Life Insurance is a contract between two parties, i.e., the insurance company or insurer or assurer and the life insurance policyholder. As per this contract, the insurer promises to pay the nominee or the designated beneficiary a sum of money upon the death (or any other event as specified in the contract) of the policyholder during the currency or term of the life insurance policy or after a set period, in exchange for a period or lumpsum payment from the policyholder called as “premium”. The other events that can trigger the payment from the insurer are terminal illness or critical illness.
Life Insurance plans are broadly categorized into two types.
- Pure Protection plans
- Protection and Savings plans
A Pure Protection plan is curated to safeguard your family’s future by providing your nominee a lump sum or a periodic payment in the event of your untimely demise during the policy term. The proceeds from the insurance company serve as income replacement and thus protect your family from the financial losses that would arise because of your absence.What is Protection and Savings Plan?
A Protection and Savings plan is a financial instrument, which, apart from providing the benefits of a life cover, helps you plan for your life’s long-term financial goals, such as purchasing a home, funding your children’s higher education or marriage, and more.
- Proposer: It is the person who pays the premiums for the life insurance plan to the life insurance company. For example: You can take a life insurance policy for yourself, spouse, children, key employee or any other person whose death can cause a direct financial loss to you. When you take life insurance policy for yourself, you are both the proposer and life assured. And, if you take the life insurance policy for another person in which you have insurable interest then you are the proposer and the person in whose name the policy has been taken is the life assured.
- Insurable Interest: It is a vital principle of insurance. A person can take insurance for something to which any damage or harm can cause him/her financial loss. In terms of Life Insurance, it can be your earning spouse, any other family member on whose income you depend, or a key employee whose absence can cause financial loss in your business. In other words, the assured is so situated that the happening of the event on which the insurance money is to become payable would as a proximity cause, involve the assured in the loss or diminution of any right recognized by law or in any legal liability there is an insurable interest in the happening of that event to the extent of the possible loss or liability.
- Life Assured: It is the person whose life is covered under the life insurance policy.
- Life Insurer: It is the insurance company that sells life insurance plans.
- Nominee or Beneficiary: It is the person you assign at the time of buying the life insurance policy to receive the benefits of your policy on your behalf in your absence.
- Sum Assured or Life Cover: It is the amount payable by the life insurance company in case of death of the assured or at the end of the policy term (in case of Protection and Saving plans).
- Premium: It is the lump sum or periodic amount payable by the proposer to the insurance company in exchange of which the latter agrees to assure the life of the assured.
- Premium Payment Term: It is the number of years for which you pay the premiums.
- Policy Term: It is the number of years for which life cover continues.
- Maturity Benefit: It is the money received by the policyholder upon completion of the policy term. You get maturity benefit only in Protection and Savings plans but not in Pure Protection plans.