Life Insurance is a contract between an insurance policyholder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium after a set period or upon the death of an insured person.
What is Life Insurance?
Life Insurance acts as financial protection for your family in case of your death or a payment made to you on surviving the policy term. In return for this payment, you make periodic fixed payments to the life insurance company. In certain types of policies, there is the option to get critical illness benefits or create additional protection for your family if you pass away from an accident. You can read about these features and types of life insurance policies below.
Why do I need Life Insurance?
Illness Protection: As you head towards retirement, life insurance policies that cover critical illnesses become important. Some life insurance policies offer you features that cover you from severe ailments like heart attacks and cancer. Buying these types of policies can protect you from some of the world’s most deadly diseases.
Family Support: If you have a spouse and kids, building a safety net for them becomes important. You would want to protect them from financial hardship in case of your untimely demise. You can also get good returns with life insurance by investing in some policies.
Savings Growth: In your early years of working, some life insurance plans can be a useful way to save and invest your money. ULIPs or Unit Linked Life Insurance Policies allow you to invest in equity and debt markets. Under current tax laws (which are subject to future amendment), you also get tax benefits for investment in life insurance policies and on the maturity amounts of such policies.
Debt: We often take large loans in our working life, especially when it comes to buying a house. An untimely death while the loan is still due can have grave economic consequences for our families. In such a scenario, life insurance money can be used to pay off the loan. Policies taken under the Married Women’s Property Act, 1874* are also immune from attachment by creditors.
Important life insurance terms you should know
1. Who is a policyholder?
A policyholder is a person who owns the life insurance policy. Usually, they are the one insured under the policy. However, sometimes, the policyholder may be a relative of the insured, a corporation or a partnership. The policyholder has the right to exercise all privileges that are provided in the life insurance contract.
2. What is Sum Assured?
Sum assured is a predetermined fixed amount that a policyholder’s family receives in case of policyholder’s death. It is basically the total sum policyholder is covered for. Sum assured is chosen by the policyholder and is always mentioned by the company in the policy details.
3. Who is a nominee?
In life insurance parlance, a nominee is a person who receives the sum assured and other benefits in case of an insured person’s death. The choice of nominee depends totally on the policyholder and the name is usually mentioned while buying the life insurance policy. In most cases, the nominee is someone from the family.
4. What is the difference between a policy term and premium payment term?
A policy term is the time period for which you are covered. A premium paying term is the duration for which you have to pay the premium of the policy. For instance, the policy term as a whole can be of 50 years but the premium paying term can be of 25 years. This means that you need to pay a premium for 25 years but you are covered for 25 additional years.
How does Life Insurance work?
Let’s say Mr X has a 1 crore ICICI Pru iProtect Smart life insurance policy in place. He has paid insurance premiums for three years. In this example, we will take the premium as ₹ 490^^ per month which comes to ₹ 17,640 in total premiums paid. Now if he passes away in the third year, his family will get an insurance payout of ₹ 1 crore. In other words, the insurance payout will be as per the policy cover regardless of when the insured passes away in the period covered.