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What is Life Insurance Plan and how does it work?

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What is Life Insurance Plan and how does it work

If you are new to life insurance terms and definitions, then you have approached right place. Life Insurance is a contract between individual and an insurance company. In case of demise of life insured, the insurance company would pay a sum assured as a benefit to the nominee of the life insurance policy. There are several other benefits too. Understanding the life insurance definition would help you in opting a right life insurance plan.

What is Life Insurance Plan?

Life insurance plan is an agreement between the insurance company and life insured wherein in case of demise of life insured, the insurance company would pay a sum assured to the nominee. Beyond this, insurance company would also provide survival benefits, maturity benefits, periodic payout benefits etc., depending on the type of the life insurance chosen by the policyholder.

How does Life Insurance work exactly?

Let us explain with an example on how exactly life insurance policies would work.

Mr. Rajesh, 40 working in an MNC company has taken a term insurance plan for Rs 50 Lakhs sum assured from Aviva Life Insurance in 2015. He opted for regular yearly premium. He has kept Mrs Ramya (wife) has nominee in the insurance document.

Unfortunately, Mr. Rajesh had died in 2021 due to covid.

Mrs. Ramya has submitted the claim along with various documents required.

After verification, the insurance company has paid the sum assured Rs 50 Lakhs to Mrs. Ramya towards death benefit.

Benefits of Life Insurance Plans

Once you understood the life insurance policy, meaning, let us move towards understanding various benefits in Life Insurance Plans

1) Financial Security with Risk Coverage – Life insurance provides risk coverage. In case of unfortunate death of the life insured, the nominee would get sum assured. This provides financial security to the family members.

2) Long-term Savings – There are various life insurance + savings plan. Such savings plans would help individuals to accumulate wealth over a period of time along with having risk coverage.

3) Market linked gains – Life insurance plans like Unit Linked Insurance Plans (ULIPs) have risk coverage and provide gains which are linked to the market. In the medium to long term, ULIPs can be used for accumulating wealth.

4) Income Tax Benefits – While life insurance policies provide risk coverage and savings, it also provides income tax benefits. Premiums paid on life insurance policies are eligible for income tax benefit u/s 80c and the maturity amount is exempted u/s Section 10 (10).

Various Types of Life Insurance

Since you understood life insurance meaning and benefits, let us understand the various types of life insurance plans.

Term Insurance Plans (pure risk coverage)

Whole Life Insurance Plans

Endowment Plans

Money Back Plans

Unit Linked Insurance Plans (ULIPs)

Child insurance plans

Retirement Insurance Plans

Each type of insurance plan works differently, hence one should understand them in detail before opting such plans.

How to choose a good life insurance policy suitable for you?

Now you understood definition, benefits and different type of life insurance plans, you might be wondering how to choose a good life insurance policy. Here are a few tips on picking up an ideal life insurance plan suitable to you.

1) Check your objectives as to why you are opting for life insurance plan

2) Evaluate how much life insurance you might need

3) Compare the life insurance plans available in the market

4) Pick a life insurance policy from the insurance company which has a high claim settlement ratio (CSR)

5) Further filter them and opt for a life insurance plan that has low premium.

6) Visit life insurance website and go for online life insurance plans. If you want to go with offline insurance plans, you can reach out to any insurance agent who can help you. Generally premiums are slightly higher in offline insurance plans compared to online plans.

How to buy a life insurance policy online?

Each and every insurance website would have their own process. Let us explain you a simple process which majorly covers across the life insurance portals.

1) Visit insurance company website

2) Visit “Buy online”

3) Select the insurance plan you wish to buy

4) Enter your personal details like full name, date of birth, address, mobile number, email ID, smoker/non-smoker, pre-existing diseases, annual income etc.

5) Enter how much life insurance amount you want to buy and the premium payment term

6) Select any insurance riders (if available) you wish to take

7) Click on “Calculate Premium” and make the payment

Insurance company might call you for any queries they might have and then issue a life insurance policy. You would get an SMS + email containing the details of the policy issued. You would also get a physical copy of policy documents within 2-3 weeks’ time frame on the communication address provided.

How to claim life insurance amount in case of death of policy holder?

In case of unfortunate death of the policy holder, nominee needs to approach the insurance company and provide the following documents

Original Insurance Policy Documents

Original Death Certificate issued by municipal authorities. In case original not available, attested death certificate of municipal authority

Death claim application form (Form A)

NEFT mandate form along with cancelled cheque or bank account passbook

Nominees photo ID proof like Aadhar Card, PAN Card, Passport or Voter Identify card etc.,

Insurance company would review these documents and would process the payment.

Understanding about life insurance plans, their benefits and various underlying definitions would help you to take an ideal plan suitable to you.

Suresh KP

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