your lifestyle even after your retirement.

Conclusion

Understanding how life insurance works is the first step toward protecting your family's future. Life insurance Provides financial security in your absence. You pay premiums regularly, and your family receives a sum assured. Choose a policy that aligns with your financial goals and family's requirements. Review coverage options, exclusions, and benefits carefully before making a decision.