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What Is Life insurance?

What Is Life insurance?
February 27, 2024


Life insurance is a contract between a policyholder and an insurance company, where in exchange for regular premiums the insurance company promises to pay a lump sum amount to the beneficiaries on the death of the insured.

How insurance can be useful?

Insurance can prove advantageous in meeting several financial goals of the individual and his family. Here are some of the important ones:

  • Financial cover against loss of life, which makes sure your family can support itself in your absence
  • Child's education
  • Child's marriage
  • Buying a house
  • Pension or regular income post-retirement
  • Post-retirement income for NRIs

These are just some of financial goals you can achieve with the help of life insurance. More importantly, life insurance plans are flexible. This means although you won't find an insurance plan dedicated to buying a house, you can buy an endowment plan (traditional or market-linked) with the aim of paying for a house at a future date.

Types of Life Insurance

Broadly, there are five basic types of life insurance plans:

  • Term insurance:

    Term plans are the most basic form of life insurance. They provide life cover with no savings / profits component. They are the most affordable form of life insurance as premiums are cheaper compared to other life insurance plans.

  • Endowment plans:

    Endowment plans differ from term plans in one important aspect i.e. maturity benefit. Unlike term plans which pay out the sum assured, along with profits, only in case of an eventuality over the policy term, endowment plans pay out the sum assured under both scenarios death and survival.

  • Unit linked insurance plans (ULIP):

    ULIPs are a variant of the traditional endowment plan. They pay out the sum assured (or the investment portfolio if it's higher) on death/maturity. Since ULIPs invest in stock markets they are well-suited for individuals with appetite for risk.

  • Whole life policy:

    A whole life insurance plan covers a policyholder over his life. The main feature of a whole life policy is that the validity of the policy is not defined so the individual enjoys the life cover throughout his life.

  • Money back policy:

    This is a variant of the endowment plan. A money back policy gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.

  • Retirement plans:

    These life insurance plans are designed to serve as a retirement corpus. Remember to make your spouse the nominee of the policy, so that he/she gets the sum assured in the event of the unforeseen. This will ensure a strong financial foothold. The right pick of life insurance also takes care of your medical expenses during your retirement.

  • Savings plans:

    This category of life insurance plans entitles you to a savings plan. The best savings plan helps you save on a regular schedule which you get back as a lump sum upon maturity of the policy. These plans are ideal to fund your life goals like child’s education or wedding or purchasing a property.

  • Child plans:

    These plans are specifically crafted to support your child’s dreams and future needs. They build a corpus as the education fund for your child, alongside the life cover. If you are looking to secure your child’s future, this is the kind of plan you should invest in.

How much life insurance do I need?

Although, it is not possible to attach a rupee value to human life, it is nonetheless important for you to estimate the value of your life in terms of what it will take for your family members to be financially independent in your absence. In insurance parlance this is the sum assured and the financial estimate of the value of your life is called Human Life Value or HLV.

Calculating the HLV involves two steps:

The fundamental method of calculating the human life value involves two steps:

  • Add up all expenses like household expenses, lifestyle expenses among others
  • Calculate future liabilities (like outstanding loans) that your family members will have to pay off in the event of your death.
  • Once you add the two figures, you get your human life value, which in effect is the sum assured for your life insurance policy.

Points to remember:

  • There is no one-size fits all life insurance plan. Your life insurance plan does not have to be like your friend's or colleague's or relative's insurance plan. Your needs and goals are different and this must reflect in your insurance plan.
  • The earlier you start the better it is, since life insurance premiums are lower at an earlier age and begin to rise as you age
  • Go for term plans - they are the most affordable form of life insurance which means you get a larger life cover at a lower premium
  • Use life insurance riders effectively to enhance the effectiveness of your life insurance policy. A rider is an add-on to the primary policy, which offers benefits over and above the policy subject to certain conditions.
  • Feel free to talk to an experienced and competent agent about the policy details and whether it is suited to you.

How do I choose the right Life insurance for me?

Once you have identified the need to take life insurance, you should know about getting some basic steps right to select the best life insurance policy.

Select the best life insurance plan/policy in 3 easy steps

  • Engage an insurance advisor

    While this may seem trivial, engaging a reliable and competent insurance advisor at the initial stage in your quest for life insurance is critical. Most individuals are not capacitated to take a decision by themselves and need the expertise of an insurance advisor.

  • Calculate the life cover

    The insurance advisor will help you calculate the amount of life cover - or the sum assured. He will assess sources of your income, number of your dependents, your debts and liabilities and your expenses based on your lifestyle and arrive at a life cover. He will also decide the best plan be it - erm plan, endowment plan, unit-link plan or a combination of plans, to help provide you with an optimum life cover. You can also check your Life insurance need with a calculator online, which is a quick and easy way to find out.
    Likewise, if you have other needs like planning for your child's education or marriage, pension for your retirement or a woman's insurance plan for women, trust your advisor to do the math and come up with an ideal solution.

  • Compare insurance plans

    Since there are many insurance companies in the market offering a variety of plans, you need to be sure you select the most suitable one. The insurance advisor will do the homework by comparing life insurance plans from various insurers across relevant parameters recommending the most apt plan based on your needs.

What are the Benefits of Buying Life Insurance?

Life insurance offers three major benefits, namely protection, long-term savings, and investment. Here is an insight into each of these advantages.

1. Protection

Life is unpredictable and full of uncertainties. The risk of an untoward incident such as death cannot be eliminated. In such a situation, your family will have to face financial constraints caused by the loss of your regular income. Investing in a life insurance plan provides the safety net during such times. Your insurance provider is liable to pay the beneficiary or nominee the pre-determined death benefit, thus keeping your family protected even in your absence.

2. Long-term savings

It is important to consider life insurance if you are seeking to make long-term savings. Such a product helps you to save systematically and build a corpus for your future. The accumulated amount may be used for multiple purposes, such as purchasing a new home, funding your child's future education or meeting his marriage expenses, among many others. What's more, life insurance plans also offer regular pay-outs in the form of annuities, and is therefore, an excellent method to meet your retirement goals.

3. Investment

Unit-Linked Investment Plans (ULIPs) offered by life insurance providers are primarily investment instruments. This market-linked product acts as a tool to create wealth. ULIPs offer significant returns on the premiums paid towards the insurance policy. Most life insurance plans provide considerable returns during maturity, thus making it an attractive investment vehicle.

Besides the major aforementioned advantages, life insurance plans offer a host of other benefits. You may claim tax deductions under Section 10, 80C, and 80CCC of the Income Tax Act, 1961 on the premium paid towards your insurance policy. You may also borrow a loan against your insurance plan in case of a financial crunch.

Buying life insurance plan is a necessity. While many invest in such a plan, not all are aware of the numerous benefits it offers. Life insurance plans help your family tide over difficult times and provide them with financial support in your absence. Besides, availing of an insurance policy inculcates the habit of disciplined savings, thereby enabling you to build a good corpus. You may, therefore, opt to invest in a life insurance plan and fulfill your obligations in the best possible way.

4. Financial Security

The most important benefit of life insurance is the financial security it offers to your loved ones. Upon the insured person’s death, a pre-specified sum assured is paid to the bereaved family to support them through the sudden financial struggles.

5. Tax benefits*

Your life insurance policy entitles you to certain tax savings. Annual premium payment up to Rs 1.5 lakh is exempted from tax, under section 80C of the Income Tax Act, 1961. In addition, while the death benefit is tax-free, the maturity benefit of policies with total premiums not exceeding Rs 5 lakh also enjoys tax exemption under section 10 (10D).

How to choose the best insurance policy?

To make the most of your life insurance, it’s important to choose the best policy according to your needs, convenience and affordability. To ensure that, figure out the amount of coverage you need and the type of plan that best fits your requirements. Asking yourself these two questions can be helpful here:

  • How long do you want to get a life cover for?
  • What are the life goals or priorities for which you need to save?

For example, if you are looking to build a corpus for your child’s higher studies, a child plan can be the right pick.

What is life insurance premium?

The life insurance premium is a stipulated amount of money you pay to the insurance company in a predefined schedule to receive the policy benefits in exchange. According to the plan you choose, premiums can be paid annually, half-yearly, quarterly or monthly and through options like single payment, limited pay or regular pay schedule.

Factors affecting life insurance premium

There are certain factors governing the life expectancy of the insured and the nature of the policy, which are considered parameters in determining your life insurance premium. They are:

  • Age: It’s the most important factor when it comes to life expectancy. Hence, younger policyholders enjoy lower premiums compared to their older counterparts.
  • Gender: Research studies suggest that women live longer than men and hence are eligible for lower premiums.
  • Medical Records: The amount of premium depends on overall health. A person with no past illness or health complications is considered less prone to untimely death and is entitled to lower premiums.
  • Lifestyle and Occupation: If one has an unhealthy lifestyle or is engaged in a risky occupation, he/she would have to pay higher premiums.
  • Smoking and Alcohol Habits: Smokers and alcohol drinkers are considered to be more prone to multiple health complications. Hence, they are charged with higher premiums.
  • Amount and Type of Coverage: The higher the sum assured, the higher the premium and vice versa. In addition, if you opt for additional riders like accident or illness coverage, premiums will increase. Also, you’ll have to pay more for a longer tenure of the policy. Lastly, term insurance policies offering only death benefit come with a lower premium compared to those with maturity benefits.

Why should i buy Life insurance online?

Buying Life insurance online is fast, efficient and cost effective. Companies have assessed the needs to their clients over the years and have now made insurance available online. Below are some of the advantages of buying insurance online:

1. Direct Buying

Customers deal with distributors when buying insurance online. Buying offline, they save the commission that would be paid to the distributor and hence it is cost effective. You eliminate the need of a third party and hence end up saving time and money.

2. Informed deal

Whenever you decide to buy a plan, you always have an option to compare the plans in terms of benefits offered, coverage, features, claim process, renewal etc. This way one can easily weigh the pros and cons and finally can choose the right insurance plan that meets his/her needs.

3. Access to online reviews

Customers always leave an online review about their experience with the company. You can have access to these reviews and ensure you have all the details about the product and the company before making a decision.

4. Automated services

The online platform isn't restricted to sale only, instead, it is a fast and competent servicing channel at the same time. The policyholder can avail the online services like download the policy document or brochure, get prompt insurance quotes online, when the policy lapses, renew it online, pay the annual premium online, track your investments, make claim whenever required etc. You can do this independently and swiftly.

5. Customer Support

You get access to 24x7 customer support when you buy insurance online. The company has a chat option on their website where you can ask the staff anything. You can get clarity to doubts, or look for the policy options and pretty much have access to any information online.

How much life insurance do you need?

A life insurance cover should typically be based on the beneficiary’s monthly income and expenses. To arrive at how much life insurance you need, assess your liabilities and the funds you require to support your life goals. Technically, there’s no set formula to calculate the ideal coverage. However, experts say, the life cover should be at least 10 times your annual income, which is supposed to take care of your family’s financial needs when you’re not there, taking into account the probable inflation rates. But while you opt for coverage, make sure you’ll be able to afford the entire premium schedule.

Which financial goals can you secure with life insurance?

There are three major financial goals that you can achieve with your life insurance. They are:

  • Financial protection: With the life cover provided by your policy, your loved ones will get solid financial support if you die an untimely death.
  • Corpus building: The death or maturity benefit offered by a life insurance policy helps in building a lump sum corpus. The wealth thus created can be utilized to fund your life goals, like buying a house, funding your child’s education, wedding etc.
  • Tax benefits: Life insurance comes with tax savings options. The annual premiums up to Rs 1.5 lakh are exempted from tax under section 80C of the Income Tax Act, 1961. The death and maturity benefits are also entitled to tax benefits subject to section 10 (10D)*.

Frequently Asked Questions (FAQ)

A. Is life insurance necessary?

Life insurance is basically an arrangement where you agree to pay premiums in return for a lump sum that takes care of any financial requirements you or your dependents may encounter, either after your death or your policy's maturity.
The lump sum taking care of future financial goals is a benefit. Benefits accruing on death of the insured are death benefits, those on survival of the policyholder are called maturity benefits.

Life insurance helps meet financial goals that are either foreseeable or urgent, especially in case of death of a benefactor or parent.
Most people perceive life insurance as a back up to tide over a crisis that may leave dependents in a financial lurch, which is a limited view.

B. What is an ideal life insurance cover?

There is no one glove fits all solution when it comes to how much life insurance each person needs. However, the generally acceptable strategy to assess your insurance cover is to get 10 to 18 times your annual income; depending on what age you subscribe to an insurance policy.
The amount of insurance cover you need depends on how many people are exposed to a financial risk which may arise due to death or some kind of contingency. The cover should be such that the dependents should be able to at least survive in your absence to a satisfactory level until such time they are self-reliant.

C. How much will life insurance cost me?

The purpose of life insurance is mainly two fold - first to provide financial protection to enable your dependents eke out a reasonable living in the event of your death, and the second to help you meet your financial needs and goals in the future should you survive till the maturity of the policy.
Whether you consider the death or maturity benefit of life insurance, how much life insurance you need will depend on your age at entry, how many dependents you have, the type of financial goals you have for the long term, inflation and other determinants.

D. At what age should I buy life insurance?

A vital aspect to note is that it is better to buy life insurance when you are relatively younger and healthier. As you age, the statistical probability of you dying increases and so do your premiums. Starting with low priced contributions helps you to be adequately covered or protected even at a later stage in life with minimal costs. It can also help meet many of your financial goals should you survive the term of the policy.

The optimal age range to buy life insurance in India is between 25 to 40 years of age. If you can start earlier, it would be even better, but on an average, people don't have income to pay for their premium since they are not working before they turn 25. The earlier you start on the 25 to 40 age spectrum, the better and more cost efficient buying life insurance turns out to be.

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ARN - ED/10/23/5575

Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Author Profile Written By:
Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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We at HDFC Life are committed to offer innovative products and services that enable individuals live a ‘Life of Pride’. For over two decades we have been providing life insurance plans - protection, pension, savings, investment, annuity and health.

*. Tax benefits are subject to conditions under Sections 80C, & Section 10(10D) and other provisions of the Income Tax Act, 1961. Tax Laws are subject to change from time to time.