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Life Insurance

Life insurance differs from health insurance as it offers financial protection to your family in the event of your death, rather than coverage for medical expenses. It serves various purposes and comes in different forms, making it essential to select the right policy. Opting for the best life insurance policy in India can be a daunting task, considering the abundance of options available. In this article, we will explore crucial factors to consider when choosing a life insurance policy, providing you with comprehensive details to simplify your decision-making process. By consolidating all the necessary information in one place, we aim to assist you in finding the ideal life insurance policy for your needs.

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What is Life Insurance ?

A life insurance policy involves a contractual agreement between a policyholder, who is the customer, and an insurer, which is the insurance company. This agreement stipulates that upon the policyholder's unfortunate demise or after a predetermined period, a lump sum amount will be provided. When the policy begins, the policyholder designates a nominee to receive the funds on their behalf. It's important to note that not all life insurance policies mature upon the policyholder's death. Many policies are purchased for a specific duration and mature once the agreed-upon tenure is completed. The Indian market offers a variety of life insurance policies to choose from

Key Features of Life Insurance Policy

A life insurance policy is much more than a source of coverage and thus consists of numerous features.

  • Death benefits: Under a life insurance policy, refer to a predetermined sum assured that is payable to the nominee in the event of the life assured's untimely demise within the policy tenure. These death benefits serve as crucial financial support for the policyholder's dependents, helping them meet their day-to-day needs and pursue their life goals.
  • Investment opportunity: Life insurance policies can indeed serve as investment opportunities when opting for plans like Unit Linked Insurance Plans (ULIPs), Money Back policies, and Endowment plans. These types of policies offer the advantage of providing both life coverage and investment benefits. By investing in these plans, policyholders have the potential to earn returns on their investments. These returns can be in the form of maturity benefits, bonuses, or investment gains, depending on the specific terms and conditions of the chosen life insurance policy. It's important to carefully consider the investment component of these policies and assess the potential returns before making a decision.
  • Tax exemptions: Tax exemptions refer to specific provisions in tax laws that allow individuals or organizations to reduce their taxable income, thereby decreasing their overall tax liability. These exemptions are typically granted for certain reasons or circumstances, promoting economic growth, social welfare, or encouraging specific activities. Common examples of tax exemptions include deductions for charitable contributions, education expenses, medical costs, or home mortgage interest. Governments often use tax exemptions to incentivize behavior or support certain industries. Tax exemptions can also apply to specific groups, such as veterans, senior citizens, or low-income individuals. These exemptions play a crucial role in shaping tax systems and ensuring fairness, while also fostering economic development and social progress.
  • Maturity Benefits: Many life insurance policies offer maturity benefits when the policy term comes to an end, provided that the policyholder has survived the entire duration of the policy. In such cases, if the insured individual is alive at the end of the specified policy tenure, they become eligible to receive the maturity benefits. These benefits typically include a lump-sum payment or a series of regular payments, depending on the terms and conditions of the policy. Maturity benefits serve as a financial safety net, providing policyholders with a source of funds that can be utilized for various purposes such as retirement planning, education expenses, or any other financial needs.
  • Collateral for loan: Certain life insurance policies provide a valuable feature wherein policyholders can obtain loans against their policies. This provision proves beneficial for individuals facing urgent financial needs, such as medical emergencies or fulfilling immediate financial obligations. By leveraging this feature, policyholders can access funds quickly and conveniently without the need for extensive paperwork or credit checks. These loans enable individuals to address critical financial requirements promptly, ensuring that they can cover expenses related to medical treatments, unforeseen emergencies, or meet their financial obligations in a timely manner. This aspect of life insurance policies offers a valuable lifeline for individuals during challenging times, providing them with the necessary financial support when they need it most.
Life insurance plans can provide certain tax benefits that can help you save on income tax.

Here are some ways you can potentially save income tax with life insurance plans:

  • Deductions under Section 80C: Premiums paid towards life insurance policies are eligible for a deduction under Section 80C of the Income Tax Act. You can claim a deduction of up to Rs. 1.5 lakh per financial year on the premium paid for life insurance policies, subject to certain conditions.
  • Maturity proceeds under Section 10(10D): The maturity amount received from a life insurance policy, including bonuses, is tax-free under Section 10(10D) of the Income Tax Act. This means that the amount received on maturity or surrender of the policy is exempt from tax.
  • Tax-free death benefit: In the unfortunate event of the policyholder's demise, the death benefit paid to the nominee/beneficiary is tax-free under Section 10(10D) of the Income Tax Act. This can provide financial security to your loved ones without any tax implications.
  • Additional riders for tax benefits: Some life insurance plans offer additional riders like critical illness cover or disability cover. The premiums paid towards these riders may also be eligible for tax deductions under Section 80D or Section 80C of the Income Tax Act, depending on the specific rider and its conditions.

It's important to note that the tax benefits mentioned above are subject to the provisions and conditions of the Income Tax Act. The specific tax benefits may vary based on the type of life insurance plan, policy terms, and your individual circumstances. It's always advisable to consult a tax advisor or financial planner to understand the tax implications and benefits related to life insurance plans based on your specific situation.

Life Insurance Policy FAQ's
1. What is term life insurance?
Term Life Insurance is a simple plan, which takes care of the expenses of your family in your absence in the form of a huge life cover for a very small premium. In case of a policyholder's untimely death, their family or nominee receives the Cover Amount as per the policy. The plan can be customized to one's needs by including add-on benefits.
2. How much life cover do I need to protect my family?

Your cover amount of Term Insurance should be a factor of your family's expenses keeping in mind the inflation as well.

A simple way to calculate is going up to 20x of your annual earnings so as to sufficiently cover your family's financial needs in your absence

3. Do you get your money back at the end of a life insurance policy?
Life Insurance policies offer an option of Return of Premium. In case you choose this option, all the premium paid, excluding GST, is paid back as Survival Benefit, in case the policyholder survives the Policy Term
4. How to file a life insurance claim?
In case of the insured's death, the nominee of the deceased will be able to claim in the following way:
  • Intimate the insurer about the death as soon as possible with all the important details such as time, place, and cause of death.
  • Submit needful documents and proof to the insurance company. This will consist of the insured's death certificate along with the claim form provided by the insurance company.
  • If the policy was assigned, the assignee will have to provide the documents. If someone else (apart from the nominee or assignee) is filing a claim, (s)he has to submit the legal proof of his/her relation with the insured.
  • If required, post-mortem, hospital, and attending doctor's reports have to be submitted.
  • In cases involving police inquiries, an investigation/survey report will have to be submitted.
  • Once the investigation is over, the insurance company will approve/disapprove the claim. The details of the same will be shared with the claimant.
5. Can premiums be tax deductible?
Yes, the premium paid towards the policy is tax exempted up to a maximum limit of Rs 1.5 lakh in a financial year U/S 80C of the Income Tax Act.
6. Can Insurance be cashed in before death?
Yes. Depending upon the cash value of a particular policy, it can be cashed in. Cash value is a part of a life insurance policy's death benefit which can be liquidated. In case the policyholder takes a loan against the cash value and passes away while the loan is unpaid, the death benefit is reduced by the amount of the outstanding loan.
7. Do I need both- Life Insurance and critical illness cover?
It completely depends on your insurance needs. However, it is beneficial to have enhanced insurance coverage and opt for life insurance and critical illness cover both.
8. Does life insurance cover accidental death?
Yes, life insurance policies do cover accidental death. However, one must check the policy documents if it specifically states that it does not cover death by accident.
9. Do Life Insurance Policies offer Grace Period?
Yes. The life insurance policies offer a grace period of 30 days (to pay the premium) in case the policyholder missed his/her premium payment date.
10. How Much Life Cover Can I buy?
The amount of cover depends on your income, your family's requirements, and your liabilities. However, as per the financial experts, your cover should be at least 10-15 times the annual income.
11. How to revive a lapsed life insurance policy?
The IRDA has directed all the insurance providers to allow policyholders to revive their lapsed policy within two years from the time it is deactivated. One needs to pay the renewal fee along with the late fee and additional penalties that may vary from insurer to insurer.
12. What will happen to the life insurance benefit if both the policyholder and nominee dies?
In such scenarios, where both the policyholder and nominee died, then the benefit will be payable to their heirs or legal representative.
13. What to do if my nominee dies before me?
In such a case, you can add a new nominee. In case you don't, by default, the company will consider your heir your new nominee.
14. What is the most cost-effective life insurance type?
A term plan is the cheapest type of life insurance since it does not include any survivor benefits. When the policy period ends, the plan lapses.
15. I have a Life insurance cover of 25 Lakhs. Is it enough?
The thumb rule for choosing the right coverage is getting the cover of 10-15 times your annual income. Therefore, analyze your requirements first, and then decide your ideal life insurance coverage.
16. Should I choose a term life insurance or a whole life insurance policy?
If you are looking for a coverage that lasts for a shorter period of time and buys in affordable premiums then you can buy a term insurance policy. Whereas, if you want coverage for a very long time or for your entire life then go for a whole life insurance policy.
17. What is Return of Premium (RoP) life insurance?
Return of Premium is a feature that you can get with your term life insurance wherein, if you outlive your term insurance policy the insurer pays you back the premiums that you paid in full or partially.
18. What will happen to my life insurance policy if I do not pay my premiums?
If you stop paying for your life insurance policy, your policy will lapse after the grace period and you will lose all the premiums that you have paid.
19. What are the factors that affect my life insurance premiums?
Your life insurance premiums are based on multiple factors such as your age when you decide to buy the policy, lifestyle habits which include smoking and drinking, medical history for existing diseases, gender and the tenure of your policy.
20. Do I have to pay taxes on the receival of my life insurance sum assured?
Since life insurance doesn’t fall into gross income you do not need to report about the amount you receive.
21. What type of life insurance is considered to be best in general?
Although all kinds of life insurance serve different purposes, Term Insurance is said to be the best form of life insurance.
22. Is short term life insurance worth it?
Short term life insurance is known as term insurance. Yes, it is an excellent option as it gives you affordable premium payment options and you get the flexibility of switch or extend your coverage.