Life Insurance Brief Introdcution

What is Life Insurance?

Life Insurance is a financial product that offers financial protection to a person’s family if he dies.

When someone dies, his family suffers emotional loss and maybe also financial loss. One cannot compensate emotional loss. However financial loss can be replaced using life insurance.

Life Insurance is a contact between a person (the Insured) and a company (the Insurer).

  • The person pays a sum of money known as premium to the Insurer.
  • In return the insurer promises to pay the person’s family or beneficiary a certain amount of money known as “Sum assured” if the person suddenly dies.

Illustration of Life Insurance with Glossary

Mr Muthu is 30 years old. He is married. He wants to buy a 30 year term life insurance policy worth Rs 50 lakhs. He talks to an insurance company and receives a yearly quite of Rs 8,500.

Let us now try to understand how this works.

  1. Mr Muthu has to pay the company Rs 8,500 every year for the next 30 years.
  2. If he suddenly dies before his 60th birthday, his family will get Rs 50 lakhs from the company.

Life Insurance Policy
The contact between a person and the Insurance company is known as Life Insurance Policy.

Policyholder
The person who buys an insurance policy is the policyholder.

Sum Assured
Sum Assured is the amount that the insurer has agreed to pay if the person dies. In our example, the sum assured is Rs 50 lakhs.

Premium
Premium is the amount that a person has to pay so that his beneficiary can avail the benefits if he suddenly dies. In our example, Mr Muthu must pay a premium of Rs 8,500 every year.

Claim
Claim is the demand made by the beneficiary of the insured person for payment of sum assured as per terms of the Life Insurance policy. If Mr Muthu suddenly dies, his beneficiary must make a claim so that they can get the sum assured of Rs 50 lakhs.

Conclusion

Life Insurance is financial product which substitutes uncertainty of life with financial certainty. In case a person suddenly dies, there will be a loss of income. But if he is insured, the family can now be financially taken care of.

I hope you found this article useful. If you have any comments please feel free to contact me.

Before making any investment decision, please contact your financial adviser. I have provided this article for educational purpose only.

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Reference

Subhodeep Mukhopadhyay

I am a Management Consultant in the Education Sector. In my previous corporate career, I have worked in Banking, Private Equity and Software industry. I am an MBA in Finance/ Computer Engineer and enjoy doing equity research and financial analysis in my free time.

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