What is Life Insurancea

What is Life Insurancea

Life insurance refers to a legal contract undertaken for a specific term (known as the policy term) between the insurance company (insurer) and the customer (insured). In this contract, the insurer provides a life cover (known as the sum assured) in exchange for a price (known as the premium). The primary purpose of life insurance is to provide financial security to the insured's dear ones by providing the sum assured in case of the untimely death of the insured during the policy term.

If the insured survives the policy term, they may receive a maturity benefit, and the policy is terminated, depending on the type of life insurance chosen. Thus, a life insurance plan can offer a death benefit, a maturity benefit, or both, based on the specific product.

Life insurance is a foundational element to protect your family financially. It acts as a financial saviour in the following scenarios:

• Death: Death leaves behind a financial and emotional vacuum. A lump sum payout as a death benefit under a life insurance plan will certainly support your family members in that hour of distress and give them financial stability to surpass moments of sorrow and meet ongoing financial obligations.
• Accident: Accidental deaths are a risk. Under a plan with an accidental death benefit rider, your nominee gets an additional accidental death sum insured over and above the base policy sum insured amount if the cause of death is an accident.
• Debts: Life insurance proceeds can be used by the family to pay off the deceased's outstanding loans (e.g., home loans, personal loans). This way, it safeguards your loved ones from a traumatic financial burden.
• Child's Future: Specific child insurance plans help you create a corpus to fund your children's future education expenses and important milestones well in advance.
• Old Age: Post-retirement life can be lived to the fullest with a regular flow of financial income in the form of a pension. A pension or annuity plan offers you a steady income, allowing you to pay premiums during your working years and enjoy a guaranteed or market-linked income in retirement.

How a Life Insurance Plan Works

A life insurance plan is a contract where financial protection is provided to the insured person's beneficiary in the event of their demise. Here's how the process typically works:

• Policy Selection: The individual chooses a suitable life insurance plan based on their financial needs, risk appetite, and future goals (e.g., term, endowment, ULIP).
• Premium Payment: The policyholder pays premiums—monthly, quarterly, or annually. These payments are calculated based on the policy's terms, the insured's age, health, and life expectancy.
• Coverage Period: The insurance coverage remains active as long as premiums are paid. If the insured passes away during this period, the policy pays out a death benefit to the designated beneficiary.
• Benefit Payout: Upon the insured's death, the beneficiary files a claim with the insurer. After verification and documentation, the company disburses the benefits to the nominee.
• Policy Maturity: Plans that are not pure term plans also offer a maturity benefit if the insured outlives the policy period, providing the policyholder with a lump sum (e.g., in Endowment or ULIPs).

Types of Life Insurance Policies

Life insurance plans can generally be classified into four broad categories:

• Term Insurance Plans: This is the purest form of insurance, which only offers a death benefit to your nominee if the insured dies during the policy term. There is no maturity benefit, and the premiums are typically the lowest and most affordable.
• Endowment Plans: These plans are designed as guaranteed or non-guaranteed saving plans, offering a death benefit or a maturity benefit, whichever event occurs first. They offer protection combined with savings.
• Unit Linked Insurance Plans (ULIPs): These products are a combination of a pure term insurance plan and an investment plan. A part of the premium is used for life cover, and the remaining is invested in market-driven funds. The returns are volatile and managed by the customer based on their risk-taking abilities.
• Money Back Plans: These plans offer periodic payouts to the customer at regular intervals during the policy term. The full sum assured is paid back in instalments (known as money backs). On death, the complete sum assured is payable to the nominee irrespective of any earlier payout made by the company.

Also Read: Invest Smart: How Life Insurance Can Grow Your Wealth

Key Factors that Affect Life Insurance Premium

Understanding the factors that affect your life insurance premium is crucial when shopping for the right policy. Here are the key elements that determine your premium:

• Age: Younger applicants usually pay lower premiums due to a reduced mortality risk and a longer premium paying period.
• Health: Your health and medical history are critical. Conditions like hypertension or diabetes can increase premiums. Insurers often require a medical exam to evaluate these risks.
• Lifestyle: Habits such as smoking or heavy drinking can dramatically raise premiums. High-risk activities like skydiving or racing also increase costs.
• Occupation: Jobs with higher risks, such as working in hazardous environments (e.g., deep-sea fishing, mining), can increase premiums.
• Policy Duration: Longer policy terms typically have higher premiums as they cover a more extended period during which a claim could be made.
• Coverage Amount (Sum Assured): The more coverage you choose, the higher your premium, as the potential payout from the insurer is greater.
• Gender: Actuarial tables show women statistically live longer than men and often receive slightly lower premiums.

General Exclusions and Limitations in Life Insurance Policies (IRDAI Requirement)

While life insurance provides essential financial security, it is important to understand that policies are subject to specific terms, conditions, and exclusions. Key exclusions commonly found in life insurance contracts include:

• Suicide: A claim arising from the insured's suicide is typically excluded, though some policies pay out a portion of the premium or sum assured if suicide occurs after a certain period (e.g., 12 months) from the policy's inception.
• War/Hostilities: Death directly caused by war, invasion, or hostilities is generally excluded.
• Hazardous Activities: Death while engaging in illegal or overly hazardous activities not disclosed in the proposal form.
• Material Misrepresentation: If the policyholder provided false or misleading information about their health, income, or lifestyle during the application process, the claim may be repudiated.

Policyholders must carefully review the policy document's detailed exclusion clause to be fully aware of the policy limitations.

How to Choose the Best Life Insurance Policy

Choosing the right life insurance plan involves understanding your financial needs and securing the future for your loved ones. Here’s how to select the best policy:

• Assess Your Needs: Identify the main reasons for buying life insurance, like income replacement, debt settlement, or funding future financial obligations. Use a Human Life Value (HLV) calculator for an objective assessment.
• Understand Policy Types: Get familiar with different categories of life insurance—term life, endowment, and ULIP. Each serves different financial goals.
• Compare Insurance Providers: Research insurers' reliability, financial stability (e.g., Solvency Ratio), and claim settlement ratio.
• Check Coverage Details: Ensure the policy covers your needs comprehensively, including the death benefit and any additional riders for disabilities or critical illnesses.
• Evaluate Premiums and Benefits: Compare costs and benefits across policies. Consider premiums, payment terms, and the ease of the claim process.
• Seek Professional Advice: Consult a financial advisor if you need help understanding complex details or to tailor advice to your specific situation.
• Review Regularly: Life changes (e.g., marriage, birth of a child, new mortgage) might necessitate policy updates. Regular reviews ensure that continued coverage aligns with your current needs.

Also Read: Life Insurance Vs Annuity: Understanding The Basics

Steps to Buy Life Insurance Online from Aviva Life Insurance

Purchasing life insurance online from Aviva Life Insurance is streamlined and user-friendly. Follow these steps to secure your policy:

• Visit the Website: Start by visiting Aviva India’s official website. Look for the life insurance products section.
• Choose a Plan: Explore the available life insurance products. Review the features of each plan to choose the one that best meets your requirements.
• Calculate Premiums: Use the online premium calculator provided on the site to estimate the cost of your chosen plan based on the coverage amount, term, and your age.
• Fill Out the Application: Complete the online application form. You must provide personal information, medical history, and a beneficiary designation.
• Undergo Medical Screening: Depending on the chosen plan and the amount of coverage selected, you might be required to undergo a medical examination to assess your health status.
• Review and Pay: Review your policy details and premium amount. If everything is in order, pay online through a secure payment gateway.
• Receive Policy Documentation: Once your payment is processed, you will receive your policy documentation via email. It is essential to review the final document carefully upon receipt.

How to File a Life Insurance Claim After the Policyholder's Death

Filing a life insurance claim after the death of a policyholder involves several key steps to ensure the process is smooth and the benefits are disbursed promptly. Here's what you need to do:

• Obtain the Death Certificate: Secure a certified copy of the policyholder's death certificate, as it's the primary document required for filing a claim.
• Locate the Policy Documents: Gather all policy-related documents, which include the life insurance contract and any other relevant paperwork.
• Contact the Insurance Company: Inform the insurer about the policyholder's death as soon as possible. Most companies have a dedicated claims service or helpline.
• Complete Claim Forms: Fill out the claim forms provided by the insurance company. Provide accurate and complete information to avoid delays.
• Submit Required Documents: Along with the claim form, submit the death certificate, policy document, and any other required documents like proof of identity and relationship to the deceased.
• Follow-up: Once the claim is submitted, contact the insurer for updates. If additional information is needed, provide it promptly to expedite the process.

Importance of Nominees and Assignees in a Life Insurance Plan

Designating a nominee is crucial for managing life insurance policies effectively.

• Financial Security: The nominee is the person named to receive the benefits. This ensures immediate financial support to dependents without legal delays.
• Simplified Claims Process: Having a nominee streamlines the claims process, allowing for quick and straightforward benefit disbursement.
• Protection for Minors: If the nominee is a minor, appointing an Appointee (Custodian) to manage the funds ensures the child's financial future until adulthood.
• Avoids Legal Issues: Without a nominee, the benefits might be tied up in legal disputes or probate, delaying distribution to the rightful heirs.
• Assignees: An assignee is a party to whom the policyholder transfers their rights in the policy (e.g., to a bank when taking a loan). Unlike a nominee, an assignee has a legal right over the policy proceeds.

Tax Benefits of Life Insurance Investment

Investing in life insurance secures financial protection and offers notable tax benefits under the Income Tax Act, 1961. Here’s how you can save on taxes:

• Income Tax Deductions on Premium: Premiums paid are deductible under Section 80C, allowing up to Rs. 1.5 lakh in deductions annually, which lowers your taxable income.
• Tax-Free Maturity Benefits: Under Section 10(10D), the payout on the maturity of a life policy is generally tax-free, provided the premium is within 10% of the sum assured for policies issued after 2012. (Note: New tax rules apply to high-value policies issued after April 1, 2023).
• Death Benefit: The death benefit received by beneficiaries is also tax-free under Section 10(10D), ensuring they receive the full amount without deductions.
• ULIP Benefits: Investment returns from the fund value of Unit Linked Insurance Plans are eligible for tax-free status upon maturity, subject to conditions under Section 10(10D).

YMYL Content Disclaimer (As per IRDAI Guidelines)
Disclaimer: Insurance is the subject matter of solicitation. The information provided in this blog post is for general informational purposes only and is not intended as financial, tax, or legal advice. Every individual's financial situation is unique. You must evaluate the policy terms, conditions, benefits, and exclusions carefully. We strongly recommend that you read the sales brochure carefully before concluding any insurance sale. Consult a qualified financial advisor, tax professional, or legal expert before making any investment or insurance purchase decisions. Past performance of any investment-linked product is not indicative of future results. Returns are subject to market risks.