How Life Insurance works...!!!

Dear friends

Thank you very much for your valuable comments and feedback on my last blog on life insurance. I am sure you have revisited your insurances. In this blog I am taking you to a simple & quick tour on concept and working of life insurance.

A simple definition of life insurance is “insurance on human life”. In legal context;

· Life insurance is a contract. There are two parties in this contract.

· One party is Life insurance company, we call it “insurer” & another party is known as insured – or Life insured - the person on whose life insurance is taken.

· Insurer promises to pay the insured (or beneficiary/nominee) a stipulated amount of money called Sum Assured in the event of death of insured taking place during the policy term or at maturity of policy (depending on policy type).

· To be eligible to receive the death/maturity benefit, insured’s obligation is to keep the policy running in force by paying timely & regular premium to the insurer.

· The contract ends at death of insured or maturity of the policy whichever happens earlier.

· It can also be terminated premature, if insured doesn’t wish to continue the policy. In other cases, it can be terminated by insurer, if certain policy provisions ask for such termination.

How life insurance works:

The concept of life insurance dates back to very old time. Today, modern statistical tools and scientific applications have made life insurance business a different stuff altogether. However, basic mechanism on which life insurance works remains the same always. This mechanism is sharing and pooling of risks. In principle, a group of individuals together contribute to a pool or fund where the contributions made by them are utilized to pay a compensation amount to family of those who die during the period. In modern times, life insurance companies play the same kind of role. They invite proposals from thousands of interested individuals to pay a defined small contribution called premium, to build a huge reserve maintained by the company and this fund is used to pay/compensate nominees of unfortunate individuals who are no more. In other words, you can say that you transfer risk of death to the life insurance company at a nominal cost called premium. This is how life insurance works.

Today, we have house/car/personal loans, EMIs and credit cards, so most of us live in debt. These debts are burden which we always wish to settle while we are earning & alive. Through a life insurance policy, we can relieve ourselves from this burden to some extent and build wealth & assets while we are alive. Moreover, in case of an unfortunate event, we can relieve our loved ones from huge financial burden passing on to them because of our not being there. This way, we are not only living tension free and building a financial soundness while alive, but we are also supporting our near and dear ones, while away from them. That’s why one of LIC’s ad says – Zindagi ke saath bhi, zindagi ke baad bhi.

Friends, in Life insurance parlance;”Dying too early and living too long – both are risks”. In my next blog I will take you to the life insurance tools (products) to counter both of these risks.