How Much Life Insurance Cover Do I Need?

Name: Life Insurance
SKU: Life Insurance
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The life insurance coverage amount should be sufficient to support your loved ones financially after your unforeseen demise, while its premium amount fits well into your regular expenses. So, it is recommended to have a life cover amount of at least 10X the annual income. And you should also check what plan suits your portfolio the best.

Life Insurance

At the end of the day, our family is all we have. You can achieve every goal in life, climb the ladder of success, and fulfil all your dreams - but only seeing your family safe and happy can make your heart truly smile. Make you feel complete. And since they mean so much to you, it’s unarguably important to protect them from the uncertainties of life. To take care of them, even in your absence. More so, if they are dependent on you.

Life Insurance is the priceless protection you can gift your loved ones. It helps them lead a sweet, comfortable lifestyle, even when you are not around.

So let’s decode it to the T, shall we?

What Is Life Insurance?

Life insurance is a contract between you and the insurance company. It’s designed to pay a sum assured to your chosen nominee, in case you pass away during the policy term. You need to pay a certain premium fee, in exchange for financial coverage.

In addition to the sum assured they provide to your family in your absence, several life insurance products also serve as an investment option. They can be used to fund several future financial goals. This may include short-term goals (utility bills, groceries, EMI, etc.) and long-term goals (buying a house, retirement planning, children’s wedding expenses, etc.).

Important Terminologies Of Life Insurance?

An individual who purchases and owns an insurance policy. They are required to pay the premiums to keep the policy active.

An individual whose life is covered under the life insurance policy. In case of the death of this individual during the policy term, the insurance company pays the claim to the nominee. The life assured may or may not be the same as the policyholder.

The person who receives financial benefits from the insurance company, in case the life assured passes away during the policy term. The nominee can be the life assured’s spouse, child, parent, etc.

It is the maximum period of time the life cover will remain active. In case the life assured doesn’t survive this policy term, their nominee will receive the policy’s financial benefits.

A life insurance policy pays a death benefit to the nominee if the life assured dies while the policy is active. They can use this money to fulfil their financial goals, pay off daily expenses and loans, and lead a comfortable life.

Note: The death benefit depends on the life insurance policy you choose.

A life insurance policy pays a maturity benefit to the life assured if they survive the policy duration. The payable amount depends on the insurer and the policy you own.

Note: No maturity benefit is payable in the case of term life plans.

It is an amount of money that the policyholder needs to pay regularly to keep their life insurance coverage active. The premium is calculated based on certain factors, like - the policy duration, cover amount, features/benefits you choose, etc.

It is the extra time frame that your insurer gives you to pay your overdue premiums - in case you missed paying your premiums on time.

Note: Keep in mind that if the premiums are not paid within the Grace Period your life insurance policy will lapse and you will no longer be able to avail of its benefits.

If you fail to pay your premiums by the due date (the final date for making the payment), insurers offer you a grace period. If you don’t pay the premiums even during this grace period, your policy will become inactive, and you’ll lose your coverage. This is called Policy Lapse.

These are certain risks or expenses that will not be covered under your life insurance policy.

It is the time given to you after policy purchase, during which you can review the policy and return it to the insurer if you feel unsatisfied. You will receive a refund of the premiums you have paid. The Free Look Period usually lasts for 15 days from the date of receipt of the policy document.

Note: Certain charges, such as administration charges and stamp duty charges, may be deducted from your refund amount.

An ‘insurable interest’ basically means that the policyholder posseses a genuine reason for buying life insurance on another person. This element helps prevent anyone buying life insurance on other people simply to gain a profit if they die.

It is the money that accumulates in your life insurance policy over time and earns interest as long as the policy is active. You can borrow, withdraw, or use this money to cover your future premiums.

Note: Not all life insurance plans have this benefit. So read the policy document carefully before making a purchase.

It is the sum of money that your insurer will pay you if you surrender, i.e., discontinue your life insurance policy before it matures.

Generally, a life insurance policy acquires a surrender value if you have paid the premiums regularly for at least 2-3 years. This time frame may vary across insurers and products.

They are add-on benefits that can be added to your existing policy by paying an additional premium. They enhance the coverage and make the policy more comprehensive.

How Does Life Insurance Work?

Life Insurance, in a simple sense, is a contract between you (the policyholder) and the insurance company. The insurance company pays you or your nominee the benefits of the plan (depending on the policy type) and you are required to pay a premium to keep your policy and coverage active.

For example, Mr Malhotra buys an endowment plan with a sum assured of Rs 50 Lakhs and a policy term of 20 years. He is required to pay an annual premium of Rs 1 Lakh for the same over the course of the policy term. He appoints his spouse as the nominee.

Now, if Mr Malhotra passes away during these 20 years, his nominee will receive Rs 50 Lakhs as the death benefit.

If Mr Malhotra survives these 20 years, he will receive Rs 50 Lakhs as the maturity benefit.

Note: Some life insurance plans may also pay you survival benefits.

Types Of Life Insurance Policies

Term Life Insurance

Acts as a replacement for your income and helps your family lead a comfortable lifestyle in your absence.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your nominee will be eligible to receive the total sum assured as the death benefit.
Maturity Benefit	If you survive the policy term, no benefit is paid. However, if you buy a Term Return of Premium (TROP) plan, you will receive the amount of premiums paid (minus taxes) - once the policy matures.

Whole Life Insurance

Covers you till the age of 99-100, and acts like a legacy for your heirs.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your nominee will receive the total sum assured as the death benefit.
Maturity Benefit	If you survive the policy term, you will receive the sum assured as a maturity benefit.
Survival Benefit	Depending on your insurer and product, you may receive a survival benefit at the end of your premium payment term. It can either be a predetermined amount or a percentage of the sum assured.

Unit Linked Insurance Plan (ULIP)

Gives you a combo of stock market-linked investment and insurance coverag.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your nominee will be entitled to a death benefit, which can either be - Sum Assured + Fund Value The higher of either Sum Assured or Fund Value
Maturity Benefit	If you survive the policy term, you will be eligible to receive a maturity benefit. It is equal to the fund value of your investment on the date of maturity.

Benefit

How It Works

Death Benefit

If you don’t survive the policy term, your nominee will be entitled to a death benefit, which can either be -

Sum Assured + Fund Value

The higher of either Sum Assured or Fund Value

Maturity Benefit

If you survive the policy term, you will be eligible to receive a maturity benefit. It is equal to the fund value of your investment on the date of maturity.

Endowment Plan

Provides insurance coverage while simultaneously helping you build a savings fund.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your nominee will receive a death benefit. This can be either the sum assured or a multiple of the annual premiums you pay.
Maturity Benefit	If you survive the policy term, you will receive a maturity benefit as a lump sum amount. This can be the total premiums paid (minus taxes), a portion of the premiums paid, or an amount agreed upon while buying the policy.

Money Back Plan

Gives your ‘money back’ in the form of periodic payments, as well as an insurance cover.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your nominee will be eligible to receive the sum assured as the death benefit.
Maturity Benefit	If you survive the policy term, you will be eligible to receive a maturity benefit. It can be the sum assured, the survival benefit as regular payouts, or a total lump sum of the payouts.
Survival Benefit	Depending on your insurer and product, you may receive regular payments at specified intervals. They can be either a percentage of the sum assured or a percentage of the annual premium you have paid.

Child Insurance Plan

Helps you accumulate a fund to fulfil your child’s dreams and secure their future.

Benefit	How It Works
Death Benefit	If you don’t survive the policy term, your child will receive a death benefit if they have attained the age of 18. Otherwise, an appointee nominated by you will receive the death benefit on their behalf. The main feature of a child insurance plan is that if you pass away, the insurance will waive the remaining premiums and your child will receive the predetermined amount when the policy matures.
Maturity Benefit	If you survive the policy term, you will receive the sum assured as a maturity benefit.

Benefit

How It Works

Death Benefit

If you don’t survive the policy term, your child will receive a death benefit if they have attained the age of 18. Otherwise, an appointee nominated by you will receive the death benefit on their behalf.

The main feature of a child insurance plan is that if you pass away, the insurance will waive the remaining premiums and your child will receive the predetermined amount when the policy matures.

Maturity Benefit

If you survive the policy term, you will receive the sum assured as a maturity benefit.

Retirement Plan

Designed to look after your retirement years, by helping you meet living expenses amidst the rising costs.

3 Types of Retirement Plans	How They Work
Single Premium Annuity Plan	You make a single lump sum investment and once you retire, you receive a regular income.
General Annuity Plan	You invest money in the plan regularly for a certain period. The accumulated money is converted into a stable income. And it’s paid to you periodically - during your retirement years.
Pension Accumulation Plan	You pay premiums for the plan during the policy term. The accrued money becomes a pension fund, which is paid to you as a lump sum when you retire.

Group Life Insurance Plan

A group of people are covered under one single plan. A good option for employees of a company, members of a bank, club or any professional organisation.

Benefit	How It Works
Low-cost cover	Members get a default life cover, often at lower prices.
No prerequisites	Pre-medical screening is not required up to a certain limit.

What Are The Main Benefits Of Life Insurance Policies?

Depending on the product you choose, you get to avail of a myriad of benefits, like -

Financial Stability

The sum assured your family receives can help cover their daily expenses and alleviate financial stress in the event of your untimely death.
Coverage For A Lifetime

Some life insurance policies expire after a certain period of time, but others offer lifelong protection. For eg, a Whole Life Insurance Policy covers you for the entirety of your life - until you turn 99 or 100 years old.
Death Benefit

The insurance company pays the chosen sum assured to your nominee if you pass away during the policy period.
Maturity Benefit

If you survive the policy term, some life insurance plans also pay you the chosen sum assured.
Survival Benefit

This benefit is provided at the end of the premium payment term (i.e. once you’ve paid off all the policy premiums) by some life insurance products.
Option To Apply for a loan

After a certain time span, also known as the lock-in period, you can use some types of life insurance plans as collateral to take loans against them.
Cash Value

A cash value is built using the premiums you pay, which can either be withdrawn or borrowed against.
Tax benefits

You can get tax deductions on the life insurance premiums you pay - under Section 80C of the Income Tax Act, 1961 - up to Rs 1.5 Lakhs every year.

The life insurance payout you or your family will receive is also entirely tax-free - under Section 10(10D) of the Income Tax Act.

Summary Table of Benefits

Type of Life Insurance Plan	Purpose	Policy Term	Death Benefit	Maturity Benefit	Tax Benefit
Term Insurance Plan	Provides a replacement for your income to secure your family’s financial needs, in your absence.	Fixed	Yes	No	Yes
Whole Life Insurance Plan	Provides life-long financial protection to family members, creating a legacy.	Up till 100 years	Yes	Yes	Yes
Unit Linked Insurance Plan	Insurance + Stock market-linked investment opportunity	Fixed	Yes	Yes	Yes
Endowment Plan	Guaranteed lump sum with insurance cover	Fixed	Yes	Yes	Yes
Money-Back Plan	Periodic payments with insurance cover	Fixed	Yes	Yes	Yes
Child Insurance Plan	Secures the future of your child by accumulating money for their key milestones	Fixed	Yes	Yes	Yes
Retirement Plan	Builds a fund or gives you an annuity (depending on the product) for your graceful retirement	Fixed	Yes	Yes	Yes
Group Life Insurance Plan	Coverage to a group of people under one plan.	Fixed	Yes	Yes, except if you own a term insurance plan.	Yes, if you pay the premium or a part of it.

How Much Life Insurance Coverage Do You Need?

There are many types of life insurance products available in the market. But before buying any of them, you need to decide on a life cover amount that is sufficient for your family. The cover should be big enough to -

Sustain the rising inflation and living costs

Settle all pending loans

Build a suitable income replacement for your family

Let them lead a comfortable lifestyle, even in your absence

For products that are a mix of insurance+investment, that give you a regular payout or a post-retirement income - you need to calculate how much to invest. This will ensure that the amount you receive on maturity is adequate enough to fulfil your long-term goals.

But, keep in mind that life insurance policies with an investment component (endowment plans, money-back plans, etc.) should be considered money-building avenues. The death benefit that your family will receive should be thought of as a policy feature and should not be your primary motive for investing in such plans. The cover amount of such products is usually 10x the premium you pay - which will not suffice your loved one’s needs if you, unfortunately, pass away. You should simultaneously buy term insurance to create a financial cushion for them.

So assess your needs and objectives, choose your product, and decide on the coverage accordingly.

Life Insurance Riders

Riders are add-on benefits that are available at a certain extra yet reasonable cost. Under specific circumstances, they kick in and provide additional financial relief.

Benefits of Riders

They enhance your coverage: They provide added protection against several risks. In case the incident covered by the rider happens, you receive the rider’s benefit.

They are convenient: You don’t have to go through any extra paperwork or medical tests - besides the one you’ve already done - to purchase a rider.

They save time: By not having to manage another insurance policy, and getting the benefits of many in one - you save time and effort.
Types of Riders

Hospital Care Rider: If you undergo hospitalisation for a treatment that is medically necessary, this rider will pay a fixed amount of money on a daily basis for each day you are hospitalised.

Surgical Care Rider: If you are hospitalised for a medical surgery for a minimum period of 24 hours and actually undergo that surgery - you will receive a fixed sum of money.

Accidental Death Benefit Rider: It pays an additional sum of money to your family if you pass away due to an accident.

Accidental Disability Rider: It will provide an additional sum of money, in case you meet with an accident that leads to permanent disability.

Critical Illness Rider: It will offer a fixed amount of money in case you get diagnosed with the listed critical illness during the policy period.

Waiver of Premium Rider: It is of 2 types -

Waiver of Premium due to Critical Illness Rider: With this rider in place - all your pending premiums will be waived if you contract one of the listed critical illnesses.

Waiver of Premium due to Disability Rider: With this rider in place - all your pending premiums will be waived, in case you undergo injuries that lead to permanent disability.

Please Note: Depending on the product and the insurer, there may be more types of riders available. Please read the policy wording carefully before buying.

Tax Benefits Available With Life Insurance Policies

Under sections 80C and 10(10D) of the Income Tax Act of India, you can get tax benefits on the life insurance premiums you pay and the claim amount you receive.

Tax benefit u/s 80C

You can claim a deduction of up to Rs 1,50,000 if you buy a life insurance plan for yourself, your spouse, or your child.
Tax benefit u/s 10(10D)

The claim amount received by either you or your family is exempted from taxation.
Tax benefit u/s 10(10A)

If you buy a pension accumulation plan, you can withdraw 60% of the accumulated fund and invest the rest in a single-premium annuity plan. This withdrawn 60% is exempted from taxation.

Things To Note Before Buying Life Insurance

Here are 7 points you should remember before buying your preferred plan -

Choose The Right Type Of policy

First and foremost, you need to decide on the type of policy you need to buy. It should cater to your and your family’s financial goals. For instance, if you simply want to protect your family from financial instability in your absence, you can buy a term insurance plan. If you want a steady retirement income, you should go for an annuity plan. And so on.

Understand what each plan type has to offer (features, benefits, etc.) and its limitations as well. This will help you make an informed decision.
Choose An Adequate Cover

As important as it is to get the right life insurance product, it is equally important to get the right amount of coverage. Consider your family’s expenses, long-term goals, as well as loans/liabilities and savings/investments. And calculate an amount that will keep them financially afloat in the future.
Choose A Reputable Insurance Company

Buying from a good and genuine insurer will make sure your policy journey is smooth and seamless. This is all the more important at the time of death claims since you won't be there to help your family if anything goes awry.
Check The Claim Settlement Ratio (CSR)

Claim settlement ratio is a metric that shows you the ratio of the number of claims settled by the insurance provider divided by the number of claims received by it in a given financial year. A high CSR means that a greater number of claims are being settled by the insurance company - which is a good indicator.
Fill Out The Proposal Form All By Yourself

Nobody knows you better than you know yourself. If someone else fills out your form on your behalf, there is always a possibility of wrong information being entered or important details being left out. So make sure you fill it out yourself carefully and disclose all that’s asked of you.
Hand-pick customization options

You can personalise your policy as per your requirements. You can go for features, like - increasing cover to ensure your family is adequately covered throughout, limited pay to speed up premium payments, etc.

You can also strengthen your coverage by adding riders. Before you opt for one -

Check whether you really need it or not.

Buy only if it fits your needs.

Don’t buy it by default - as not all of them might be helpful.
Keep All Policy-Related Files Safe

Many insurance companies provide an e-insurance account facility, where you can store and access your life insurance plan digitally. You can also open a Digilocker account and store your policy-related documents. Ensure you share these credentials and account details with your family/nominee, so they can easily access them at the time of claim in your absence.

Life Insurance Claims Process

In Case You Don’t Survive The Policy Term

Notify The Insurer

In case you pass away, your nominee must contact the insurance company as soon as possible.

The usual options to intimate are:

Through the insurance company’s toll-free or SMS

Through email

Through the insurance company’s website
Submit Relevant Documents

Then, your nominee will have to to fill out the claim form either online or offline. They will also have to submit the required documents to the insurer.
Submit Additional Documents If Needed

Once the initial list of docs is submitted, the insurer may request additional documents. The nominee must ensure they are checking emails/messages/letters received from the insurer for such requests - and submitting all documents promptly.

List of Mandatory Documents Required

Claimant statement form

Death certificate (self-attested copy)

KYC document of the beneficiary (self-attested copy)

Bank details of the beneficiary

Additional Requirements For Claims Within 3 Yearsd

Original policy document

Medical attendant's certificate (if any)

Self-attested copies of hospital or treatment records (if any)

Employer's certificate (if applicable)

Additional Requirements For Accidental Or Unnatural Death Claims

FIR and final police closure report

Driving licence (in case of demise while driving)

Post mortem report

Valid insurance document of the vehicle (in case of death due to a road traffic accident)

Police inquest report/inquest panchnama

Newspaper cutting (if any)
Claim Approval And Payout

Once submitted, the insurer will review the documents and decide whether or not to approve the claim. If approved - the claim will be paid according to the payout option selected by you during the policy purchase.

In Case You Survive The Policy Term

Contact Your Insurer

If you, the insured person, want to file a claim, you need to visit your insurance company's branch office and provide the required documents.
Submit Relevant Documents

For a claim request to be processed, you need to submit the following documents -

Duly filled claim form or policy payout form in the specified format

Original Policy Document
Verification

An assessor will then verify the submitted documents, to determine whether the claim is valid or not.
Claim Approval And Payout

Once the claim is verified and approved, the maturity amount will be credited to your registered bank account. All plans except ULIPs will have a fixed sum that will be paid to you.

For ULIPs, your insurer will credit the maturity amount to your bank account the day after you make the claim. This amount depends on the NAV on the date of maturity of your policy at the time of market closing (3 PM) if it’s a working day. If it’s not, the amount will be determined based on the next working day’s NAV.

If, for any reason, the insurer denies the claim, they will contact you via phone, SMS, or email to inform you about the same.

Please Note: Documents needed for a life insurance claim, as well as the steps involved may vary across insurers. So read the policy wordings thoroughly.

Wrapping Up!

In today’s world full of uncertainties, Life Insurance has become a necessity. It lets you be there for your family, even when you are not. It makes sure they are taken care of, in your absence. So understand your needs, do your own research, and choose a policy that’s right for you and your loved ones. That protects them through every ebb and flow of life.

Have any questions/queries/doubts? SMC experts are always there to help you out!