Life Insurance

What Does A Life Insurance Policy Cover?

by SMCIB on Wednesday, 26 April 2023

What Does A Life Insurance Policy Cover?

Life is like a game of Jenga, where you stack up your dreams, ambitions, and aspirations - one block at a time. Every single move is made with care and attention. But just like the game, life can also be unpredictable and unstable; sometimes, even a small wrong move can topple the tower.

This is where life insurance acts as a safety net for you and your loved ones. It offers financial protection to your family when the unexpected happens.

Life insurance is a shield that guards your loved ones at uncertain times and it is important to understand when they can make a claim - to truly reap its benefits. So, what does a life insurance policy cover, exactly? Let’s see!
 

What is Life Insurance?

Life insurance is a legal contract that you sign with an insurance company. It promises to cover your financial risks in exchange for a fee, called the ‘premium’. The primary purpose of life insurance is to financially protect your loved ones when you are no longer around them.

But here's the kicker: life insurance doesn't just provide protection. It also helps you achieve your long-term financial goals. Want to retire comfortably? A retirement plan can help you save for it. Want to fund your child's education or wedding? A child plan has your back. Want to leave a financial legacy behind? A whole life insurance policy has got you covered. And so on.

So, different life insurance policies help you or your loved ones take care of financial milestones and dreams. Now, let’s understand what situations life insurance policies cover.
 

What Does a Life Insurance Policy Cover?

To answer this question more clearly, let’s first talk about one thing the life insurance policy does not cover. There is only one exclusion - death due to suicide or self-harm within the first year of purchasing the policy. In this case, the insurer will return the premiums paid by you (excluding taxes) to your nominee, instead of the cover amount.

Other than this exclusion, all types of deaths are covered under a life insurance policy. Let’s see -
 

1️⃣ Death due to natural causes

A life insurance policy offers financial protection in the event of a natural death. This includes death due to an illness, medical condition, chronic lifestyle disease, or other health issues. In fact, even death caused by HIV/AIDS, STDs, or other similar conditions is covered.
 

2️⃣ Death due to an accident

An unexpected accident can, unfortunately, happen anywhere, anytime. Whether it is at home, on the road, in the air while travelling by plane, or anywhere else, your life insurance policy covers every single incident.

For example:
Karthik is a 27-year-old software engineer with a dependent wife and child. He purchases a term life insurance policy with a sum assured of Rs. 50 lakhs and pays his premiums regularly. He opts for a policy duration of 20 years and appoints his wife as the nominee.

After 3 years, while driving back from work, Karthik gets into a car accident. Despite being rushed to the hospital, he passes away due to severe injuries. Since Karthik had term insurance, the insurer pays a death benefit of Rs. 50 lakhs to his wife. She is thus able to meet her family’s financial needs with the claim amount and plans to use the remaining amount for her child’s future educational needs.
 

3️⃣ Death due to involvement in illegal activities

Another situation where your life insurance provides coverage is death caused by involvement in illegal or criminal activities. In the event of your demise during such scenarios, the policy ensures that your nominee will receive the claim amount.
 

4️⃣ Death due to participation in risky activities

A life insurance policy also covers death because of participation in risky adventure sports and activities. This includes paragliding, skydiving, scuba diving, river rafting, mountaineering, and much more.
 

5️⃣ Death due to natural calamities

Natural calamities such as earthquakes, floods, landslides, hurricanes, droughts, etc. can strike without warning. Unfortunately, these disasters can result in the loss of life. If you have a life insurance plan, you can be assured that your loved ones will be financially protected in such a tragedy. This means that if you pass away as a result of such a disaster, your nominees will receive the claim amount specified in your policy.

For example:
Kiara is a resident of a coastal town that's prone to natural calamities. She decides to purchase a life insurance plan to ensure her family's financial stability in case of any unfortunate event since she has 2 dependent children. She buys a term life insurance policy for a duration of 20 years, with a cover amount of Rs. 75 lakhs.

A few years after buying the policy, a massive hurricane strikes the town, causing widespread destruction. Unfortunately, Kiara passes away. Her family receives a death benefit of Rs. 75 lakhs. This provides them with the monetary support they need to manage their lifestyle and take care of their financial goals.
 

6️⃣ Death due to manmade disasters

Manmade disasters such as acts of terrorism, riots, war, civil disturbances, etc., can have a devastating and unexpected impact on human lives. A life insurance plan will cover death caused as a result of such terrible disasters.
 

7️⃣ Death due to intoxication

Life insurance policies cover death due to unbridled consumption of alcohol, drugs, or other harmful substances. It is important to note that this coverage may vary depending on the policy and insurer.
 

Keep This In Mind!
The abovementioned list of situations covered by a life insurance policy is not exhaustive. Though we have discussed most of the situations covered under a life insurance policy, there are numerous other situations that your policy may cover. It is important to note that your insurer is responsible for disclosing any exclusions in the policy document. You should read the policy document carefully, and not presume any exceptions unless they are explicitly stated.

 

Important Note: Riders May NOT Cover The Aforementioned Situations
A rider is an optional add-on that you can add to your base life insurance policy by paying an extra premium. It provides additional coverage and protection against specific risks.

For instance,

  1. Critical Illness Rider: Provides a fixed payout if you are diagnosed with a critical illness listed in the policy document.
  2. Accidental Disability Rider: Provides a fixed sum of money if you become permanently disabled due to an accident.
  3. Other Types of Riders: There are several other types of riders that you can add to your base policy, including hospital care rider, surgical care rider, waiver of premium rider, accidental death rider, etc. Each rider provides unique benefits and can be purchased based on your requirements.

It is essential to keep in mind that the riders you choose may not cover every situation covered by the base policy.
 

To conclude,

A life insurance policy is a valuable tool that can provide financial security for you and your loved ones. It typically provides coverage for all types of death, except for suicide within the first year after the policy is purchased. Ensure you take the time to carefully review your policy document so you know about its scope of coverage. You should talk to your insurer and go through the policy document to understand what your base plan and any riders you opt for cover.

Insurance Knowledge Videos