What Is Life Insurance in India & How Does It Work?

Life insurance in India provides financial security and long-term planning, protecting loved ones from financial uncertainties. The market offers various products tailored to diverse needs. These policies ensure families maintain stability and pursue aspirations even without the primary earner.

Fundamentals of Life Insurance in India

Life insurance is a contract between an individual and an insurance provider. The insurer commits to paying a specified sum to designated beneficiaries upon the insured’s death or after a predetermined period. This arrangement involves distinct terms defining the policy’s roles and financial aspects.

The “policyholder” purchases the policy and pays premiums; the “insured” is the person covered. The “nominee” is designated to receive benefits upon the insured’s death, ensuring the payout reaches intended recipients without legal complications.

“Premium” refers to regular payments made by the policyholder to keep the policy active. Payments can be monthly, quarterly, semi-annually, or annually, offering flexibility. The “sum assured” is the predetermined amount the insurer promises to pay the nominee if the insured dies during the policy term. This amount is chosen at policy purchase and forms the core financial protection.

Beyond the death benefit, some policies offer a “maturity benefit,” a lump sum paid to the policyholder if they survive the entire policy term. The “death benefit” is the payout made to the nominee upon the insured’s death.

Types of Life Insurance Policies

India’s life insurance market offers various policy types for pure protection or combined protection and savings. Term life insurance is straightforward, covering specific periods (e.g., 10, 20, or 30 years). It offers a high sum assured at low premiums without a savings component. Payout occurs only if the insured dies within the term; otherwise, no benefit is paid, making it cost-effective for pure risk coverage.

Endowment plans combine life insurance with savings. They provide a lump sum payout upon maturity or to the nominee if the insured dies during the term. They offer guaranteed returns and may include bonuses, suitable for financial protection and wealth accumulation for goals like education or marriage. Premiums are paid for a fixed period, and maturity benefits include the sum assured plus any accumulated bonuses.

Unit-Linked Insurance Plans (ULIPs) blend life insurance with investment opportunities. A portion of the premium goes towards life cover, while the remaining is invested in various market-linked funds (equity, debt, or balanced) chosen by the policyholder. ULIPs offer flexibility to switch between funds based on market conditions and risk appetite. They come with a mandatory five-year lock-in period.

Money-Back policies provide periodic payouts (survival benefits) at regular intervals during the policy term. This allows policyholders to receive money at different life stages, helping to meet short-term financial needs. If the insured survives the policy term, they receive the remaining sum assured at maturity; in case of death, the full sum assured is paid to the nominee.

Whole life insurance provides coverage for the insured’s entire lifetime (typically up to 99 or 100 years). These policies accumulate cash value over time, which can be borrowed against or withdrawn. Premiums remain fixed throughout the policy’s duration, offering lifelong financial security and a savings element.

Policy Management and Claims

Managing a life insurance policy in India involves several steps, from application to claims. When applying, individuals must submit documents to verify identity and financial standing. These include proof of identity (Aadhaar, PAN, passport) and address (driving license, Aadhaar, utility bills).

Income proof (salary slips, bank statements, ITR) may be necessary for higher coverage. Medical reports and passport-sized photographs are also part of the application to assess health and risk. Forms are available online or at physical branches.

Premium payments offer flexibility. Policyholders can choose monthly, quarterly, half-yearly, or annual options. Payment methods include online banking, direct debit, UPI, digital wallets, and credit or debit cards. Payments can also be made via cheque or cash at branch offices or authorized centers. Setting up auto-debit mandates helps ensure timely payments and prevents policy lapses.

The claims process, for either a death or maturity benefit, follows a procedure. For a death claim, the nominee must notify the insurance company and submit the original policy, the insured’s death certificate, and nominee’s identity and address proof. Depending on circumstances, additional documents like medical or police reports may be required. For maturity claims, the policyholder submits the original policy, a discharge form, and identity proof to receive proceeds. After submission, the insurer verifies documents and processes the claim for payout.

Tax Considerations

Life insurance policies in India offer specific tax benefits under the Income Tax Act, 1961, helping policyholders manage their tax liabilities.

Section 80C allows tax deductions on premiums paid towards life insurance policies. Individuals can claim a maximum deduction of up to ₹1.5 lakh per financial year for premiums paid for themselves, their spouse, or children. For policies issued after April 1, 2012, the premium paid must not exceed 10% of the sum assured to qualify for the full deduction. If the premium exceeds this limit, the deduction is proportional.

Section 10(10D) addresses the tax treatment of maturity or death benefits received from a life insurance policy. Any sum received under a life insurance policy, including bonuses, is exempt from income tax. This exemption applies to various policy types, including traditional life insurance, endowment plans, and ULIPs.

Conditions apply for this exemption:
For policies issued after April 1, 2012, the annual premium must not exceed 10% of the sum assured.
For policies issued between April 1, 2003, and March 31, 2012, the premium threshold was 20% of the sum assured.
For ULIPs issued on or after February 1, 2021, the aggregate annual premium must not exceed ₹2.5 lakh.
For non-linked policies issued on or after April 1, 2023, if the aggregate annual premium exceeds ₹5 lakh, the maturity benefit becomes taxable.

Tax laws are intricate and subject to change; consulting a tax advisor is advisable.