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What is Life Insurance?

Life insurance is a financial product that provides financial protection for your family or dependents in the event of your untimely demise. Read ahead to know all about it.

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Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

Life is precious but uncertain at the same time. It is impossible to predict what the next step of your life will be. When you think about life and its numerous phases, all you want for yourself and your loved ones is to have a secure future.

Life insurance is a financial tool designed to provide financial security to individuals and their loved ones in the face of unforeseen events or the loss of a breadwinner. It serves as a safeguard against the uncertainties of life by offering financial assistance to beneficiaries upon the policyholder’s death.

What is Life Insurance?

Life insurance offers protection against risk and the chance to build up resources for future costs. A life insurance policy is especially beneficial for those who have minors, children with special needs, or all those who want to secure their family’s future during any uncertain incident. It is advisable to start an early life insurance policy as the premium amount keeps on increasing with age or if the individual has pre-existing medical conditions.

There are different kinds of insurance policies available to suit your financial requirements, like term insurance, endowment plan, money-back insurance policy, ULIP, and many more.

Benefits of Life Insurance

Life insurance is a crucial component of any comprehensive financial plan, as it provides much-needed security for loved ones in the event of an unexpected loss.

Risk Coverage

After your demise, the beneficiary of the policy will get a lump sum amount to secure their future, thereby eliminating the need to be dependent on someone else. By enrolling in this policy, the risk to the family members will be covered, which would otherwise occur if the bread earner of the family meets with an unexpected death.

Tax Benefit

Applying for life insurance can help you save on taxes. The premiums paid towards insurance can be claimed for income tax deductions under Section 80C of the Income Tax Act, 1961. This reduces your taxable income and aids you in obtaining a life cover instead.

The claim amount received against the life insurance policy is exempted under Section 10 (10D).

Loan Option

Insurance companies allow you to get a loan against a life insurance policy if you are in need. It has lower interest rates when compared to a personal loan and is much quicker in terms of processing. However, the option is available on selected policies. If you need a loan, you can use your life insurance policy as collateral.

Business Continuity and Succession Planning

For business owners, life insurance is an essential component of business continuity and succession planning as it provides a safety net to ensure the seamless continuation of business operations even after the demise of an important stakeholder, such as a business partner or a key employee. Life insurance proceeds can be used to buy out the deceased partner’s shares, facilitate a smooth transition of ownership, or provide financial support during a difficult period. This protection helps safeguard the business’s value and ensures its long-term viability.

Peace of Mind and Financial Security

One of the most invaluable benefits of life insurance is the peace of mind it offers. Knowing that your loved ones will be financially protected after your passing can bring a sense of security. Life insurance provides the reassurance that your family’s financial well-being is safeguarded, allowing you to focus on enjoying life without worrying about the uncertainties of the future.

Supplementing Retirement Income

Life insurance can also be used as a tool to supplement retirement income. Certain types of life insurance, such as permanent or whole life insurance, accumulate a cash value over time. This cash value grows tax-deferred and can be accessed through policy loans or withdrawals during your lifetime. These funds can be utilized to supplement your retirement income, cover unexpected medical expenses, or fulfill any other financial needs that may arise during your retirement years.

Financial Protection for Loved Ones

The primary purpose of life insurance is to provide financial security for your loved ones after your untimely demise. When you have life insurance, your beneficiaries will receive a lump sum payment, known as the death benefit, which can be used to cover funeral expenses, outstanding debts, mortgage payments, and other ongoing living expenses. This financial cushion ensures that your family can maintain their standard of living even after you are gone, reducing the burden of financial hardship during a difficult time.

Types of Life Insurance

There are various types of life insurance policies available in the market, each designed to meet the specific needs of the policyholder. These policies differ in their coverage, premium rates, and other key features. Below mentioned are some of the life insurance policies that are available in the market:

Term Insurance

Term insurance provides life cover in after your demise and does not have any maturity benefits. This is the simplest form of insurance and is cheaper than most available options present in the market. However, no claim for the policy can be made if the insured person survived till the end of the policy period.

Endowment Plan

An endowment plan is similar to term insurance, but the only difference is that the lump sum amount is paid out even if you survive the maturity period. The policy offers insurance benefits along with saving benefits. In case of the sudden demise of the policyholder, the endowment policy guarantees that along with the sum, a participation profit will also be paid.

Unit Linked Insurance Plan (ULIP)

ULIPs or Unit Linked Insurance Plans invest some part of your premium towards life insurance and the rest into a financial instrument. The policy has a lock-in period of 5 years and can be continued even after the lock-in ends. You can also choose where you want to invest according to your risk appetite.

Whole Life Insurance Plan

The whole life insurance plan covers you throughout your life, where you pay the premiums for a stipulated period. The corpus is paid out to your family in case of death and does not have a fixed validity. This plan is perfect if you have financial dependents. The overall process is simple and can be done online.

Money Back Policy

Money back policy provides life coverage throughout the policy term and also provides regular payments for survival. The payment made is a percentage of the sum assured, which is given during the plan tenure, and the rest of the sum assured is paid out on the maturity of the policy.

In case you pass away during the tenure, the sum assured is paid regardless of the payments made to you before. Unlike other life insurance policies, this policy offers you money during the policy period and is quite expensive in comparison to other policies.

Annuity Pension Plan

A pension plan involves paying a lump sum amount to the insurance company, where the payments are sent out immediately on a regular basis or in a lump sum form. The wealth can also be left to accumulate according to your risk appetite.

Universal Life Insurance

Universal life insurance combines the protection of life insurance with an investment component. It offers more flexibility than whole life insurance, allowing policyholders to adjust their premium payments and death benefits throughout the policy’s duration. The premiums paid into a universal life insurance policy are divided between the cost of insurance and the cash value account, which earns interest based on prevailing market rates. Policyholders can also borrow against the cash value or use it to cover premium payments. Universal life insurance is suitable for individuals who want flexibility in their coverage and investment opportunities.

Variable Life Insurance

Variable life insurance is a form of permanent life insurance that allows policyholders to invest their premiums into various investment options such as stocks, bonds, or mutual funds. The cash value of a variable life insurance policy fluctuates based on the performance of the underlying investments. While variable life insurance offers the potential for higher returns, it also carries higher risks. Policyholders assume the investment risk and must carefully monitor and manage their investment choices. Variable life insurance is suitable for individuals who are comfortable with investment risk and seek the potential for greater long-term growth.

Term vs Permanent Life Insurance

When considering life insurance, two primary options are term life insurance and permanent life insurance. Both types have distinct characteristics and cater to different needs. The following tabular representation will compare term life insurance and permanent life insurance based on various factors:

Factor

Term Insurance

Permanent Life Insurance

Coverage Period

Limited period

Lifetime coverage

Death Benefit

Pays out a death benefit if the insured dies during the term

Pays out a death benefit whenever the insured passes away

Premiums

Generally lower premiums initially, but increase over time

Higher premiums that remain level throughout the policy

Investment Component

Does not include an investment component

Includes an investment component such as a cash value account or potential dividends

Policy Flexibility

Limited flexibility to modify coverage or extend the term

Greater flexibility to modify coverage or access funds

Affordability

Generally more affordable for short-term coverage

Initially more expensive, but can provide long-term value

How does Life Insurance Work?

When you purchase a life insurance policy, you go through an application and underwriting process. The insurance company assesses your health, lifestyle, and other factors to determine your insurability and premium rates. Once approved, you start paying premiums based on the agreed-upon terms.

After your unfortunate demise, the beneficiaries must file a claim with the insurance company, providing necessary documents such as the death certificate. Upon verification, the insurance company pays out the death benefit to the beneficiaries. They can then use this money to cover various expenses, including funeral costs, mortgage payments, education expenses, and other financial obligations.

Who Needs Life Insurance?

While nobody likes to dwell on the topic of death, life insurance is an essential consideration for individuals in various life situations. Life insurance offers a payout, known as the death benefit, to the beneficiaries designated by the policyholder upon their passing. Let us explore who needs life insurance and why it is important.

Breadwinners and Providers

If you are the primary breadwinner or provider for your family, life insurance is crucial. Your income supports your loved one’s financial well-being, and if something were to happen to you, it could leave them in a difficult position. Life insurance ensures that your family can maintain their lifestyle, pay off debts, cover everyday expenses, and even fund long-term goals like education or retirement.

Parents and Guardians

For parents, especially those with young children, life insurance is vital. As a parent, you want to ensure that your children are cared for during your untimely passing. Life insurance provides the financial resources necessary for your children’s upbringing, education, and other needs. It can alleviate the burden on the surviving parent or guardian and help maintain stability during a difficult time.

Homeowners with Mortgages

If you own a home with a mortgage, life insurance can be instrumental in protecting your loved ones from the burden of debt. The death benefit from a life insurance policy can be used to pay off the mortgage after your passing, allowing your family to remain in the home without the financial strain of monthly payments.

Business Owners and Partners

Life insurance is often a critical component of a business succession plan. If you are a business owner or partner, life insurance can provide funds for business continuity, covering expenses, paying off debts, and ensuring a smooth transition of ownership. It can also be used to compensate for the loss of a key employee, providing financial stability during the adjustment period.

Individuals with Co-Signed Debts

If you have co-signed debts, such as loans or credit cards, life insurance can protect your co-signers from being burdened with the full responsibility of repayment. The death benefit can be used to settle these debts, relieving your loved ones from potential financial strain.

Individuals planning to invest in Estate

Life insurance can play a vital role in estate planning by providing liquidity to cover estate taxes, legal fees, and other expenses. It ensures that your assets can be transferred smoothly to your heirs without them having to sell off valuable assets to cover these costs.

Individuals with Final Expenses

Even if you do not have dependents or substantial financial obligations, life insurance can still be beneficial. It can help cover your funeral and burial expenses, relieving your loved ones from the financial burden during an already challenging time.

How to Buy Life Insurance Policy Online?

Life insurance is a crucial aspect of financial planning, as it provides financial security to your loved ones in case of your unfortunate demise. In the digital age, buying a life insurance policy online has become a convenient and easy option. However, many people still find it challenging to navigate the online process.

Step 1: Determine Your Insurance Needs

The first step in buying a life insurance policy online is to assess your insurance needs. You should consider factors such as your age, health, income, and liabilities to determine the type and amount of insurance coverage you need. For instance, if you are young and healthy, a term life insurance policy may be suitable for you, whereas a permanent life insurance policy may be more appropriate for older individuals with more complex financial needs.

Step 2: Research Insurance Companies and Policies

Once you have determined your insurance needs, the next step is to research insurance companies and policies. You should look for companies that have a good reputation and offer policies that meet your requirements. You can use online tools and resources to compare policies, coverage, and premiums across different insurance providers.

Step 3: Obtain and Compare Quotes

After identifying potential insurance companies and policies, you should obtain and compare quotes. Most insurance companies have online tools that allow you to get a quote for their policies. To obtain an accurate quote, you will need to provide some basic information, such as your age, gender, health status, and smoking habits. You should obtain quotes from multiple companies to compare the premiums and coverage.

Step 4: Apply for the Policy

Once you have selected the insurance company and policy that meets your needs, the next step is to apply for the policy. You can do this online by filling out the application form and providing the necessary documents. Some insurance companies may require a medical exam, while others may offer a no medical exam option. Be sure to review the application form carefully and provide accurate information to avoid any issues with the policy later.

Step 5: Review and Accept the Policy

After submitting your application, the insurance company will review it and underwrite the policy. If approved, they will provide you with the policy documents and premium payment instructions. It is important to review the policy documents carefully to ensure that the coverage and terms are as expected. If you are satisfied with the policy, you can accept it and make the premium payments online.

How to Claim Life Insurance after the Death of the Policyholder?

The death of a loved one is always a difficult and emotional time, and dealing with the logistics of claiming life insurance can add another layer of stress. However, knowing the process and steps involved in claiming life insurance can make the process less overwhelming.

Step 1: Gather the Necessary Documents

To claim life insurance, you will need to provide specific documentation to the insurance company. This documentation typically includes the policyholder’s death certificate, a claim form, and any other documents specified by the insurance company. It is important to request multiple copies of the death certificate, as you may need them for other purposes, such as closing bank accounts or filing for probate.

Step 2: Contact the Insurance Company

The next step is to contact the insurance company to initiate the claims process. The insurance company will assign a claims adjuster to your case who will guide you through the process. You may need to provide additional documentation or answer questions about the policyholder’s health history and cause of death.

Step 3: Submit the Claim Form

Once you have gathered all necessary documentation and contacted the insurance company, you will need to complete and submit a claim form. The claim form will require you to provide information about the policyholder, the beneficiary, and the cause of death. Be sure to complete the form accurately and thoroughly, as any errors or omissions can delay the claims process.

Step 4: Wait for the Claim to be Processed

After submitting the claim form and all necessary documentation, you will need to wait for the insurance company to process the claim. This can take several weeks to several months, depending on the complexity of the claim and the amount of the benefit.

Step 5: Receive the Benefit

Once the claim has been processed and approved, the insurance company will issue a check or electronic transfer of the benefit amount to the beneficiary. The beneficiary will typically have the option to receive the benefit in a lump sum or through periodic payments.

Why Do You Need to Buy a Life Insurance Policy?

Though life may seem smooth when you are younger, there could be some health issues in the future that might require medical aid. Also, no one can predict their life span and for how long they will live with their loved ones. If something were to happen, you wouldn’t want your family to wind up paying your loans and clearing the debt.

The concept of life insurance is to secure your family’s future and help them sustain themselves through tough times. It leaves them with enough wealth to be independent and lead a comfortable life.

What Should My Life Insurance Cover Be?

Before making a final decision, it is important to cover the following aspects to select the best coverage for you. Keep scrolling through to know the details:

Age Factor

Although the age limit for life insurance is a critical criterion for selecting the amount of coverage you require, it should not be used as an excuse to put off getting a policy. Your age and health will determine not just the amount of insurance you should get but also the length of time for which you should retain it.

Life Goals

The biggest goal in life is to acquire adequate financial assistance. Life insurance aims to provide much-needed financial backup to your family in case of unexpected emergencies or demise.

Lifestyle & Family

If you want to prepare for your family’s future and lifestyle carefully, it is recommended that you select the finest insurance policy that meets your demands.

Pending Debts

After your demise, your loved ones can use the insurance proceeds to pay off debts such as college loans, vehicle loans, credit cards, and personal loans. If you owe any of these bills, you should purchase comprehensive insurance coverage.

Budget Bracket

Your life insurance coverage will lapse if you are unable to pay the premiums. Because a more comprehensive life insurance policy will require a higher premium, choose a plan that matches your budget.

Estimated Working Years

The major aspect of retirement planning is to get done with financial responsibilities during the working years. Ensure that the insurance coverage you choose should correspond with the premium amount you can easily pay during the working years.

Things to Consider Before Buying Life Insurance

Life insurance offers financial protection and peace of mind by ensuring that your family’s financial obligations are taken care of, such as mortgage payments, education expenses, and daily living costs. However, before purchasing a life insurance policy, it is essential to consider certain factors to make an informed decision that aligns with your needs and circumstances.

Determine Your Life Insurance Needs

The first step is to assess your financial situation and determine the purpose of the life insurance policy. Are you looking to replace lost income, cover outstanding debts, fund your children’s education, or leave an inheritance? Evaluating your needs will help you determine the appropriate coverage amount.

Understand the Types of Life Insurance

There are different types of life insurance policies available, such as term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period. Permanent life insurance, on the other hand, offers coverage for your entire life and includes a cash value component. Understanding the differences between these types of policies will help you choose the one that aligns with your needs and goals.

Calculate the Right Coverage Amount

It is essential to calculate the appropriate coverage amount that will adequately protect your loved ones. Consider factors such as your outstanding debts, mortgage, future income needs, and any other financial obligations. A general rule of thumb is to aim for coverage that is at least 7-10 times your annual income, but individual circumstances may warrant different amounts.

Evaluate Your Budget

Life insurance premiums can vary significantly based on factors such as age, health, coverage amount, and policy type. It is crucial to evaluate your budget to determine how much you can comfortably afford to pay for life insurance. Keep in mind that while term life insurance may have lower initial premiums, permanent life insurance policies tend to be more expensive but offer additional benefits.

Assess Your Health and Lifestyle

Life insurance premiums are influenced by your health and lifestyle choices. Insurers typically require a medical examination and may review your medical history. Certain pre-existing conditions or high-risk activities, such as smoking or dangerous hobbies, can increase premiums or limit coverage options. It is important to disclose all relevant information accurately to avoid complications during the claims process.

Research Insurance Companies

Before purchasing a life insurance policy, research and compare different insurance companies. Look for providers with a solid financial reputation, good customer service, and a history of prompt claim settlements. Reading customer reviews and seeking recommendations can provide valuable insights into a company’s reliability.

Eligibility for Buying Life Insurance

When it comes to purchasing life insurance, it is important to understand the process of qualifying for coverage. Insurers assess several factors to determine eligibility and premium rates. In this section, we will explore the key considerations when qualifying for life insurance.

Age and Health

Age and health are two fundamental factors that significantly impact life insurance qualification. Generally, younger individuals and those in good health have a higher chance of qualifying for coverage and securing better rates. Insurance companies evaluate an applicant’s medical history, including pre-existing conditions, lifestyle choices, and family medical background. They may require a medical examination, which typically involves basic tests like blood pressure and cholesterol levels and a review of medical records. If an individual has a chronic illness or poses a high health risk, they might face higher premiums or even be denied coverage.

Coverage Amount

The amount of coverage you seek also plays a role in the qualification process. Life insurance policies come in various forms, such as term life, whole life, and universal life, each with its own features and benefits. Insurance providers evaluate the coverage amount requested to assess the associated risk. Higher coverage amounts may require more thorough underwriting and stricter qualification criteria.

Occupation and Lifestyle

Certain occupations and lifestyles are considered riskier than others, which can impact life insurance qualification and premium rates. Jobs that involve hazardous activities or exposure to dangerous environments may be subject to higher premiums. Similarly, individuals who engage in extreme sports or have risky hobbies may face additional underwriting scrutiny. It is essential to disclose accurate information about your occupation and lifestyle during the application process to ensure transparency and avoid complications in the future.

Smoking and Substance Use

Tobacco use, including smoking cigarettes and cigars, or using chewing tobacco, is a significant factor affecting life insurance qualification. Smokers typically pay higher premiums due to the increased health risks associated with smoking. However, some insurers differentiate between occasional and regular smokers, so it is crucial to provide accurate details. Substance abuse, including alcohol or illegal drugs, can also impact eligibility and rates.

Financial Background

While life insurance primarily focuses on providing financial protection to dependents, an applicant’s financial background may also be considered during the qualification process. Insurance companies may evaluate an individual’s income, debts, and financial stability. This assessment helps determine the appropriate coverage amount an applicant can afford and whether they have the financial means to pay the premiums.

Family History

Family medical history can provide insights into an individual’s predisposition to certain illnesses or genetic conditions. Insurance companies may ask for details regarding immediate family members, including parents and siblings, to assess the potential risk. While a family history of certain conditions may not automatically disqualify an applicant, it can impact the premium rates.

Is Buying a Life Insurance Policy Worth it?

The payout from a life insurance policy can be used to cover funeral expenses, pay off debts, and provide ongoing financial support to your beneficiaries. Other reasons which make buying a life insurance policy worth it are:

Peace of Mind

Knowing that your loved ones will be taken care of in case of your death can give you peace of mind. You will not have to worry about how they will manage without your income or support.

Investment Opportunities

Some types of life insurance policies, such as whole life insurance, can serve as an investment opportunity. These policies can accumulate cash value over time, which can be borrowed against or used to pay premiums.

Wrapping Up

Life insurance is not just a mere financial product; it is a powerful testament to your enduring love and commitment toward your loved ones. So, as you navigate the uncertainties of life, embrace the profound significance of life insurance and make a choice to protect those you hold dear.

There are different types of life insurance policies available, and choosing the right one depends on your personal circumstances, goals, and budget. It is essential to review and understand the terms and conditions of the policy before making any decisions. Life insurance can provide assurance to both policyholders and their loved ones.

Key takeaways

  • Life insurance gives risk protection for the insured and the chance to build up resources for future costs.
  • A life insurance policy is a legal agreement between the insurer and the insured in which the insurer promises to pay a certain amount of money after the demise of the insured.
  • After the insured individual passes away, the beneficiary must file a claim with the insurance company in order to receive the death benefit.

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- A Consumer Education Initiative series by Kotak Life