Life Insurance


Life insurance is a contract between the policy owner and the insurer, where the insurer agrees to reimburse the occurrence of the insured individual’s death or other event such as terminal illness or critical illness. The insured agrees to pay the cost in terms of insurance premium for the service. Specific exclusions are often written in the contract to limit the liability of the insurer, for example claims related to suicide, fraud, war, riot and civil commotion is not covered.

Life insurance covers life and charges premium in return. It is a legal contract signed between the insurance company and the insurer. The contract also describes the limitations for the insured. Life insurance is designed to protect your beneficiary by providing enough cover as benefits.

Why Life insurance?

Life insurance ensures financial protection on accident or death.  It enables maintenance of the same lifestyle even after the unfortunate demise of a loved one. The beneficiaries can utilize the monetary benefits to replace the income one would have earned or help pay off debts or other expenses. Life insurance boost confidence to the insured, offers satisfaction of being covered for illness, life or financial loss.

The benefits of life insurance are:

  1. Covers death or critical illness.
  2. Covers financial interests of the family on the death of the policyholder.
  3. These product also have inbuilt wealth creation propositions. The customer benefits on two counts and life insurance occupies a unique space in the landscape of investment options available to a customer.
  4. Life insurance products offers specific tailor made products for different life stages.
  5. They Offers retirement plans.
  6. A few products offer loan facilities against the plan.
  7. Last but not least life insurance premiums offer tax saving benefits.
Types of Life Insurance Policies

We cannot control the uncertainties of life, but we can cover the risks surrounding us. Life insurance is the cover for the risks that we run during our lives. It protects us from the contingencies that could affect us in a big way. There are two kinds of life insurance policies namely the term life policy and permanent life policy.

 Term Life Policy 

Term life insurance policy covers risk only during the selected term period. Under, Term Life contract the insurance company pays a specific lump sum to the designated beneficiary in case of the death of the insured. These policies are usually for 5, 10, 15, 20, 25, 30 or 35 years. Term life insurance is very popular in advance countries but is not so in India . However, after the entry of the private operators and aggressive marketing by some players this product is becoming popular. The premium on such policies is comparatively lower when compared to the whole life insurance policies, mainly because these policies do not carry the cash value. The drawback of the policies are, if one survives the period of the policy, the insured does not get any return at the end of the policy. The premium on such policies becomes expensive with age mainly because the risk of death of is higher with age. Once over 60 years, these policies become difficult to afford. If the premium is not paid within the grace period, the policy could lapse without acquiring any paid-up value. These policies help fetch tax saving benefits.

Permanent Life Insurance 

Whole life policy is effective until the policyholder is alive. Risk is covered for the entire life of the policyholder, therefore are known as whole life policies. In Permanent Life contract, a portion of the money paid as premiums is invested in a fund that earns interest on a tax-deferred basis.  Over a period of time, these investments are supposed to accumulate increased cash values which you will be able to get back either during the period of the policy or at the end of the policy or at intervals, depending on the policies. Your need for life insurance can change over a different stages of life. You should consider your circumstances and the standard of living you wish to maintain for your dependents. Your life insurance premium is based on the type of insurance you buy and your chance of death while the policy is in effect. This type of policy not only provides security to your dependents by paying a death benefit upon death, but also enables you to use some part of the money when alive or at the end of the policy. The premiums of such policies can be expensive and when premiums not paid on time can lapse the policy. So to get the full fledged benefits paying the premiums on time and having a nominee is important. These policies have can help you fetch some tax saving benefits.

How much Life Insurance Do you need?

Once you decide to buy life insurance to protect your family or dependents, you’ll need to figure out how much to insure and how much you can afford to. The idea is for your beneficiaries to be able to maintain their standard of living, without having to dip into the principal. Some say it is best to buy about 8 – 10 times your current annual salary, but the best way to determine how much it will really take is to do some calculation. Basically determine your yearly household expenses, assets, income from all sources and debts if any. Most of the time people take assistance from the professionals in decision making. Beware of the person you choose is objective and will not try to sell you more insurance than you need. So figuring out how much insurance you require is more important than the type of policy you purchase. It means you have to make more efforts to gather the information you need and calculate the following:

Annual income 
It is the amount your dependent will need to maintain their standard of living as of today. This should be enough to cover your rent or mortgage, home maintenance and repairs, home improvements, household items, and real estate taxes and insurance. It should also include health and auto insurance, utilities, clothing, food, transportation and auto maintenance costs, plus child and dependent care, recreation and entertainment, and any other expenses they might have.

Income your dependents will have when you are gonespan This will include your spouse’s salary if working outside the home and investment income from all of the accounts you currently have. Do not include the insurance proceeds as income here.

The difference between what your dependents need and what they will have

Deduct annual income from dependents income and you will have determined how much more they will need to live comfortably.

Once you know how much they will need, factor the equation into how much you can afford to invest. Be certain to ask about how the insurers calculate their rates so you pay the lowest premium possible for the best coverage. Shop around, as rates do vary from insurer to insurer.

Determining Risk Group

Insurance companies generally divide us into four risk groups, preferred, standard, substandard or uninsurable.

Preferred – You are a low risk. You are not sick; don’t have a high-risk job or hobby, have a clean bill of health. You pay a lower premium.

Standard – You are an average risk. There might have had been some health issues in the past, but don’t have a terminal illness or a high-risk job or hobby. You pay an average premium for similarly situated insured.

Substandard – You have a high-risk job, such as pilot, scaffold worker or diver, or you have a chronic illness like diabetes, heart disease or high blood pressure. You pay a high premium.

Uninsurable – You have a terminal illness thus are a high risk. Insurer will be reluctant to sell you a policy. Take note that the categorization may differ from company to company, so shop for insurance with other companies whatever the ‘label’. If you have or had an illness or health condition, it is best to get in touch with a professional who deals with and get you better quotes from different insurance companies. Once you are rated “substandard,” you must disclose it to all the other insurance companies when you apply for coverage.

Factors affecting the cost of Life Insurance premium

Life is precious and we make efforts to protect it from different circumstances. The cost of life insurance premium is determined by the level of coverage we require. The insurance companies also take certain criteria into consideration while calculating the premium. Below are some of the points listed which affects the life insurance premium.

  1. The level of coverage a buyer would prefer to buy, the higher the coverage, costlier becomes the life insurance policy.
  2. The health condition of the policy buyer also helps in determining the cost of the life insurance plan.
  3. The age and sex of the applicant matters while calculating the premium. The older you are the premium becomes costlier. And for females the cost of the premium is slightly cheaper because as per the analysis women live longer than men.
  4. Mortality cost is the cost of paying claims to the beneficiaries of insured people. The cost for most insurance companies has declined over the years. This means there is a longer period to collect premiums and the death claims are paid out later than originally anticipated. Still companies have to be careful while selecting the new policyholders who are basically healthy. They should charge rates which reflect the actual mortality risks of those people who have serious health problems or who engage in potentially dangerous activities. Otherwise, they might have higher than expected costs for death claims, which could cause financial difficulties.
  5. Operations cost, the cost of operating the insurance company and selling its products. These costs includes marketing costs like commissions, operating sales offices, advertising expenses, etc and non-marketing costs like the cost of constructing and maintaining company buildings, salaries of officers and staff, etc.
  6. The return on investments, the Insurance companies invest money until they need it to pay claims or expenses. The good investment returns may help pay off their expenses which might ultimately reduce the cost of insurance premium. This will enable them to sell policies at lower premiums and compete more effectively against other insurance companies.
Claiming Life Insurance benefits

Sounds simple, Life insurance pays benefits to the beneficiary listed on the life insurance policy in case of death of the policyholder. But the payments are not issued automatically when life insurance companies are not informed immediately when their policyholders die. Just like in any other insurance, you have to file a claim if you wish to collect the benefits.

Intimate your insurance representative or broker. He or she can help you fill out the necessary forms and act as an intermediary with the insurance company. Although your insurance professional can assist you with the details of filing your claim, you will find it helpful if you keep all the policy papers ready beforehand.

If you do not have an insurance professional or do not know who the deceased’s representative was, you can directly deal with the insurance company. Call or write to its nearest office to ask about the procedure that should be followed. As a beneficiary, if you need to collect the benefits of a life insurance policy, filling out paperwork is probably the last thing on your mind. Life insurance companies and life insurance brokers try to make the process as easy as possible, however there are certain pieces of information and documents that are required to make the claim. You will need to provide to the life insurance company or life insurance representative: ·An original, or certified copy of the policyholder’s death certificate · Proof of identity as the beneficiary ·A familiarity with the policy so that you are aware of your payment choices Generally the life insurance claim process is very quick. You complete a proof of death form and attach the death certificate. If there is more than one beneficiary for the life insurance policy, you will each need to fill out your own forms as part of the same claim. Once the claim is submitted, you should receive a settlement in fairly short order. You may receive a lump sum or installments, according to your choice or the policy owner’s prior decision, or you may be able to leave the proceeds on deposit. The money will accrue interest until it is withdrawn. The insurance company will handle the settlement as instructed. The only thing that can really hold up a life insurance claim is if the death certificate is a copy or is invalid .

When a life insurance policy lapses?

While buying a life insurance policy make sure the policy meets your needs today and also in the future. What might happen if you change your mind and plan to cancel the policy. If you decide to cancel it after a few days you might still have the option of canceling it. But if it is more than weeks, months, or years and then, you realize you don’t want the policy anymore. You are only left with the option of lapsing it, i.e., you stop paying premiums.