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Life Insurance in India

Last Update Date : April 30, 2019
Estimated Read Time: 11 min

Life Insurance is a traditional concept which is a legal contract between the Insurer or Insurance Company and the Insured to provide a certain designated sum of money as a benefit to the Insured family on occurrence of any event. It’s a guarantee provided by the Insurer to pay Insured’s beneficiaries a certain sum of money (sum assured) against the premium payments paid in case of any loss to Insured’s life. There are different policies available in the market provided by various insurance companies in India as per individual requirements like LIC, ICICI Prudential, Max Life, Bajaj Allianz etc.

Introduction to Life Insurance

The concept of insurance is very old and dates back to 1750 BC. Life insurance policy is one of those vital investments that helps in achieving financial security to the dependents and family along with fulfillment of major objectives in life. The life insurance policy is a tool that helps the Insured’s family to get financial protection in case of any event. There are various life insurance products that are offered by a number of noted companies to the people in India. One can even customize based on the requirements, future goals, family needs etc and proceed further to reap the benefits in future.

Let’s get a fair idea on the terminology or jargon used in Life Insurance, Advantages, Types of life insurance, Important points to remember while purchasing insurance, Online and Offline policies etc.

Common Terms in Life Insurance

Here is a list of few terms that are widely used in the world of life insurance.

  • Insured: The policy holder or the person buying an insurance policy is referred to as Insured.
  • Insurer: The insurance company or the provider who sells the policy is called as Insurer.
  • Policy Term: Here policy term is the total period for which policy is taken by the Insured.
  • Grace Period: The Insured is expected to pay premium towards his insurance policy either monthly, bi-monthly or on annual basis. For any reason, if the premium payment is not made on time or gets delayed, then the Insurer provides an extension of 15 days approximately (in case of monthly premium) and 30 days for paying the annual premium payment to continue the policy.
  • Rider: In addition to the actual insurance policy, the Insurer also gives an option to choose some additional features or add-ons which are called riders. These extra features may enhance the insurance policy by providing extra benefits.
  • Sum Assured: Excluding the bonus amounts, the total lump sum amount that is guaranteed to be paid to Insured at the time of maturity of policy is called sum assured.
  • Claim Settlement: The payment made by the insurance company to the insured in case of any event as mentioned in the contract is referred to as claim settlement.
  • Bonus: Apart from the sum assured, there is additional payment made at the time of maturity for timely payment of premium etc. in the form of bonus.
  • Lapsed Policy: The Insurance provider will cancel the policy in case of any non-payments.
  • Death Benefit: The sum assured paid by the Insuring Company to the nominee in case of life loss of Insured.
  • Accidental Benefit: In case the Insured meets with an accident, all hospitalization expenses, medical expenditure etc. will be incurred by the insurance company based on the policy terms.
  • Waiver: In case of any serious illness or dis-ability, the Insured may opt for a rider on his insurance policy. He need not pay the premiums as he is not able to afford, and the Insurance Company ensures that the policy is continued so that the Insured can receive benefits.

Advantages of Life Insurance Policy

  • Financial Protection and Life Coverage: A life insurance policy helps the Insured to plan according to his family needs in case of his absence in future. His dependents will get protection financially as the lump sum amount will be given to the nominee against the premiums paid by the Insured.
  • Liability Cover: The Insured might have different liabilities like home loan, or any other debts which needs to be cleared. In his absence, the family will not go through the trauma if there is a life insurance policy. The lump sum amount can be utilised to clear the financial liabilities by his beneficiaries.
  • Retirement benefit: One’s life can’t come to an end when he retires from the job where there will be no continuous flow of income in the form of salary. In such situations, a person can plan well in advance by investing in pension plans which will ensure that there is a certain income flow at the time of retirement to fulfill all the requirements.
  • Regular Income Flow: One can choose from a wide variety of policies available in the market to ensure that there is a continuous flow of income along with life coverage.
  • Savings: Once a person buys a policy and starts paying the timely premiums there will be a kind of discipline which leads to savings.
  • Achieving Long-Term Goals: Investment in insurance or its related products assists an individual not only to get life cover but also create savings for future needs like child education, marriage, etc. It also gives a sense of confidence to the policy holder to face any uncertain situations in future.
  • Tax Benefit: As per Income Tax Act, 1961, the investment made towards life insurance policy is tax exempted under section 80C. Here the tax payer gets the benefit of tax deduction against all the premiums paid towards the policy
  • Loan Benefit: There are certain policies which facilitate the option of partial withdrawal of policy amount in case of any emergency based on the terms and conditions of policy.

Types of Life Insurance

Now a person can choose the insurance policy from a wide variety of options provided by various insurance providers in the market. One can do a thorough research before opting a particular policy based on his requirements, family needs and future goals. Few insurance companies also customise the policy as per the client requirement.
The life insurance policies are of two categories – Policies that cover purely life and Policies that provide risk coverage for life along with investments growth. Let’s have a look at different types of insurance policies available in India.

 Policy Category Coverage

            Policy CategoryCoverage
Term Insurance PlansRisk Cover
Whole Life PoliciesInsurance Cover for whole life
Endowment PoliciesInsurance Cover and Savings
Money Back PlansInsurance Cover and Periodical benefits
Child PlansPolicies that suits for Children
Unit Linked Insurance Plans (ULIPS)Insurance Cover and Investment
Retirement / Pension PlansCorpus generation post retirement

Term Insurance Plans

Term Insurance plan provides a life cover based on the duration of the policy. It can be taken for a period ranging from 5 to 60 years based on the plan conditions where the insured has a life protection cover. The amount will be paid to his nominees or family on occurrence of an event only and doesn’t carry any maturity benefits. Terms insurance plans are the basic simple and cheaper plans useful only in case of any event. There is no protection cover after the completion of policy term to the policy holder.

Whole Life Policies

Normally the insurance policies expire once the term comes to an end like 5, 10, 20 years etc. But a whole life policy provides cover to the insured throughout his/her life. The insured will also receive a survival/maturity benefit based on the policy and his beneficiaries receive death benefit in case of any event to the policy holder.

Endowment Policies

Here the endowment policy offers both life cover as well as maturity benefit to the insured once the policy term comes to an end.
The premium amount will be higher compared to other policies, and the policy holder is assured of a certain amount upon maturity of the policy. Unlike in term insurance policy, the insured gets a certain sum assured upon maturity of the policy in case of endowment policies.

Money Back Plans

There are certain percentage of sum assured amount that is paid to the policy holder at pre-decided intervals in case of money back policies. A survival benefit will also be paid upon maturity or a death benefit whichever is earlier. These are one of the preferred policies due to regular source of income. Money back policies can be opted when one wants to have liquidity along with building their investments.

Child Plans

The child policies acts as a best source to generate funds for their secured future. The corpus can be built and utilized for education, wedding or any other major events. In case of any event to the child’s parent, the immediate premium payment will be made by the insurance company in most cases. And later though there is no payment of premium, the policy continues till maturity.

Unit Linked Insurance Plans (ULIPs)

ULIPs would assist the policy holder to generate returns along with protection cover. The premium amount paid is divided and invested in certain market products like stocks, bonds, mutual funds and the other portion into life insurance. There are dedicated fund managers who monitors the funds along with market conditions. A partial withdrawal option is also available here to the policy holder.

Retirement / Pension Plans

The insured pays a one-time premium or at regular intervals which is accumulated and paid to him as per his instruction at the time of retirement. Pension or annuity plans help in generating the corpus and have the financial independence post retirement. The payout can be made throughout his life time or a lump sum amount that gets credited to his account. Also, the death benefit is provided which is either 105% of the premiums paid by the Insured or the fund value.

Important Points to Know While Purchasing Life Insurance

The Insurance Regulatory and Development Authority (IRDA) has laid our certain regulations which has to be followed by all the insurance companies which aims to provide benefit to the end user or the policy holder. However, there are certain aspects which needs to be verified by the applicant before buying an insurance policy.

  • Purpose & Research: The policy holder should be clear on his objective while buying a life insurance policy that would suit to his short-term/long-term goals, future needs of his family, corpus required etc. To get maximum benefits, one can spend a considerable amount of time in doing research and finalise on the best plan available in the market.
  • Coverage of Policy: Depending on the age of the person, his family needs in future, loans, debts to be cleared, medical expenses, etc. the relevant policy along has to be chosen that would provide enough amount as coverage to clear all liabilities. Only then there would be a steady income provided to the family or beneficiaries in case of any event.
  • Terms and Conditions of Policy: During the policy selection process, an individual has to thoroughly go through the policy document, its terms and conditions etc. It contains all the important information about the policy like conditions of policy, surrender value, foreclosure charges, sum assured in case any, claims procedure etc
  • Rider Information: The insurance policy carries its standard features, and a person can opt for riders (upgrades) to increase the protection cover.
  • Policy Tenure & Premium: The period of the policy is one of the deciding factors while selecting the right policy. The insurance cover can be for a temporary basis in case of term insurance, and if someone wants to have protection cover throughout his life, the whole life policy can serve the purpose. In case a person is buying the policy for investment purpose or to save tax, then the premium amount may be slightly higher compared to term insurance and pension plans.
  • Right Policy: After doing the research and comparing different policies, select the right policy that suits to your needs based on the crucial factors like policy term, sum assured, protection cover, premium, claim process etc.
  • Policy Document Safety: Once the right policy is purchased from the insurance provider, keep the policy document safely as it gets the status of a legal document. The policy document has all the details related to the policy, nominee details, riders, bonus details in case any etc.

Principles of Life Insurance

The main objective of the insurance company is to provide safety and security to the policy holders in exchange of premium making profits at the same time.

  • Nature of Contract – An insurance contract comes into existence when one person proposes the contract, and the other accepts the same. A person should be at his will to enter into the contract after knowing the complete information along with its terms and conditions.
  • Principle of utmost good faith – Here the contract is between an Individual (policy holder) and the Insurance Company. It’s always essential to have good faith between both the parties. The policy holder is expected to provide all the information with utmost honesty, and it’s the responsibility of the insurance provider to explain all the terms and conditions of the policy. Any declaration of incorrect details by the Insured or any discrepancies in the policy features may lead to complicated situations in future or at the time of settlement.
  • Law of large numbers – The law of large numbers is used to get the death rate which in turn assists the Insurer to design the policies to minimize any loss and provide a secure coverage the insured.
  • Risk/Minimal loss – As per minimal risk policy, an individual should take necessary measures to reduce the risk or damage that arises due to the life style, habits, etc. The insurance companies do business to make profits, and the insured individual is expected to take all steps to stay healthy and avoid any damage or loss to his life.

Online VS Offline Policies

In this internet age and e-commerce, there are many insurance providers who are selling their insurance products online in India.
There are many key players in the market who cater to the needs of people like Bajaj Allianz, ICICI Prudential, HDFC life, Max Life etc.
At the same time, certain providers provide various services offline to the customers like the largest insurance provider in India – Life Insurance Corporation (LIC) offers certain plans offline to its customers. There are certain benefits attached when we buy the insurance policy online as below:

  1. Comparison – one can do research online comparing with other hundreds of policies available online without asking agent who may not be able to compare and explain in such large number
  2. Fast Process – Once the policy is decided, purchasing it, premium payment, receipt generation etc. will be done quickly within minutes as it’s a real time procedure.
  3. Anytime Access – The policy holder can login to his account on the web site of insurance provider to go through the policy related details anytime.
  4. Time Saver – All the process starting from research till purchasing the policy can be done online sitting anywhere without visiting any office or agent. This saves a lot of time along with not paying any commission or brokerage to the policy agents.
  5. Transparency – All the relevant policy details along with policy documents will be available on the company web site for the policy holder to go through anytime. There is no intervention of any individuals mis-leading or manipulating the data to close the deal with client.

Insurance Companies in India

Today we have more than 50 insurance companies operating in India providing their services to a wide variety of clients. IRDA is the body that regulates all the life insurance as well as general insurance companies in India. Here are few insurance companies as below:

  • Life Insurance Corporation (LIC) of India
  • SBI Life Insurance
  • HDFC Standard Life Insurance
  • Bharati AXA Life Insurance
  • ICICI Prudential Life Insurance
  • Max Life Insurance
  • Bajaj Allianz
  • Birla Sun Life
  • Kotak Mahindra Life Insurance
  • Reliance Life Insurance
  • Aviva Life Insurance

Claim Settlement Process

All the insurance policies will come to an end as per their tenure or in case of any event or loss of life of Insured. They can be either Maturity Claims or Death Claims.
Based on the category whether it’s a maturity or a death claim, the settlement of claim has to be done to the Insured by the Insurer / Insurance company within stipulated time.

The insured should submit relevant documents to the Insurer to take the process ahead and settle the payment.

  1. For Death Claims – The nominee or the beneficiary has to submit the below documents:
    • Claim Form
    • Original Copy of Death Certificate
    • Original Policy document
    • Photo Identity of the beneficiary
  2. For Maturity Claims – In case of maturity claim, the policy holder can submit the below documents
    • Original Policy document
    • Claim Form
    • Legal proof of title in case there is no nominee/beneficiary appointed by the Insured

We have got a fair idea by now on the basic concept of life insurance, benefits, types of insurance, few companies in India that provide the insurance-based services etc. Life insurance is a vast sector that provides services to the citizens of India through their wide range of products based on different requirements of customers. Nothing is predictable, and the only way to secure the future is by taking appropriate steps in that manner. Life insurance is the simple form to get prepared financially in case of any unforeseen event, accident or retirement. One needs to appreciate the importance of life insurance in their life and consider it as back-up plan and have peace of mind for the rest of life.

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Chetan Chandak (B.Com, LLB)
Chetan is the Head of Tax Research at H&R Block (India) with an experience of more than a decade in tax advising. He is also a regular contributor for some of the leading news publications in India such as Economic Times, Financial Express and Money Control. Professionally, Chetan is fascinated by international taxation and expat-related tax research.

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