by Life Insurance Products are financial instruments designed to provide protection and financial support to individuals and their families. These products offer monetary benefits in case of death of the policyholder or on survival after a specified period. Life insurance helps in securing the future of dependents, meeting long term financial goals, and managing risks related to human life. In India, life insurance products are regulated by IRDAI to protect policyholders’ interests. Life insurance products also encourage regular savings and disciplined investment habits. Different products are available to suit the needs of individuals at different stages of life, such as protection, savings, investment, and retirement planning. By choosing suitable life insurance products, individuals can ensure financial stability, income replacement, and peace of mind for their family members in uncertain situations.
Procedure for Effecting Life Insurance:
1. Proposal & Disclosure (Application)
The process begins when a prospective policyholder (the proposer) submits a formal Proposal Form to the insurer. This form requires detailed personal, health, financial, and lifestyle information. Crucially, the proposer must adhere to the principle of Utmost Good Faith (Uberrimae Fidei), disclosing all material facts truthfully and completely. Any misrepresentation or concealment (e.g., of a pre-existing illness or hazardous occupation) can later invalidate the policy. The proposal form serves as the primary basis for the insurer’s risk assessment and underwriting decision.
2. Medical Examination & Verification
For policies above a certain sum assured or age, the insurer mandates a medical examination by an approved doctor. The insurer arranges and bears the cost of this examination. The doctor’s report assesses the proposer’s health, confirming details from the proposal form. Concurrently, the insurer initiates field verification, which may include checking personal details, financial standing (for high-value policies), and lifestyle habits. This step is essential for risk evaluation, preventing anti-selection, and ensuring the proposed premium accurately reflects the individual’s risk profile.
3. Underwriting & Risk Assessment
In this core step, the insurer’s underwriting department analyzes all collected information (proposal, medical report, verification findings). The underwriter evaluates the mortality risk associated with the proposer based on age, health, occupation, and family history. The outcome is a decision to: accept the risk at standard premium, accept with extra premium or exclusions, postpone, or decline the proposal. Underwriting ensures the principle of fairness, where each policyholder pays a premium commensurate with their individual risk, maintaining the financial stability of the insurance pool.
4. Acceptance & Issuance of Policy
If the proposal is accepted, the insurer sends a formal acceptance letter along with the policy document and the first premium receipt (if the initial premium was paid with the proposal). The policy document is the legal contract. It meticulously outlines all terms, including the sum assured, premium amount, policy term, benefits, exclusions, and the free-look period. The proposer, now the policyholder, must review it thoroughly to ensure all details are correct and that they fully understand the contract’s conditions before the free-look window expires.
5. Commencement of Risk Cover & Free-Look Period
The insurance cover typically commences from the date of receipt of the first premium, subject to underwriting approval. By law, the policyholder is granted a 15-day free-look period from the date of receiving the policy document. Within this period, they can choose to cancel the policy for any reason by returning it. The insurer will refund the premium paid, subject only to a nominal deduction for proportionate risk cover and medical expenses. This provision protects the policyholder’s interests, allowing for an informed final decision without penalty.
Types of Life Insurance Policies:
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Term Life Insurance
This is pure protection insurance. It provides a guaranteed death benefit to the nominee if the insured dies within a fixed policy term. It offers the highest sum assured at the lowest premium but has no maturity or survival benefit. If the insured outlives the term, the policy expires with no payout. Variants include Level Term (fixed sum assured) and Increasing/Decreasing Term. It is ideal for covering specific financial liabilities like a home loan or income replacement for dependents. Return of Premium (TROP) term plans refund all premiums upon survival.
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Whole Life Insurance
This policy provides lifelong coverage until the death of the insured, irrespective of age. A portion of the premium covers the life risk, while the remainder builds a cash value over decades. This cash value can be borrowed against or withdrawn. The sum assured, plus any bonuses, is paid to the nominee upon death. It serves as both a long-term financial safety net and an estate planning tool, ensuring a legacy for heirs. Premiums are typically higher than term plans but payable for a limited period (e.g., 20 years).
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Endowment Policies
Endowment plans combine savings with protection. They pay the sum assured plus accrued bonuses either on the death of the insured during the term or upon survival to maturity. They are traditional, low-risk savings instruments with guaranteed returns. Premiums are significantly higher than term insurance. They are suited for individuals seeking disciplined savings for specific goals like a child’s education or marriage, while simultaneously securing their family’s financial future. Money-back policies are a variant that provide periodic partial payouts during the policy term, with the balance at maturity.
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Unit Linked Insurance Plans (ULIPs)
ULIPs offer dual benefits of life cover and market-linked investment. The premium is split: one part pays for mortality charges, and the remainder is invested in units of the policyholder’s chosen equity, debt, or balanced funds. The final payout is variable, depending on fund performance. They offer flexibility through features like fund switching and top-ups. While providing potential for higher returns, they carry investment risk and involve charges like fund management fees. They are suitable for those with a higher risk appetite seeking wealth creation alongside insurance.
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Annuity/Pension Plans
These plans are designed for post-retirement financial security. During the accumulation phase, the policyholder pays regular premiums or a lump sum. Upon vesting (at a chosen retirement age), the insurer uses the accumulated corpus to provide a regular income stream (annuity) for the remainder of the policyholder’s life. Types include Immediate Annuities (income starts immediately after a lump sum) and Deferred Annuities (income starts at a future date). They address the risk of outliving one’s savings and ensure a stable, predictable income during retirement, with options for a spouse’s pension.
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Child Plans
These are specialized endowment or ULIP-based plans where the child is the beneficiary, but the life insured is typically a parent/guardian. The plan ensures that if the parent (the premium payer) dies during the policy term, future premiums are waived, and the agreed sum is secured for the child’s future. On survival, the policy matures to provide a lump sum for the child’s major milestones like higher education or marriage. They are structured to financially safeguard a child’s future against the uncertainty of the earning parent’s lifespan.
