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What is a Life Insurance Policy and How does it Work?

What is a Life Insurance Policy and How does it Work?

With uncertainties increasing all around, life insurance is proving to be an ultimate lifeline. Having an insurance cover ensures that the dependents of the bread-winner of the family do not suffer financially in their absence. An increasing number of people in India are realising the importance of having a life insurance policy, especially during the pandemic. COVID-19 has been a real eye-opener for a lot of people as to why and how a life insurance cover is a financial safety net in times of need.

Lack of awareness is one of the major impediments for widespread adoption of life insurance. The availability of different types of insurance products also confuses some people. But most life insurance policies function in a similar manner. Let us understand what is a life insurance policy and how does it work?

What is a Life Insurance Policy?

A life insurance policy is a contract signed between a policyholder and an insurance company. This contract determines the amount to be paid to the nominee after the policyholder's death. A life insurance policy works only if the policyholder has paid all premiums regularly. Precisely, life insurance policies are best known for providing life cover to the policyholder.

Life Insurance Policy: How does it Work?

A life insurance policy works like any other insurance policy: the policyholder has to pay a premium for a certain period of time. The premium you pay helps the insurance company cover your family's financial needs after your death. This allows your family to have access to financial support in case of emergencies. When the policyholder passes away and the life insurance policy is in force, the nominees receive maturity benefits that can be used to pay off any debts, liabilities or to manage the lifestyle expenses.

Different Types of Life Insurance Plans in India

Now that you know what is a life insurance policy, let us understand how many types of life insurance policies are available. Life insurance plans are based on your discretion. There are various types of life insurance policies that you can choose from. Remember that it is important to consider your financial goals when you are planning to buy the best life insurance plan. Listed below are the different types of life insurance plans that are available:

1. Term life insurance

Term insurance is the most popular one in life insurance category. It has a specific period and expires at the end of the term. The best things about a term plan are the premiums are quite affordable. These plans can be bought by people who have just started their career as the premiums are low. Some of the best term life insurance plans offer critical or terminal illness cover – that means the policyholder will be paid a lump sum amount on diagnosis of life-threatening diseases to help them cover the medical expenses.

Learn more about Term Insurance Plans.

2. Whole life insurance

As the name suggests, it is a policy that covers you till you turn 99. That means, you can be protected till you are 99 years of age. Whole life insurance plans have a death benefit along with cash value. The life insurance policy’s cash value will grow over time and can be withdrawn by the policyholder when it accumulates enough value. Or, it can also be withdrawn if the policyholder opts for a loan on the life insurance policy.

3. Unit Linked Insurance Plans

ULIPs are investment plus insurance plans so that you can enjoy best of both the worlds. This is a type of life insurance policy that offers life cover along with investment opportunities. Most of the ULIPs have a lock-in period of 5 years, hence, it can be considered as a long-term investment plan. It function as per market dynamics and you should understand your risk appetite before buying a ULIP.

4. Endowment/ Saving Plans

This is a type of life insurance policy that offers you a life cover along with an avenue for savings. If you buy the best saving plan, you can save regularly over a period and this will lead you to get a lump sum amount at maturity. Buying an endowment or saving plan is beneficial if you have long-term financial goals such as funding your child’s education, buying a new house, or spending a carefree retirement life.

5. Money Back Policy

Money back policy is a type of life insurance policy that gives money-back at regular intervals. A percentage of the Sum Assured is paid back at intervals during the policy tenure. These life insurance plans offer Survival Benefits, which are paid out during the plan tenure and at maturity. If the policyholder passes away when the policy is in force, the entire Sum Assured is paid to the beneficiaries irrespective of the Survival Benefits already paid.

6. Child Insurance Plan

Child insurance plans are life insurance policies that are opted to safeguard the future of your child. Along with providing a life cover, it helps in building an education fund to support your child’s dreams and aspirations. Child plans are investment plus insurance plans designed to assist you in creating wealth for your child’s future needs. You can invest in these plans right when your kid is born to build a strong financial cover.

7. Retirement Plans

These life insurance policies help you build a retirement corpus so that you can enjoy your post-retirement life. You can make your spouse the beneficiary to your life insurance plan. So, in case, something happens to you, they can be financially independent. Also, having the best life insurance plan will help you pay for medical expenses during retirement.

Learn how to plan for medical expenses during retirement?

What Type of Life Insurance Policy is Right for me?

Only understanding what is a life insurance policy is not enough. You must know what type of life insurance policy will be suitable for your needs. In addition to the amount of coverage you need, you should also figure out what type plan you need. Of all the types of life insurance plans available, there are two major questions that will help you determine the right policy –

1) How long you want your life insurance coverage to last?

2) What goal do you wish to prioritize and save for?

Answer these questions and find a life insurance plan that suits your needs.

For example, if you want a life cover where you can add your spouse too, then look for insurance plans that offer such benefits. iSelect Star Term Plan allows you to add your spouse in the same life insurance policy at discounted rates. Secure their financial future by helping them get a life cover.

How to Claim a Life Insurance Policy?

In the event of an untimely death of the insured, the insurance company pays the sum assured to the nominee. The claims process is very simple; the insurance company has to be informed as soon as possible after the death of the insured. The nominee has to fill a claims form and submit with required documents like death certificate. The insurance company verifies the claim and releases the benefit. In some cases, the insurance company may choose to examine the claim. You will have to provide additional documents and the claim settlement will take slightly more time. Sometimes, insurers reject an insurance claim. Some of the reasons for rejections are concealing information while buying the policy, giving false information and policy lapsing.

How to Choose a Beneficiary for your Life Insurance Plan?

Choosing a beneficiary depends upon your needs. If you get a life insurance for minor children, then your spouse or the godparent of your child are the best options. If you have an adult child, you can directly make them your nominee. You can also choose more than one person as your beneficiary. It can be a non-profit organization, a charity, or a trustee.

Know all about choosing a nominee for your life insurance plan.

Claims can be paid out in a lump sum or in regular monthly instalments. You can choose the way you want the nominees to receive the death benefit. If the policyholder passes away, as a beneficiary of the plan, you can follow these 3 steps to file a claim:

3-steps

1. Death Certificate:1 You will be asked to submit a copy of the death certificate of the policyholder when you start the claim process. The life insurance company may need a certified copy, hence, you must keep this document handy, if you do not want to delay the process.

2.Contact the Insurer: Contact the life insurance company and inform them. Although, when a loved one passes away, we have a lot on our plates to deal with. However, the sooner you start the entire process, the better it is.

3. Documentation: The life insurance company may need a lot of other documents such as claim form. Ensure that all the necessary documents are ready with you before you start the claim process.

Do I Need a Life Insurance Plan?

Yes! Life insurance policies are a guarantee for your loved ones. Buying the best life insurance policy can help in providing financial assistance to your family in an unfortunate event. This covers accidental death, permanent and temporary disability, and child support. You need a life insurance plan if:

  • You are married
  • You have children
  • You are unmarried

Whether you are single, married or have kids, you need a life insurance plan to stay protected. If your family relies on you for financial support, it is better you consider buying the best life insurance plan. The cost of education is spiraling and building an education fund right from the beginning is the only solution if you want to secure their future. Also, even if you are single, unexpected expenses may pop up anytime, catching you completely off-guard.

How much Does a Life Insurance Plan Cost in India?

The actual cost of buying a life insurance policy depends on the following few factors:

  • Life cover amount
  • Your current age
  • Lifestyle and habits
  • Current and history of physical health
  • Family health history
  • Policy tenure you are intending to choose

A life insurance policy is a contract between the policyholder and the insurance company, with the promise that the insurer will pay a pre-decided amount to the nominee on the condition that the policyholder pays all the premiums without fail. The pre-decided amount could be the maturity amount paid after the policy tenure gets over or the death benefit paid if the unfortunate happens during the policy term. In a nutshell, all the benefits of a life insurance policy are tied to the payment of premiums, which is why one should opt for a premium that can be easily serviced.

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How do I Apply for a Life Insurance Plan Online?

Now that you know what is a life insurance policy and how it works, let us move to the buying process. Buying a life insurance policy has got simpler with time, thanks to the online channels that allow purchasing a policy easily, without any hassles. Applying for a life insurance plan is easy in India. You can either contact the nearest branch of an insurance company. Or you can buy a life insurance plan online. Canara HSBC Oriental Bank of Commerce Life Insurance has optimized its procedure by taking it online. You can ditch the unnecessary paperwork and choose the convenience of buying a life insurance plan from the comfort of your home. Life insurance companies conduct a verification of all the details provided by the buyer before issuing a policy. One has to fill out an application form with details like medical history and family health history. The insurer may even ask you to undergo a medical examination, if required.

Is buying a life insurance policy worth it?

A life insurance policy aims to protect your family. In simple terms, the death benefit received by the nominee(s) replaces the financial assistance you provided to your dependants. In the wake of the pandemic, more people are scrambling to buy the best life insurance. Because of the financial security it provides, buying a life insurance plan is worth it. In a way, this smart financial tool must be an integral part of financial planning. Your family will be financially savvy in case something happens to you. If you protect your loved ones with the promise of a life insurance plan, you can be assured of fulfilling all the promises you had made to them, even if you are not around. And Canara HSBC Oriental Bank of Commerce Life Insurance will always keep “Aapke Vaade Sar Aankhon Par”. Listed below are our top life insurance plans that you consider:

1. Guaranteed Income4Life Plan

Guaranteed Income4Life, as the name suggests, this life insurance plan guarantees regular income along with providing a life cover. It is a highly customizable plan that offers flexibilities in terms of premium payment options and increasing life cover. The plan has 3 different variants to suit your financial requirements and goals. Whether it is lifelong protection for you and your spouse or fulfilling your child’s education needs, preparing you for early retirement or giving you that extra income to make sure every promise is fulfilled;Guaranteed Income4Life has it all covered.

2. Guaranteed Savings Plan

It is a guaranteed income plan which ensures that you get a guaranteed maturity benefit. The premiums to be paid are high, but you receive a better value in return. The GSP covers for the entire life term even though you pay premiums for a limited time. Customize your savings horizon as align them accordingly with your financial goals to meet your milestones. Whether you are planning to build an education fund for your child’s future, or you want to save for your child’s marriage, or you want to retire and lead a happy life – this savings plan may help you achieve your life goals.

3. iSelect Star Term Plan

iSelect Star Term Plan is a life insurance plan that offers a limited premium payment option. It is tailored to suit the Indian market as it is budget-friendly. The plan offers the option of adding the spouse, thereby adding a discount for the spouse. Also, it has a return of premium option. That means, if the policyholder outlives the policy term and has paid all the premiums, then the premiums will be paid back at maturity. This is a win-win! The plan also offers a variety of riders that you can add for enhanced protection.

FAQs Related to Life Insurance Policy

In typical life insurance cases, once you miss your premium installment, you are given a grace period to pay the premium amount. In case you fail to do so even after the grace period, your policy will lapse and the benefits will no longer be paid out. However, depending on the type of policy, you might also be offered a revival period, to revive the policy; paid up can also happen depending upon type of policy and the number of premiums paid.

9 things to do if you cannot pay your life insurance premiums.

Life insurance cover depends on your beneficiary's monthly income and expenses. You need to evaluate your liabilities and assess your financial goals. It requires a thorough self-assessment of retirement corpus and life goals. However, experts suggest that you should always buy a life cover at least 10 times of your income. You can be assured that you have adequate life cover for you and the beneficiaries. Not buying the right policy cover may put you in a fix. You do not need to pay premiums beyond your budget. Analyze your existing financial circumstances and calculate the premium before making any decisions.

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