What is life insurance and why do or don't you need it. We explain

Deepika Chelani
Updated: 30 Dec 2021, 09:25 AM IST
TL;DR.

Life insurance is a contract between a policyholder and insurer. Under this arrangement, the insurer agrees to pay a fixed amount of money upon the insured person's death or after a specified period of time. Let’s explore more on this

Life insurance is a contract between an insurance policy holder (insured) and an insurance firm.

Life insurance is a contract between an insurance policy holder (insured) and an insurance firm.

Natural and unintentional causes of mortality and disability pose a threat to human existence. When a human life is lost or a person is permanently or temporarily handicapped, the household loses income. Life Insurance is a financial protection plan for events involving human life, such as death, accident, disability, retirement, and so on.

Although human life can never be quantified, a monetary amount might be calculated based on potential income losses. As a result, the Sum Assured (or the sum promised to be repaid in the case of a loss) is considered as an ‘advantage' in terms of life insurance. 

Life insurance policies pay out a certain sum of money if the policyholder dies or becomes handicapped due to an accident during the policy's term.

Definition of life insurance

In legal terminology, a contract between an insurance policy holder (insured) and an insurance firm is known as life insurance. The insurer agrees to pay a predetermined quantity of money (also known as "Cover Amount"or "Sum Assured" ) upon the insured person's death or after a certain length of time under this contract.

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Life insurance is a contract between a policyholder and insurer.

How does life insurance work?

A death benefit and a premium are the two primary components of a life insurance policy. Let us understand these terms in detail:

Death benefit

The death benefit, also known as face value, is the amount of money guaranteed by the insurance company to the beneficiaries named in the policy after the insured passes away. 

For example, the insured may be a parent, and the beneficiaries could be their children. The insured will select the appropriate death benefit sum based on the projected future requirements of the beneficiaries.

Based on the company's underwriting standards relating to health, age, or any hazardous activities in which the prospective insured participates, the insurance company will assess if there is an insurable interest and if the prospective insured meets the requirements for coverage.

Premium

The money paid for insurance by the policyholder is known as premiums. If the policyholder pays the requisite premiums, the insurer must provide the death benefit upon the death of the insurer. 

The premiums are calculated in part by the insured's average lifespan considering the chances of the event that the insurer will have to provide the policy's death benefit. A portion of the premium is also used to cover the insurance company's operating costs.

Bottom Line

Life insurance may provide peace of mind by ensuring that your bills and loved ones are taken care of financially in the case of your death. As a general guideline, after you become a parent, each adult in your household who earns a living should obtain life insurance coverage that will continue until the youngest kid graduates from high school.

If you have substantial financial responsibilities, such as excessive credit card debt or a mortgage, you may be able to pay those liabilities with life insurance.

 

First Published: 30 Dec 2021, 09:25 AM IST
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