Life insurance

What is life insurance?

Life insurance is a contract between the individual (policy owner) and the insurance company (insurer), where the insurer agrees to pay a particular sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.

Life insurance business means the business of effecting contracts of insurance upon human life, including any contract whereby the payment of money is assured on death (except death by accident only) or the happening of any.

Risk covered in a life insurance policy is death of the policy holder(s) before the stipulated date.

Types of life insurance policies

With the advent of private life insurance companies in Indian life insurance market, the types of insurance products available to Indian population have changed dramatically. In this section, we provide you brief details of very basic insurance products. These products may be modified in order to meet various needs of the buyers. What will be offered in the market place will usually be a hybrid product.

  1. Term Insurance:
  2. Insurance is provided for a specific term, such as 30 years. If the policyholder dies during that period, a pre-specified sum of money is paid to the beneficiaries. If policyholder outlives the term, no money is paid out at the end of the term. There is no investment component in a pure term insurance product and hence it is often most inexpensive option to get substantial death benefit cover per rupee of premium paid.

  3. Whole Life Insurance:
  4. A form of term insurance in which the policy is in effect for the entire duration of the policyholder's life. There are several variations in whole life insurance, for example, option to pay premium for a limited period and with and without profit plans.

  5. Unit Linked Insurance Plan (ULIP):
  6. Following is the abridged version of FAQ on ULIPs given out by IRDA: A ULIP is a life insurance policy which provides a combination of risk cover and investment. The allocated (invested) portions of the premiums after deducting all the charges and premium for risk cover under all policies in a particular fund as chosen by the policy holders are pooled together to form a Unit fund. Most insurers offer a wide range of funds to suit one's investment objectives, risk profile and time horizons. Different funds have different risk profiles. The potential for returns also varies from fund to fund.

  7. Endowment Policies:
  8. One of the most popular traditional insurance plans, these are insurance policies in which a lump sum is paid out at the end of the pre-specified term, or when the policyholder dies whichever is earlier. Traditional with-profit Endowment Policies pay out a specific sum, called 'the sum assured'. This amount can be increased through investment performance through bonuses declared from time to time. Since this policy type has additional benefits, it carries higher premium costs as compared to a term insurance plan.

Life Annuity

A life annuity is a contract in which an insurer agrees in consideration of a certain payment or payments, to pay to the beneficiary, a fixed sum during a given period of years or until his death. The periodical payment is called the annuity and the person who receives it is the annuitant.

Life annuities are mostly pensions provided by the annuitants from out of their own savings. A person who has built up a capital sum by life insurance or otherwise may wish to enjoy the whole of it himself during the rest of his life. It is uncertain how long he lives. It is only an insurer who can calculate the value of the risk, receive the lump sum and agree to pay the appropriate annuity throughout the annuitant's lifetime or for any fixed period.

Types of annuity plan offered by most of the life insurance companies are listed below:

Life Annuity

Payable for annuitant's life.

Life Annuity with return of purchase price

Payable for annuitant's life and return of original purchase price to beneficiary on annuitant's death.

Life Annuity guaranteed for 5, 10, 15 years

Payable to annuitant/beneficiary for 5/10/15 years irrespective of the annuitant's existence. If annuitant lives beyond the stated years, annuities payable for his/her life.

Joint Life Last survivor

Payable to annuitant for life and after death to his/her spouse (if alive) for life

Joint Life Last survivor with return of purchase price

Payable to annuitant for life and after death to his/her spouse (if alive) for life. Original purchase price returned to beneficiary on spouse & annuitant's death.

Group Life Insurance

Insurance companies have structured products that cater to large homogenous groups such as group of employees of a company. Group life insurance has several advantages over individual policies.

  • Group members need not undergo any medical examination either at inception or during renewal subject to the limits applied by an insurance company. For higher sum assured, however, the insured has to undergo the required medical examination.
  • Also unlike individual policies, there is no need for financial underwriting if the group is for employees. The employer would be able to confirm the financial status of his employee.
  • Administration costs of group insurance covers are low and insurer usually passes on this saving as reduction in premium rates.
  • Individuals need not worry about renewing the policy every year as the group managers take care of such issues.
  • Group insurance policies would have a higher critical illness cover than an individual plan
  • Group insurance policies may have wider scope than an individual policy such as covering gratuity, superannuation and so on.

Because of these advantages, group life insurance has become very popular.

New Pension Scheme (NPS)

From May 1, Indians have access to another investment avenue to plan for retirement in the New Pension Scheme (NPS).

Detailed write up and info on NPS

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