LIFE INSURANCE BASICS

How does life insurance work?

Life insurance is an extricable part of any robust financial plan. In order to choose a policy that provides you the exact cover you and your family need, it’s important to understand the intricacies of available plans. Here’s what you need to know to get started:

When you buy a policy

  1. When you buy a policy, you have to take a series of decisions – what policy to buy, how much it will cover, how long it will last, etc. It thus acts as a contract between you and the insurance company. How the insurance company serves you depends on the type of policy you buy. For example, do you want to be insured only for a certain period of time? Do you want additional benefits? Do you want to earn some money during the insurance period?
     
  2. The life cover you opt for is the amount the insurance company promises to pay you in case of an unexpected death. This needs to be a well-thought out decision, keeping in mind many factors such as your lifestyle, income, savings, and debt.
     
  3. Timing plays a big role here. The insurance is valid only for a certain duration of time. Some plans last your whole life, while some last only for a certain period – 10 years, 20 years, and so on. Usually, beyond this duration, you cannot claim the insurance money.

Related: All you need to know about buying life insurance

Paying premium

To buy an insurance cover you have to pay a certain amount regularly. This is called Insurance Premium. Consider this as the fee the life insurance company charges for providing you the life cover. You have to pay this amount every year till the policy lasts. For example, if you buy a term plan for 20 years, you have to pay a certain premium every year for 20 years. The amount you pay as premium depends on the type of policy, the life cover, your age, and your medical condition.

How is the premium decided?

Before approving your insurance, insurers carry out the process of Underwriting. It involves assessing risk by ensuring that the cost of cover they intend to provide to you is proportionate to the risks they face by doing so. To do this, they require you to fill up an application form and undergo a medical examination, or at the very least, fill up a questionnaire. If it turns out you have a higher risk of developing chronic illnesses, or that you work in a high-risk occupation, you may be required to pay extra premium to cover the risk you pose. If you are insured through your company, however, your insurer may do away with underwriting.

Claiming your money

In case of an untimely death, the insurance company will pay you the entire coverage amount. This is why it becomes essential to choose the duration of the policy very carefully, and to buy cover as soon as possible.

Related: All you need to know about insurance claims

Premium refunds

So what happens if an insurance policy lapses? Do you get your premium payments back? The answer depends on the type of policy [SN1] you have chosen. In case of a term plan—the most common and basic of life insurance plans—you do not get the premium payments back. However, there are plans which promise to make a certain payment even after the policy expires, called Term Plans with Return of Premium.

Insurance policies are for your benefit. It is important you understand how they work before you get one. This will help you take wiser decisions, thus securing the financial future of your loved ones.