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How Does Life Insurance Work?

A life insurance policy is a contract between the insurance company and the policy holder, wherein the insurance company promises to pay a sum of money in exchange for a premium. Learn what is life insurance and how it works.

  • Oct 23, 2021

The COVID-19 pandemic has been a great eye-opener for many Indians in making them realise the importance of having robust life insurance cover during adversity. The lack of awareness has been one of the significant impediments to life insurance purchases. Also, the availability of different types of insurance products tends to confuse people. But most life insurance policies work in a similar manner. Let us understand more about what life insurance is? and how life insurance works?

What is Life Insurance?

When you purchase a life insurance policy, you sign a contract with the insurance company that agrees to provide you with the life cover. The contract lays out the policy terms and determines the amount that the insurance company must pay your family in the event of your demise during the policy period. A life insurance policy works only if you pay the premium diligently on time.

How Does Life Insurance Work?

The working of life insurance is similar to any other insurance type. You, as the policyholder, must pay the premium to the insurance company for a specific period as agreed in the policy. The premium helps the insurer to cover your family’s financial needs after your demise.

This allows your family to get financial support in the event of any emergency. The insurer pays the death benefit and other accrued benefits (if any) to the nominee allowing your family to meet their everyday expenses and manage their usual lifestyle even in your absence.

How is the premium decided?

When you submit your insurance applicant, the insurers carry out an underwriting process to determine the premium amount based on the risks involved. After assessing the risks, based on age, gender, profession, medical history, and lifestyle habits, they determine the premium amount you must pay to get the life cover.

Now that you know how life insurance works, you must know about the different types of life insurance policies in India.

Term Insurance

Term plan is one of the most popular types of life insurance in India. As the name suggests, a term plan provides coverage for a specific period, and after that, the policy expires.

One of the reasons many people prefer buying a term plan is that it offers high coverage at an affordable premium. Also, it is one of the simplest life insurance policies. In a term plan, the insurer pays the death benefit to the nominee in the event of your demise during the policy term. But, if you survive the policy period, you don’t get any survival or maturity benefits.


Unit Linked Insurance Plans are invest-cum-insurance plans. In ULIP, you get life cover as well as investment opportunities. Typically, the ULIPs have a five five-year lock-in period, and it is considered one of the best long-term investment plans.

A part of the premium you pay for ULIP is used for provided life cover. The remaining amount is invested in different money market instruments to generate returns for you. It functions as per the market dynamics, so you must invest carefully based on your risk appetite and financial goals.

Child Insurance Plan

Child insurance plans are specially meant for safeguarding your child’s future. Apart from providing life cover, it allows you to build a corpus for your child’s future needs like education, marriage, etc. Child insurance plans are a great way to help your child realise their dreams and aspirations. You can buy child insurance plans as soon as they are born so that you can leverage time benefit to build a sizeable corpus.

Be informed while buying a life insurance policy

When you buy a life insurance policy, it is critical to understand the working of the policy you buy, and know it’s features and benefits so that you can make the most of it.

Kotak e-Term Plan

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  • Nominal Cost
  • Multiple Plan Options
  • Flexible Payout Options
  • Critical Illness Rider
  • Tax Savings
  • Long term Coverage

Ref. No. KLI/22-23/E-BB/492


- A Consumer Education Initiative series by Kotak Life

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