The mere thought of unfortunate events can be uncomfortable, but preparing for them is imperative. Taking the time to plan ahead can help minimise the impact of any tragedy and make it easier to cope with the situation. Without proper financial planning, your family may be left in a precarious position, leading to long-term financial difficulties. Let alone goals, even making ends meet can be challenging. The situation is similar to walking on a tightrope; the potential for disaster is great, and the consequences could be dire.
Fortunately, life insurance can prevent all these things from happening. With the right life insurance, not only can you protect your family and their future, but you can also ensure that their dreams and goals are not impacted by your sudden passing. Knowing your family will be well taken care of - even in your absence - can provide a sense of security and peace of mind.
Let's take a closer look at what life insurance is, how it works, and more in this article.
What Is Life Insurance?
Life insurance is essentially a contract between you and the insurance company wherein the insurer agrees to pay a sum assured to your family in case you pass away unexpectedly in exchange for the premiums you pay. You receive financial protection and risk coverage from the insurer with the payment of your premiums.
A life insurance policy provides your family with a sum assured if you pass away during the policy period as well as provides an investment option to fund future financial goals including -
Short-term goals like utility bills, EMIs, groceries, etc.,
Long-term goals like buying a house, planning for children’s wedding or saving for retirement etc.
How Does Life Insurance Work?
Essentially, life insurance covers your financial risks in exchange for a premium payment made to the insurance company by you. Here are some important life insurance terms you need to know:
Basically, this is the amount required to secure a family’s future without compromising on their lifestyle. In technical terms, this is called the sum assured.
The premium is the amount of money you pay to the insurer for the plan to ensure that it remains active.
The person whose life risk is covered by the policy is the life assured. They are also known as the ‘insured’.
A nominee is a person or persons who are financially dependent on the life assured and need financial protection. Alternatively, they are called 'beneficiaries'.
They are the person/s who receive the death benefit if the life assured passes away.
Now that we’ve learnt about the basics of life insurance, let’s move on to the buying process -
Life Insurance Policy - Buying Journey
Buying insurance isn't an overnight process. It involves a series of steps. From researching the different types of coverage to comparing prices and finally choosing the best policy for individual needs, the buying process of a life insurance insurance policy requires an informed and thoughtful approach. If you are interested in buying an insurance product, you need to submit an application for the same. A life insurance insurance policy can only be issued to a customer once the application has been approved by the insurer.
Here’s a breakdown of each of the steps involved -
Step 1: Insurer Will Assess Your Application
As part of the application process for a life insurance policy, the insurance company will evaluate your risk and eligibility.
Insurance companies will compare your risk to the standard risk they assume. An insurance company will examine two things here:
Profile Information: You will need to provide information about your occupation, income, location, etc. A comparison will be made between your profile and the standard profile defined in your policy. In the next step, they will determine whether you carry more risk than was assumed when the product was created.
Health Status: Next, they ask for information about your health. This will enable them to determine if your lifestyle or health condition places you in a higher risk category than a typical healthy individual as assumed when designing the policy. For instance, if you have a smoking habit, then you will be deemed a high-risk individual.
Next, the insurer will assess your eligibility. Your insurance company will want to be sure that you are purchasing the policy for the financial security of your family and not just for financial gain.
A team of professionals at the insurance company called underwriters evaluates your risk and eligibility. They are basically responsible for evaluating and assessing applications and deciding whether to provide coverage, based on the risk level posed by a customer. They also determine if you need to pay a loading, i.e., an extra premium if you are a high-risk individual.
Step 2: The Insurer Will Issue The Policy
Once the underwriter approves your application, you will be issued the policy. Risk coverage begins as soon as the policy is issued.
Step 3: You Need To Make Timely Premium Payments
In accordance with the terms of your policy, you are required to continue paying the premiums to keep it active. Keep track of your premium payment due dates because your policy and coverage will only remain active if your premium payments are made on time.
Step 4: Claim Payout Will Be Made
Should you pass away during the duration of your policy, your nominee or family will need to notify the insurance company. It is necessary for them to provide several documents and the details of the death. After that, the insurance company's claims team will evaluate the claim in accordance with the policy terms. Lastly, your nominee will receive the payout if your claim is verified and approved.
Note: The policy, if it has a maturity benefit component, will pay you the amount if you outlive the policy term.
Life insurance policies are designed to provide financial security for your loved ones in the event of your untimely demise. With the right policy in place, you can ensure that your family is provided for in the future - no matter what life throws at them. We hope you have gained a better understanding of how life insurance policies and life insurance companies work.