Life Insurance | Everything you need to know

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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 an 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.

Life Insurance
What is Life Insurance?

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, the need to build 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 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 deductions 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 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.

Tax Benefits of Life Insurance (Section 80C and Section 10D)

If you buy life insurance, you qualify for a tax deduction up to ₹ 1.5 lakh annually under section 80C of the Income Tax Act, 1961. -The payout received at the time of maturity will be tax free subject to the conditions given in Section 10(10D) of the Income Tax Act, 1961. Tax laws are subject to amendment from time to time.

Types of Life Insurance

Types Of Life InsuranceCoverage
Term Insurance PolicyPure Risk Cover
Endowment PoliciesInsurance Cover + Saving
Non-Linked Participating Endowment PlanInsurance cover + Sum Assured
Unit Linked Insurance Plans (ULIP)Insurance + Investment Benefits
Non-participating Non-linked endowment planFixed Insurance Cover

1. Term Insurance Policy

This is the simplest type of life insurance policy. It pays your family a sum of money in case of your death, during the policy term. It does not pay anything if you survive the policy term. However the premiums on this type of policy tend to be low. For instance a monthly premium of just ₹ 1,000 can get you a life insurance cover of close to 1 crore rupees (for a 30 year old, non-smoker) for 40 years.

2. Endowment Policies

Policies other than term life insurance, are called endowment policies. These can in turn be divided into participating, non-participating and unit-linked.

3. Non-Linked Participating Endowment Plan

This type of policy lets you ‘participate’ in the profits of the life insurance company and get a share of them. It pays your family a sum of money on your death but it also pays you an accumulated sum, if you survive the policy term. The survival payment or benefit is linked to the profits of the life insurance company.

4. Unit Linked Life Insurance Policy (ULIP)

This policy pays an amount on your death and a maturity amount if you survive the term. However unlike a traditional participating policy, the maturity amount is more dependent on your investment choices than the profits of the life insurance company. Your policy is invested in funds and divided into ‘units’ similar to the units of a mutual fund. You typically get a lot of freedom to choose the type of fund your money will be invested in.

5. Non-participating Non-linked endowment plan

A non-participating policy defines exactly how much your family will get on your death and how much you will get on the maturity of the policy. There is no variable or investment-linked component. You know before-hand exactly how much you will get, in each scenario.

How to pick the best life insurance plan?

You can keep in mind these points while choosing a life insurance plan for yourself

  • Arrive at an adequate sum assured. Ideally, it should be at least 15-20% of your current annual income
  • Buy suitable additional benefits, as per your requirement like an accident coverage and critical illness coverage
  • Choose a plan that provides regular income to your family after your death
  • Remember, low premiums do not mean the best policy. Look for other factors such as the claim settlement ratio of the insurer, the ease of buying the policy, etc.

Which is the Best Life Insurance?

Well, different types of policies suit different types of people. Someone who is willing to take some risk and knows a little about investment may go in for a ULIP. Someone who only wants the protection aspect of life insurance may prefer a term insurance policy.

You can find some nifty optional features offered by ICICI Prudential iProtect Smart Term Insurance:

  1. Critical Illness Benefit**: This feature pays you a certain sum of money on the diagnosis of a critical illness like heart attacks and cancer. With providers such as ICICI Prudential, a defined amount is paid regardless of your actual medical expenses. This saves you the hassle of showing bills and getting reimbursed, as with medical insurance. The amount will not be demanded back from you, if you survive the illness. If your life cover exceeds the critical illness amount, the balance cover will remain intact.
  2. Personal Accident Benefit+: Accidents are all too common in India with our unruly traffic and tough driving conditions. This feature pays your family an additional amount if your death is due to an accident.
  3. Steady Income after death: Many families have a tough time managing monthly expenses after death. Hence, companies like ICICI Prudential Life Insurance give you the option of giving your family a steady income after your death rather than a lump sum which they may have difficulty managing.

You can choose all or any of these options depending on what is offered to you by the life insurance company.

How much Life Insurance cover do I need?

This depends on individual circumstances. However, as a rule of the thumb, the life insurance cover should be at least 10 times annual income. For example, if your annual income is ₹ 8 lakh, your life insurance cover should be at least ₹ 80 lakh. Although 80 lakh – 1 crore can seem like a huge sum, you can get it for a monthly premium as low as ₹ 1000 (for a 30 year old, non-smoker). Medical bills also increase with time and so a large amount is needed to cover future medical costs.

Factors that affect life insurance premium 

Your life insurance premium depends on several factors. The main factors contributing towards the calculation of life insurance premium include your age, the type of coverage you are opting for, the amount of coverage, and personal factors such as smoking status, occupational status, etc. 

What are the advantages of buying a life insurance plan online vs. offline?

When you buy life insurance online, you get the following advantages: 

1. Cost efficiency: You may get online discount when you buy online.

2. Convenience: You can buy insurance from the comfort of your house.

3. Customization: With several optional benefits available, you can customize your insurance policy as per your needs

4. Customer support: When you buy a policy online, you have access to the customer support round the clock

What are the payout options available for ICICI Pru Life Insurance Plans?

ICICI Pru Life Insurance Plans like ICICI Pru iProtect Smart offer flexible payout options that cater to every type of policyholder. You can choose from 4 payout options. These are:

Lump-sum:The agreed life cover is paid as a fixed amount to the nominee in case of policyholder’s unfortunate death.

Income: This option provides claim payout in equal monthly installments so that family’s monthly financial needs are taken care.

Increasing income: Your nominee will receive monthly installments for 10 years. Income amount will increase by 10% per annum simple interest every year. This option provides a 45% additional life cover.

Lump-sum plus income: The life cover gets paid in two parts as you mention during policy inception. You can choose to receive half of the amount in a lump sum manner and the rest as equal monthly installments.

Life Insurance FAQs

⭐ What are the benefits of Life Insurance?

There is a wide range of benefits of owning life insurance.

  • Financial safety for family and loved ones
  • High life cover at affordable premiums
  • Tax benefits^ under section 80C and section 10(10D) of Income tax act, 1961
  • Tax free payout subject to condition mentioned under section 10(10D) of Income Tax Act, 1961.
  • Assured income through Annuity plans

⭐ What is the Life Insurance term that I should choose?

Selecting the tenure of your term insurance plan is as important as the amount of cover. A life insurance policy is usually taken for covering financial risks until the end of your working age. People usually work till 58-60 years. However, in today’s times, many work till 65-70 years of age if health condition permits. So, it is better to choose a life insurance term that lasts till you have cleared all your financial liabilities like various loans, education, and marriage of children.

⭐ What Life Insurance plan should I buy?

There is a life insurance plan for every possible financial goal. If you are looking for a simple cover to shield your loved ones against financial risks, choose a term plan. Whole life Insurance plan offers life insurance coverage to the life assured for the whole life. Those looking for a combination of insurance and investment opportunity, a Unit linked insurance plan (ULIP) is the ideal choice. If you want insurance and comfort of savings, select an endowment plan. Periodic returns with an insurance cover can be realized from a money-back plan. A child plan is best for fulfilling your child’s life goals like education, marriage, etc.Plan your retirement and retire gracefully with a retirement plan.

⭐ Is proceeds from Life Insurance taxable^?

Proceeds from Life insurance policy is exempt under section 10(10D) of the Income Tax Act, 1961 if:

i. Sum paid on Death except in case of a keyman policy

ii. Sum paid other than in case of Death (i.e., surrender/partial withdrawal/maturity), if

  • For policy issued between April 1, 2003 to March 31, 2012: if Premium does not exceed 20% of Sum Assured (SA to premium is 5 times or more)
  • For policy issued post March 31, 2012: if Premium does not exceed 10% of Sum Assured (SA to premium is 10 times or more)

⭐ Should I buy Life Insurance?

Life insurance is a great financial tool. From offering protection against financial risks, over the years life insurance has evolved to provide options for building wealth and generate tax-free^ maturity.You should buy life insurance if you meet any of the following:

  • Have financial dependents
  • Are beginning a family
  • Have a mortgage or other significant debt/loan
  • Are part of a non-child working couple family structure
  • Have children
  • Have specific long-term financial goals

⭐ What is the “Sabse Pehle Life Insurance” campaign?

“Sabse Pehle Life Insurance” is the first joint mass media campaign launched by the Life Insurance Council of India. This campaign aims to create awareness about the importance of Life Insurance for Indian households.

⭐ Why would a life insurance claim be denied?

Some common reasons for life insurance claim rejection are providing false information in the application, lapse of the policy due to premiums not paid on time, type of death not covered in the plan etc.

⭐ How long does life insurance take to payout?

Life Insurance claim settlement period may vary as per life insurance Company. New-age Term Life Insurance plans now settle claims within one day of filling# like IPRU’s iProtect Smart plan.

⭐ Is life insurance necessary for senior citizens?

Buying life insurance is not necessary for senior citizens unless their children or spouse are dependent on them or they have existing loan or debt which is yet to be settled.

⭐ What is the minimum & maximum age to buy Life Insurance?

The minimum and maximum age to buy a life insurance policy may differ depending on the company and the plan you choose. The minimum and maximum age to buy our best-selling~~ term insurance plan, ICICI Prudential iProtect Smart, is 18 years and 65 years respectively.

⭐ Can a minor be appointed as Nominee in life insurance?

A minor can be appointed Nominee, but it is recommended that an appointee be a person who has completed the age of majority.

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