Life insurance is one of the most important financial tools for protecting your family’s future. Yet many people buy a policy without fully understanding how it works. Looking closely at the features of life insurance helps you choose the right plan, avoid surprises later, and make better long-term financial decisions.
This article explores the key features of life insurance, along with explaining how these features translate into real benefits for policyholders and highlighting important exclusions.
What is Life Insurance?
Life insurance is a financial contract between the insurer/insurance company and the individual/insured/policyholder. This insurance allows the beneficiary/nominee (nominated by the policyholder) to receive a specific pre-determined amount from the insurer in case of the event insured against within the active period of the policy.
Certain life insurance policies also allow policyholders to receive a maturity benefit (if applicable), in case the term gets over, but the event insured against does not occur. However, death or maturity benefits are paid as per policy terms, provided premiums are paid as required.
Features of Life Insurance
Each feature of life insurance defines how coverage works, how benefits are paid and what additional options are available.
Premiums
Purchasing a life insurance policy involves paying a particular mutually agreed amount at pre-decided, timely intervals. These amounts are referred to as premiums. The premium varies as per the assured sum, riders, tenure and other associated details of the plan. Premium structure is one of the key features of life insurance to evaluate when choosing a plan.
Policy Term
This feature of life insurance determines the time period for which the life insurance policy will remain active. The tenure generally ranges from 10 to 30 years, with exceptions existing for flexible plans. Such policies that are for a limited period are term life insurance. However, the ones that offer complete life protection are referred to as whole life insurance.
Sum Assured and Maturity Amount
It is the guaranteed amount payable to the nominee on the policyholder’s death during the policy term. The sum assured is also referred to as the death benefit. It fulfils the purpose of financial protection and meets the family’s financial goals after the demise of the insured. It can be used for managing living expenses, maintaining the standard of living, paying debts, continuing education and more.
Sum assured is different from maturity amount, which refers to the total sum received by the policyholder if they survive the policy term. In such a scenario, a life insurance plan also serves as an investment plan.
The maturity amount may include bonuses in participating policies or fund value in ULIPs, depending on the type of plan. This feature of life insurance is available with certain life insurance plans, such as endowment plans or others.
Surrender Value
The policyholder may choose to terminate the policy before maturity. If the policy has completed the minimum required period (typically 3 to 5 years, depending on the policy), it may acquire a surrender value. This refers to the amount payable by the insurer based on the premiums paid, after deducting applicable charges and including any benefits as per policy terms.
This feature of life insurance allows one to navigate through the unannounced challenging financial situations that may come up during the middle of the policy term. The insured gets the funds (as per the applicable deductions) in exchange for the complete termination of the policy.
Nominee
This feature of life insurance ensures there is complete clarity in who exactly would receive the sum assured in case of the occurrence of the event. Generally, one or more nominees can be appointed as per Section 39 of the Insurance Act, 1938.
Nominee can be updated later during the plan as well, as per the changing relationships. The nominee can initiate the claim settlement process with all the essential documents to receive the sum assured.
Note: Nominee is the person authorised to receive the claim amount and complete the settlement process. However, the nominee is not always the final legal owner of the policy benefits. In some cases, legal heirs may also have rights over the claim amount as per applicable succession laws.
Free Look Period
This is a 15 to 30-day period that the policyholder gets after receiving the policy document. It allows the policyholder to review the policy terms and conditions and cancel if it does not align with their interests or meet their expectations. If cancelled, the insured gets the complete refund, excluding the proportional risk, medical check-up charges, administration fees and stamp duty charges.
Grace Period
A grace period is an important feature of life insurance that helps prevent policy lapse (when the policy becomes inactive or void). It is the additional time given to the policyholder to pay the premium after the due date while keeping the policy active. If the premium is not paid within this period, the policy may lapse, leading to loss of coverage, subject to policy terms.
Policy Revival
If the grace period has expired and the policy is lapsed, the insurance company is no longer liable to pay any benefits. For such situations, insurers provide an option called policy revival. It allows reinstating the lapsed policy within a specific revival period, which usually ranges from 2 to 5 years.
Reviving the policy would generally require payment of all the pending premiums along with interest or penalties. The policyholder may also be required to undergo medical tests depending on the case. Once approved, the policy is reactivated with restored benefits, ensuring continued financial protection.
Riders
After opting for a life insurance plan of their choice, the policyholder can also choose from other add-on benefits. Here, they have to pay additional premiums to obtain benefits like:
- Waiver of premium: Choosing this rider allows the policyholder to waive the future premiums in case of disability or other specified conditions affecting earning capacity. It prevents financial impact on the family.
- Accidental death benefit: This rider allows the policyholder’s family to receive additional payment over the sum assured if death occurs due to an accident.
- Critical illness: This feature helps policyholders meet the daily expenses through the lump sum payment received from the policy if they are diagnosed with a critical illness covered under the policy.
Exclusions in Life Insurance
Life insurance will not serve its purpose if the policyholder dies due to reasons excluded from the policy. Here is the list of common exclusions from the policy:
Suicide
Generally, life insurance companies do not pay the death benefit if the policyholder dies due to suicide. While the period varies, it is applicable for a certain time frame, like the first two years of the policy. The insurer would return the premiums paid during the period, where again, the percentage would vary as per the insurer.
Performing Life-Threatening Activities
If the policyholder performs actions or stunts that put their life in danger, then the insurer will not pay the death benefits. The common examples include adventure sports like racing, paragliding, rock climbing and hang gliding. It is also applicable for dangerous professions, such as pilots or stunt performers. The terms would vary at each insurer.
Death Due to Overdose
If the policyholder is proven to have died due to an overdose of alcohol or drugs, then the nominee will not receive the death benefit. Similarly, if death occurs due to driving under intoxicated conditions, the death is excluded from the life insurance benefits.
Maternity Death
Certain life insurance companies may not cover death due to maternity-related reasons.
Murder
If the nominee is suspected or guilty of committing murder of the policyholder, the sum assured will not be paid. However, if the allegations are proved to be false as per the legal investigations, the promised amount can be released.
Similarly, if the policyholder dies while committing or attempting to commit a felony, the insurer is not liable to pay the death benefits. The felony here includes robbery or murder.
Death Due to War or Terrorism
Death due to terrorist activities, during war or military service is also excluded for death benefits from life insurance policies.
Death Due to Pre-Existing Conditions
The insurer may refuse to pay death benefits if the policyholder dies due to pre-existing medical conditions that were not disclosed during the application process. Pre-existing medical conditions are defined as the health problems that the person has had before the start date of the policy.
How Can You Benefit from Life Insurance?
Life insurance policies allow you to receive a specific sum of money as per the policy plans by regularly depositing the pre-decided premiums. Now, this can be used to make financial plans accordingly. Here are the possibilities of how you can benefit from life insurance:
- Plan Long-Term Finances: Policyholders can choose the life insurance policy to act as a financial safety net for the family or as an investment plan to serve retirement needs.
- Replace Lost Income: The death benefit can be used to replace the lost source of income. Alternatively, taking appropriate riders can further meet the financial constraints during situations like a diagnosis with a critical health issue or disability.
- Repay Outstanding Loans: The policyholders can choose to use the payout to settle home loans, personal loans or other business liabilities. This avoids the transfer of financial burden to dependents.
- Fund Children’s Education: Sum assured from the life insurance policy also serves as a valuable source to fund the higher education of children.
Conclusion
Life insurance is a structured financial solution that secures your family’s future against uncertainties. Understanding the features of life insurance, such as premiums, sum assured, policy term, death and maturity benefits, nominees and riders, helps make informed decisions.
Once you are well aware of these, the next step is to select the right policy for your needs. Check factors like coverage adequacy, claim settlement ratio, premium affordability and policy suitability. Evaluating these aspects ensures that you choose a plan that fits your financial goals and provides reliable long-term security for your loved ones.
FAQs
Are there tax benefits to taking a life insurance policy?
Life insurance policy premiums are protected via tax benefits under Section 80C and 10(10D) of the Income Tax Act, 1961. Maximum savings as per Section 80C are around 1.5 lakhs, while the sum assured is tax-free as per 10(10D).
What is the claim settlement ratio?
It is an important aspect to check when choosing a life insurance policy. The claim settlement ratio of an insurance company indicates the proportion of claims settled compared to the received claims in a year. The high ratio is considered more reliable and is a preferable option.
Is it possible to take a loan on a life insurance policy?
A loan on a life insurance policy is possible if the policy has acquired a surrender value. The loan amount depends on policy value, and interest is charged until repayment.
What are the different types of life insurance policies?
The different types of life insurance policies are term life insurance, endowment life insurance, Unit Linked Insurance Plan (ULIP), and whole life insurance.
How to choose between health and life insurance?
While both are crucial, health insurance covers immediate medical expenses while life insurance secures your family’s future. Ideally, prioritise health first, then add life insurance based on dependents and financial responsibilities.