Life Insurance is the safest and the most secure way to protect your family or dependents against financial contingencies that may arise post the unfortunate event of your untimely demise. Under a Life Insurance Contract in India, the insurer assures to pay a definite sum to the policyholders family on his demise during the policy term.
What is Life Insurance Policy?
Life Insurance policy is an agreement between an insurance company and a policyholder, under which the insurer guarantees to pay an assured some of the money to the nominated beneficiary in the unfortunate event of the policyholders demise during the term of the life insurance plans. In exchange, the policyholder agrees to pay a predefined sum of money in form of premiums either on a regular basis or as a lump sum. If included in the contract, some other contingencies, such as the critical illness or the terminal illness can also trigger the payment of benefit. If mentioned in the contract, a policy may also cover some other costs like funeral expenses as a part of benefits.
Except for the death benefits, an online life insurance plan also provides maturity benefits. These benefits are provided in the form of a payout if the insured survives the entire term of the life insurance policy. Moreover, online life insurance plans also offer several tax benefits under Section 80C of the Income Tax Act, 1961.
The insurance company will determine the premium payment that has to be made by the policyholder to the company. However, the claimant is given the option to choose the term of the policy and the sum assured. There are number of factors which are taken into consideration while determining the premium amount for every individual. The sum assured is amongst those factors. Higher the sum assured, higher the amount of the premium.
Why it is Important to Buy Life Insurance Policy?
It acts as a financial net in case of eventuality linked with human life, such as retirement, disability, accident, death, etc. Life is unpredictable; one can never guess what happens next. In case of sudden demise of the primary breadwinner of a family, apart from the emotional trauma, his/her family is at the risk of a financial crunch. In case this person is the sole breadwinner of the family, his/her dependents face a loss of income.
Though there is no premium calculator that can calculate the worth of a human life, what needs to be done must be done. To calculate the sum assured of a life insurance policy, the insurer takes your lifestyle and finances into consideration. This sum assured is provided to the insureds family after his/her demise in order to offer them a much-needed financial support. In order to make sure that ones family doesnt have to make any compromises due to financial crunches, one should buy a suitable life insurance plan.
Unpredictability- Life is unpredictable. One cant predict when his/her life will come to an end. If it were up to people, nobody would want to leave without ensuring the financial security of his/her family. Sadly, its not up to them. The solution is, one must buy life insurance plan and be a step ahead so that the financial goals set for his/her family can be accomplished even when he/she isnt around.
Financial Cushion- It provides much-needed financial support to the insureds family by compensating for the loss of income.
Debt-Proof Future- The sudden demise of a breadwinner is nothing short of a catastrophe. While it is an emotional crisis initially, it can get converted into a financial one in no time. With the help of life insurance, any outstanding debt, such as a motor loan, personal loan, a home loan, etc. can be taken care.
The Accomplishment of Retirement Goals- While life insurance plan is a perfect option to accomplish long-term goals; it helps accomplish retirement goals as well. Some life insurance plans offer diverse investment opportunities and some insurance plans offer performance-based dividends.
Tax Benefits- A policyholder can avail tax-benefits regardless of the type of life insurance policy he/she purchases. As per section 80 C of the income tax act, the premium paid towards the life insurance plan is eligible for tax benefits up to Rs. 1 lakh 50 thousand.
Mental Peace- Life insurance plan offers much-needed peace of mind to the policyholder by assuring the financial future of his/her family. Even a basic life insurance plan helps to generate corpus to take care of the future financial needs of the insureds family.
Savings Tool- In case a person opts for a traditional/unit-linked plan, he/she pays an enhanced insurance premium. This extra amount of money is invested in the insureds preferred fund and consequently acts as a savings tool.
Childrens Future Expenses- A life insurance plan takes care of all the future expenses of a policyholders children, such as education and wedding expenses. These days, the cost of raising a child is sky-high. Not just that, even getting admission in a reputed college costs a bomb. This policy ensures that the policyholders children dont have to make any compromises as far as their education and personal needs are concerned.
Business Security- While some life insurance plans cater to the needs of the insured and his/her family, there are some insurance plans available in the market that offer support to the insureds business. It also enables a business partner to buy the share of his/her deceased business partner.
Benefits of Life Insurance Plans
The perks of buying a life insurance policy go beyond protecting ones family in tough times. Undoubtedly, it is a necessity to safeguard ones dependents (in case of ones unfortunate and untimely demise, accidents or physical disabilities that lead to a loss of income), but there is a long list of other benefits, too, that makes the life insurance plan a lucrative choice among individuals.
Sadly, most people are not aware of the many benefits associated with it - all they care about, understandably, are the death and disability benefits. However, there is a long list of benefits attached to the life insurance policy such as maturity benefits, tax benefits etc. lets take a look at the benefits offered by life insurance plans.
Loan Against a Life Insurance Policy:
Till date, many people dont know that life insurance policies can also be used to secure a loan at a significantly more competitive rate as compared to other modes. One can get a loan from the same company or a bank or NBFC (Non-Banking Financial Company).
The maximum amount of loan an individual will be able to get depends upon the type and surrender value of his/her life insurance policy.
Generally, the loan amount is a percentage of the surrender value of the life indemnity policy and it can go up to as high as 80% to 90%. There are few companies that only allow loans amounting to 50 percent of the total premium amount paid by the policyholders to calculate the maximum loan amount they can be eligible for.
Online Payment Rebate
Most individuals have never heard about the online payment rebate benefit, but its important to note that the payment mode chosen by an individual drastically affects the premium of a life insurance policy. In fact, an insurance companys servicing cost considerably goes down when an individual opts to pay his premiums online.
This is because there is no cost involved in paperwork in this case. Therefore, the life insurance company is able to save a significant amount on the commission, which is generally paid to the agents.
Varying from company to company, this rebate might have already been given to the policyholders before the online premium rates are quoted to them.
Refund on the Sum Assured
This benefit might surprise many customers, but there are many life insurance companies that offer rebates for a higher sum assured. This is because the servicing cost of all the policies belonging to the same category is almost the same; hence, a higher sum assured means a lower cost of servicing per unit of sum assured, for the life insurance company. Subsequently, this translates to higher returns or profits per unit of the sum assured/premium paid, which explains the rebate on the sum assured.
Rebate as per the Periodic Payment Chosen
Almost every life insurance company offers the periodic payment option to its customers which can be in the annual, half-yearly, quarterly or monthly mode.
In this case, the higher the frequency of payment one chooses, the higher the servicing cost will be (comprising of administrative, processing and collection costs) for the insurance company.
Furthermore, if a policyholder chooses to pay his premium at one go for the complete year, the company can use the available funds for investment purpose which automatically means more profits and benefits for the company.
This rebate is often already included in the premium rate offered by the life insurance company once a customer chooses the periodicity for the payment.
Taking Care of Ones Business
There are some life insurance companies that provide an option, wherein if the policyholder owns a business then their business partners can purchase the share of the policyholder without any hassles (after the policyholders death). In this scenario, the business partner will simply have to enter into an agreement with the life insurance company and the pay-out received after selling the policyholders share will be given to his dependents.
However, its important to understand that the nominee or the dependents of the policyholders do not get a stake in the company.
Under section 80C of the Income Tax Act 1961, any amount of life insurance premium paid by a policyholder is eligible for a tax rebate, irrespective of the fact if its for oneself, their spouse or their children (premium paid for parents and in-laws is exempted).
The policyholder will get the tax rebate facility for all the premiums he is paying and this benefit is available with all the life insurance companies - be it from (the)private sector or (the)public. This benefit has been explained further below.
An individual can save taxes under Section 80C of the Income Tax Act, 1961. Under this section of the IT Act, the premiums paid towards the policy are eligible for tax deduction. Whats more, the life insurance policies, which offer maturity benefits, also qualify for tax deductions on the maturity proceeds of the policy under Section 10 (10D) of the Income Tax Act, 1961.
Types of Life Insurance Policies
In order to offer the best coverage, life insurance policies come in two categories. The first is pure life insurance and the second one is a perfect blend of insurance & investment components.
In order to know what life insurance plan is suitable for an individual, its important to know what types of life insurance policies are offered in the Indian insurance market.
Types of Life Insurance Policies
- Term Plans
- Pure risk cover
- Insurance + Investment benefits
- Endowment Plans
- Insurance cover + Savings
- Money Back Plans
- Insurance cover with periodic returns
- Whole Life Insurance
- Coverage for a lifetime
- Child Plans
- Retirement Plans
Here are the details of aforementioned plans:
Term Insurance Plans
Term insurance is the most basic form of life insurance. It is affordable insurance that one can buy easily, without any hassles.
A term insurance plan offers a death cover for a stipulated time period. God forbid, in the event of the sudden demise of the insured during his/her policy tenure, the provider offers a pre-decided death benefit as a lump sum, or as a monthly or annual pay-out, or as combined benefits to the nominee. The best term plan offers comprehensive life cover at competitive premiums.
Benefits of Term Life Insurance Plans
Death Benefit- The death benefit is paid as monthly payouts, a lump sum, or both.
Note- No payout is paid in case the insured outlives the policy duration.
Additional Riders- In order to enhance the basic life insurance coverage depending on the expectations of the policyholder, term plans come with various optional riders.
Unit Linked Plans
A unit-linked insurance plan or ULIP is a type of life insurance plan. It is perfect blend of insurance & investment components. It comes with a long-term investment opportunity along with valuable investment flexibility. It offers combined coverage.
The premium paid towards a ULIP is partly used as a risk-cover for life insurance plan and the remainder is invested in market funds such as debts, equities, bonds, market funds, hybrid funds etc. The selection of the market funds depends purely on the risk appetite of the insurance buyer. The insurer invests the amount in the capital market as per the insureds preference.
Benefits of ULIPs
Here are the benefits of unit-linked plans.
Best of Both Worlds- It offers the benefits of life insurance as well as investment.
Ease of Investment- Based on the risk appetite, it offers various investment options for insurance buyers.
Complete Autonomy- It offers complete autonomy of selecting the preferred investment option to the insurance buyers.
An endowment policy is a combination of life insurance and savings, which invests a particular amount in a life insurance cover and the remaining amount, is invested by the provider. In case the policyholder outlives the policy term, the insurance provider offers a maturity benefit to him/her. Furthermore, some life insurance endowment policies may offer bonuses on pre-specified periods. If applicable, the bonuses are paid either to the policyholder at the time of policy maturity or to the nominee in case of a death claim.
Endowment policies are also known as traditional life insurance policy. These plans come with an element of investment. As the risk involved is lower as compared to the risk factor of other investment products, the returns are lower as well.
Benefits of Endowment Plans
Here are the benefits of endowment plans.
Return on Investment- It acts as a long-term financial planning tool that offers returns on investment at the time of maturity.
Money Back Life Insurance Plans
This is a type of life insurance plan under which a stipulated percentage of the assured sum is paid back to the policyholder at pre-decided intervals. This payback benefit is known as a survival benefit.
Money back is the best type of life insurance policy for those who want their investments to be accompanied by an element of liquidity. Furthermore, these plans are eligible for bonuses as declared by the provider (if any).
Whole Life Insurance Plans
A whole life insurance plan offers life insurance coverage for as long as the insured lives. There are a few providers who offer life insurance coverage up to 100 years of age. Contrary to the coverage offered by term plans, this plan offers an extensive insurance cover.
The sum assured is computed when the life insurance plan is purchased and is payable to the nominee after the demise of the insured along with bonuses (if any). It is one of the best life insurance policies that offer coverage up to whole life for low premiums.
A variant of whole life insurance is available in the market that clubs the benefits with ULIPs. A whole life ULIP offers extensive coverage along with the benefit of high returns.
Note- In case the policyholder outlives the 100 years of age, the insurance provider pays the benefit of matured endowment coverage to the policyholder.
Coverage - It offers lifelong insurance coverage to the policyholder.
Partial Withdrawals - Upon the completion of the premium payment period, it offers the facility of partial withdrawals
Age No Bar - It comes without an age limit with respect to the eligibility criteria.
A child plan acts as a tool to generate funds for the insureds child. A child plan helps one build a corpus especially for a childs education and wedding. Generally, child plans either provide installments on an annual basis or a 1-time payout once the insured child is 18 years of age. Child plan offers the best benefits.
In the unfortunate event of the untimely demise of the insureds parent during the policy term, immediate premium payment is payable by the insurer. In such cases, some insurance providers waive off future premiums but the plan continues till maturity.
Child Plan Benefits
Here are the benefits of child plans.
Financial Support- Even if a childs parents have passed away, it ensures that the future of the insured child is safe and secure.
Secured Future- It helps parents accumulate funds for a major event in a childs life such as education, wedding etc.
A retirement plan, also known as an annuity or pension plan, helps the insured accumulate a corpus for his/her retirement. Typically, retirement plans provide installments on an annual basis or a 1-time pay-out once insured is 60 years of age. The plan offers vesting benefit in case the insured outlives the policy term and a death benefit in case of the insureds demise.
Note- In case of the insureds demise while his/her policy is active, the life insurance companies pay a pre-decided amount to insureds nominee.
Retirement Plan Benefits
Here are the benefits of retirement plans.
Corpus Generation- It helps the insured build a corpus for his/her retirement.
Financial Independence-It offers much-needed financial independence to the insured.
Long-Term Savings- It acts as a great tool for long-term savings.
Retirement Goals-It helps to accomplish retirement goals with complete autonomy.
Death Benefit- It offers death benefit which is either fund value or 105 percent of paid premiums.
Vesting Benefit- The plan offers fund value as payout, which has to be utilized for purchasing.
Types of Life Insurance Riders & Their Importance
Choosing the right life insurance rider is as crucial as buying itself. After all, no one wants to regret a wrong decision. Thats why; one must take time and experts advice before buying a life insurance rider. Riders are add-on benefit offers by the life insurance policy which help in enhancing the base cover. However, without knowing the types of riders available in the market, one shouldnt randomly buy one for the sake of increasing the cover amount of the life insurance plan. In this regard, here are some of the rider options available for insurance seekers:
Accidental Death Benefit Rider
With this rider, in case of the accidental death of the insured, the nominee will receive the basic sum assured amount along with the additional accidental death benefit rider. In many cases, death do not occur on-the-spot, so most of the insurance companies set a period after the incident to extend the offered cover. Lets say, if the policyholder dies after 100 days of the accident, the nominee still receives the sum assured. Thats why, it is imperative to check the life insurance policy clause carefully at the time of buying a rider.
As eventualities come without prior notice, anybody can take this rider. However, it is a must buy for those who-
Commute and travel by car, bike, public or commercial vehicles, on a daily basis.
Someone who frequently does business trips or if the job involves physical work in a factory or on-site civil work
Accidental Total and Permanent Disability Rider
If the insured person is unable to earn a daily income due to the accident which leads to total temporary or permanent disability, this rider provides financial assistance to the family. In such unfortunate situations, the life insurance company bears the monthly income of the insured. The rider benefit may vary plan to plan and it is paid for a pre-decided time period. For instance, some companies offer rider benefits for 5 to 10 years from the occurrence of the accident. In case of the death of the insured during the policy term due to suffering, the beneficiary would receive the outstanding sum assured amount.
This rider is important to buy for the individuals who-
Commutes and travel on daily basis by bike, car, public transport, train, or commercial vehicle.
Someone who job involves physical work in on-site civil work or factories or does frequently business trips.
Critical Illness Rider
This rider benefit offered by life insurance plans covers major critical ailments like cancer, heart attack, kidney failure, stroke, coma, paralysis, etc. As the coverage may differ from insurer to insurer, it is important to check the list of illnesses included by the company.
The life insurance company offers the rider benefits on the detection of a critical illness. Though any of the above listed critical illnesses may not cause immediate death, the treatment could cost a bomb or could force the insured to leave the job. In such situation, the insured is compensated using this rider plan where the given money can be used in monthly expenses or in the treatment. However, the payout may vary as some insurer offers 100% of the basic sum assured and others dont. The only condition is that the life assured will have to survive a waiting period.
As no one can predict such an illness, this rider can be bought by anybody, especially
Top-level officers with extreme work stress
Someone with unhealthy lifestyle
Waiver of Premium Rider
If the insured is unable to pay the premium due to any disability that leaves him/her with no income, the life insurance policy terminates. In such cases, the insured wouldnt be offered any compensation. Then, how will the family manage without an income?
In such a situation waiver of Premium rider is a savior, as all the future premiums of the life insurance policy will be waived off and the policy will be in force as before.
In case the premiums are not paid due to the death of the policyholder or accidental disability, the premium for the main policy and riders will be excused and the policy will continue.
Usually, this rider can be bought along with critical illness and accidental total and permanent disability rider. If not, the insured has to buy it separately. As uncertainties cant be predicted, one should consider buying this life insurance rider if they are a daily commuter or who works on on-site civil work and involves physical work.
Accelerated Death Benefit Rider
This rider works as a savior in case the policyholder is detected with a critical illness such as cancer, AIDS, leukemia, Ebola etc., which may shorten the lifespan of the insured. In such cases, the life insurance company pays a portion of the base sum assured in advance. This can be utilized for the treatment or for paying monthly expenses. The remaining money will be paid to the family on the death of the insured to secure their financial future.
Before taking any decision, a thorough analysis of lifestyle or surroundings is required. Based on this, insurance seekers should decide whether they need this rider or not.
This rider offers a monthly income or lump sum to the beneficiary in the event of the premature death of the insured. The benefit can be equal to the base sum assured which is pre-determined by the insurer.
Importance - Someone who wants to leave behind a huge death benefit.
Hospital Cash Rider
Under this, a fixed amount is paid in case of emergency/planned hospitalization. The benefit amount, terms and conditions, and sum assured may vary from insurer to insurer.
This rider benefit offered by life insurance plan is for those who want to cover expenses related to emergency hospitalization.
Surgical Care Rider
If the insured undergoes an unavoidable surgery in India, under this rider plan, a lump sum amount will be paid. However, the rider benefit may vary plan to plan or may vary from minor to major surgery.
This rider benefit can be purchased by anyone who wants to cover the expenses for surgery in case of any eventualities. This helps in mitigating any out-of-pocket expenses that may burn a hole in ones pocket.
Exclusions of a Life Insurance Policy
Though a life insurance policy offers you financial cover against multiple scenarios, there are certain situations in which your insurance company can decline your claim. It is recommended that you go through all the limitations as mentioned in the fine-print before signing-up.
Heres a quick rundown of the some of the common exclusions of life insurance policies-
Death as a Result of Lifestyle Diseases
Do not conceal any health-related information while filling out your application form. Lifestyle-related habits like smoking, drinking and other health risks associated with them are some of the crucial deciding factors.
People with coronary heart disease, blood pressure, diabetes, obesity etc. are more vulnerable to health complications. And, this is the reason why smokers need to pay a higher premium amount of a life insurance policy as compared to non-smokers because they impose a higher risk on the insurer. Even your driving habits are accounted for.
The insurance company will decide whether to accept or reject your application based on your lifestyle habits. Make sure that you accurately present your medical history to your insurer.
Accidental deaths resulting from deliberate self-harm, self-abuse, or psychological disorders are usually not covered by a life insurance plan. The beneficiaries of the policy cannot make a claim if the death of the policyholder takes place due to any such reason.
Involvement in Extreme Sports Activities
Death due to involvement in adventure sports like paragliding, scuba diving, trekking, water-sports activities, rock-climbing, sky-diving etc. are not covered under the life insurance policy.
However, there are some life insurance companies in India which have tried to fill the gap amid the increasing popularity of adventure sports/activities in our country. However, this extended coverage comes at a higher premium cost.
The claims arising due to riots or war come under man-made disasters. Any suffering or damage that is caused due to negligence on part of human-beings shall not be counted. This is to say, no coverage is provided if such a situation arises.
Loss of Life due to HIV and STDs
In case of untimely death of the policyholder due to sexually transmitted diseases like HIV/AIDS, the claim made by the beneficiaries will be rejected.
Intoxication and Overdose of Drugs
Consumption of drugs and overdose of alcohol and medicines can impose serious health risks and even result in death. If the death of a policyholder occurs due to overdose, it will lead to rejection of the life insurance claim.
Therefore, you should be responsible, else the dependent members of your family will not be given any death benefit by the company, and the purpose of buying a life insurance policy will not be served.
Criminal Intent/Illegitimate Activities
Risk arising due to involvement in any unlawful activity or intentional violation of the law is beyond the scope of coverage. If it is a sudden and unintentional act, only then will it be eligible for a claim.
Read the Fine-Print Carefully
It is advisable that you thoroughly read the life insurance policys document and understand all the terms and conditions. It may be a little monotonous but it will be worth the weariness. Singing up for a policy without going through the exclusions can cost you more than you can imagine.
Nobody would let their loved ones face financial crises in their absence. So, it is suggested to be aware of all the exclusions of life insurance policy. Reading this will enables one to know what not to do to ensure claim processing in case of life insureds untimely death.
These are the common scenarios under which life insurance claims are made -
On the demise of the Policyholder
On Maturity of the Policy
Things to Remember When Filling a Claim In Case of Death
Inform the Insurance Company: Contact the insurer as soon as possible on their toll-free number or inform them over email. It is always preferable to inform the insurer directly over a call to initiate the process.
Claim Intimation: The beneficiary or the claimant while lodging a claim with the life insurance company needs to share all the important details like -
The Policy Number
Name of the policyholder
Place of death
Name of the insured
Name of the claimant
If the life insurance policy has been purchased offline, then the insurer has to provide a claim intimation form at the time of the policy purchase.
If it is an online insurance policy, it is simple to apply for the claim settlement through claim form online.
Claim Processing: In case of an accidental or natural death, the beneficiary or the nominee needs to submit all the supporting documents to the life insurance company as a part of the claim process.
The claim support team then evaluates the insurance documents and claim declaration, and validates the same. In some cases, they might ask the beneficiary to submit a few other documents.
Documents to be submitted
The original copy of the insurance policy
The claim form and the death certificate of the deceased person
If someone other than the assignee or the nominee makes the claim, the insurance company can ask for the legal title of succession.
Deeds of assignment, if any
Discharge form signed by the witnesses
Supplementary documents like post-mortem reports, hospital certificate, and doctors certificate (if required)
The investigation report in case of police inquiries
Approval and Pay-out
Once all the documents have been submitted, and the life insurance company has looked into the veracity of the claim thoroughly, the claim will be settled by the insurer.
The life insurance company can ask for the beneficiarys bank details - a canceled cheque or a copy of the bank account passbook, which has been attested by the bank authorities.
For nominees identity proof, a copy of passport, Voter identity card, PAN card, Aadhar card etc. need to be submitted.
Generally, the claim settlement process takes 30 days. But once it is approved, the insurer may immediately make the payout.
Some insurers make the payments through the Electronic Clearance Service or ECS, which is an alternative method to make bulk payments.
Aforementioned are the basic set of documents that are required to process a claim.
Here are (a) few other documents that the insurer can ask for (if need be) -
Some other forms or reports to support the investigation or verification
Claim Settlement Process to be followed on the Maturity of the Life Insurance Policy
If the insured outlives the policy term, he/she will be eligible to claim maturity benefits. However, the insured must make sure the policy is ongoing and that all the premiums have been duly paid.
There is a clear-cut process to file a maturity claim and it involves minimal paperwork.
When the policy is about to mature, the life insurance company generally intimates the policyholder at least 1-2 months in advance. All the details regarding the maturity date, maturity amount, and discharge voucher are provided to the insured.
The discharge voucher (similar to a receipt) has to be signed by the policyholder in the presence of the witnesses. The voucher is then sent back to the insurer along with the original policy bond, on the basis of which the payment is released.
In case the policyholder has assigned the life insurance policy to another individual or entity, then the assignee must give the discharge voucher to the insurer, in order to receive the claim amount.
Points to Remember-
This process is applicable only to the life insurance policies with maturity benefits like additional bonus, survival benefits, etc.
In the event of the demise of the policyholder after the maturity date of the life insurance, but during the policy discharge procedures, it will be considered as a maturity claim. And the claim amount will be paid out to the nominees of the deceased policyholder.
The Revelation of all the Facts
At the time of buying a new life insurance plan, one must mention the details of any previously purchased policy so that the insurance provider must be aware of the existing policy and can help the insurance seeker choose the right policy as per his/her needs. Otherwise, misrepresentation can be a reason for the rejection of death claim.