What is Life Insurance? Its Types & Benefits | SBI Life

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What is Life Insurance? Its Types & Benefits

Insurance Basics & Financial Advice The gift of life is precious, and you cannot put a money tag on it. But one needs money for survival and to satisfy the needs of the family. If there is a sudden demise of the breadwinner, the family might face difficulties. Hence, to ensure the proper livelihood of the family even after the death of bread earner, it is often advised to buy a life insurance policy.

What is Life Insurance? Its Types & Benefits

5 Minute |

What is Life insurance

The gift of life is precious, and you cannot put a money tag on it. But one needs money for survival and to satisfy the needs of the family. If there is a sudden demise of the breadwinner, the family might face difficulties. Hence, to ensure the proper livelihood of the family even after the death of bread earner, it is often advised to buy a life insurance policy.

What is a life insurance policy?

Wondering about the meaning of life insurance? A life insurance policy is essentially a contract between an individual and an insurance provider, where the company promises to pay a specified amount of money to the family or beneficiary of the individual, in return for regular payments over a period of time. These payments are known as premium and are usually paid on an annual basis. The individual who buys the insurance is known as the policy holder.

Life insurance assures lump sum amount to be paid to the family if the policyholder passes away unexpectedly. Though money cannot make up the loss, it ensures no financial hiccups to the family even after the demise of the breadwinner.

The life insurance policy provides with the much-needed cover against risk and offers you opportunities to grow your savings It is also an effective tool that enables you to save for future expenses that may occur, such as the higher education or marriage of children.

Life insurance has meaning especially for those with minor children, children with special needs, those who wish to secure the financial future of their family or wish to build savings over the long term.

It is best to buy a policy early, since the premium amount rises with age and if the individual is a smoker or has pre-existing medical conditions

Benefits of life insurance

Here are some of the benefits of life insurance:-

• Tax benefits:– Enrolling for a life insurance policy can guarantee you tax benefits.The premiums you pay towards the policy make you eligible for tax exemptions of up to ₹1.5 lakhs of your taxable income, under Section 80C of the Income Tax Act. The death benefits are also fully tax exempt, under Section 10(10)D of the ITA. 

• Guarantee of fix returns:- Life insurance policies guarantee that you get a fixed amount after a fixed timeline. You need to go through the structure of different life insurance products.Read through the structure and terms and conditions of different life insurance products to choose a policy that best suits your needs. Whatever you choose, you can rest assured that the promised death benefits will be disbursed to the beneficiary, if the information provided by you at the time of enrolling for the policy was accurate.

• Risk mitigation and coverage:- These policies provide the quintessential risk coverage in terms of monetary compensations to mitigate and cover risks after the policyholder’s death.By enrolling for life insurance, you are protecting your family against financial risks that would occur if the primary breadwinner meets an untimely death.

• Provision for loan:- Certain policies provide the option of loan and allow to borrow a sum of money.This means that if you need to take on a loan, for instance, to fund the education or marriage of a child, you can use the life insurance policy as collateral.

• Health expense coverage:- Most of these policies cover the health and treatment expense that may occur.occur if the policy holder falls ill. You can also choose riders to increase the coverage of the insurance policy to protect your finances even while you are alive.

Following are the different types of life insurance policies available today in the market:-


• Term Life Insurance


Term insurance policies provide the predefined amount of money to the policyholder’s family, only if the policyholder dies during a specified term. No claim if the insured person survives till the end of the policy period. This policy essentially remains active for a predefined time and is one of the affordable policies available in the market.

• Whole life insurance

Whole life insurance as the name suggests provides you cover at all points of your life in which the policy is in force. This coverage time can go as long as 100 years. These policies also offer loan facilities to the policyholder. The overall process of buying is simple and can be done online as well through a simple process.

• Money Back Policy

The main difference and advantage of money back policy is that it gives the policyholder different survival benefits which are linked to the period of the policy. Unlike other policies, this policy gives you money during the policy period. Regardless of the instalments paid, if the policyholder dies, the family gets the entire sum. These policies are expensive as compared to other counterparts.

• Endowment Policy

Endowment policies are different from term insurance policies in a way that in case of these policies, the insured gets a lump sum amount of money if s/he survives till the maturity date. The policy offers insurance with savings at the same time. They also come with riders that may be used to increase the coverage of the policy. In case of death, the endowment policy guarantees that along with the sum a participation profit is also paid according to the nature of the policy.

• Retirement Plans

Retirement plans, in simple terms, can be defined as those plans that guarantee fixed income after your retirement. They aid in creating a retirement corpus. This corpus is then invested to generate post-retirement money flow, thus creating a financial cushion and helping in risk mitigation. The money is rolled out in the form of monthly pension. All in all, these policies help the insurer in achieving the financial goals of long term nature.

In the advent of the internet, almost all the companies claim to have the best life insurance online. However, one must read the fine print carefully and should check carefully, if the policy offerings match with individual requirements.

Principles of Life Insurance

In India, we follow four basic principles of life insurance.

  1. 1.Insurable Interest: This principle has been put in place to protect insurance policies against any kind of misuse. It refers to the level of interest that the potential policy holder is estimated to have in the life insurance policy. This interest could be in the form of a personal relationship, family bond, etc. Based on this interest level, the insurance company approves or rejects the individual’s application for a policy.
  2. 2. Minimal Risk: Any company that provides life insurance is taking on some level of risk, since they would need to pay the assured sum at some point of time. Therefore, the company would prefer to keep the level of risk as low as possible.  To ensure this, the insurer might check the applicant’s medical status, smoking habits, etc. In addition, they might expect the policy holder to take good care of their health.
  3. 3.Good Faith: As mentioned earlier, a life insurance policy is essentially a contract between the insurer and the policy holder. This contract is entered into on good faith that both parties are providing accurate relevant information, without hiding anything. If any information is withheld, it could lead to serious consequences. For instance, if the insurance provider discovers that the policy holder had a pre-existing heart condition but did not divulge the fact at the time of policy purchase, they could reject the claim made by the beneficiary, following the demise of the policy holder.
  4. 4.Law of Large Numbers: This is a key principle of life insurance, which is based on a statistical theorem that states that with larger numbers, fluctuations tend to average out. This essentially means that since life insurance is a long-term investment, the losses and gains will average out over time, minimizing the risks for the policy holder


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