How does a life insurance policy work?

Life insurance is a contract between the policyholder and the insurance company. When a policyholder buys insurance, they have to pay premiums to get a sum assured for their loved ones. This sum assured is the amount that an individual receives in return for the premium paid in previous years. In case of the demise of the policyholder within the tenure of the policy, the nominee receives the sum assured. This ensures that, in the policyholder’s absence, their family does not face any financial turmoil. With the uncertainties of life, having a life cover leaves the policyholder and their dependents financially secure. 

Whenever you are buying any long-term financial product that affects you and your family, it is important to know how it works beforehand. Since there are several types of life insurance, you must know the core concepts before narrowing down your choices.

The basics of life insurance

When you buy life insurance, there are several decisions you have to make. Starting from what policy you want to buy, its premium, its tenure, and any maturity benefits. Once you get the clarity on the type of life insurance you want, you can sign the contract with the life insurance company. Once you understand how life insurance policies work, narrowing your choice and buying one gets easy. 

The way your life insurance policy works depends upon the type of policy you have selected. If you have selected life insurance with savings or investment components, you may also receive maturity benefits. Also, along with that, you need to consider if you want to take any rider options with your base plan. Riders are add-on benefits that you can club with your basic life insurance policy. There are additional premiums that insurance companies charge for the additional benefits that they provide. 

One of the key factors that you, as a policyholder, should consider is the sum assured of your policy. It is the funds that your family members need in your absence and, hence, choosing the right amount of coverage is a crucial decision. This is because having low coverage can cause unexpected financial troubles for your loved ones. Take your and your family’s lifestyle, income, and savings into consideration before narrowing the choices. Also, if there are any liabilities that you have or are planning to take, consider them too. 

The tenure of your life insurance policy is also a game-changer. Since, after the tenure is over, you no longer get the life cover from your insurer. It is important that, based on your current life and plans, you choose your tenure wisely. 

Things you should know about your life insurance plan

There are several types of life insurance products which have unique features and benefits. Depending on the policy that you select, you are required to pay premiums regularly. Premiums are a type of fee that the life insurance company is charging for providing a life cover. Till your policy matures, you will be required to pay premiums regularly throughout the policy. For example, if you buy term insurance for 20 years, make regular payments on your premiums for the entire duration of 20 years. There are several factors that insurance companies take into consideration while determining your premium. 


While understanding how life insurance policies work, it is important to understand how your insurer determines your premium. There is underwriting that your insurance company carries out before approving your policy. It takes the policyholder’s information to determine the premium amount. This includes their age, income, health condition, family history, and occupation, amongst several other factors. These factors help insurance companies to access their risk and decide the premium amount accordingly. 


In case of the demise of the policyholder, the insurance company is required to pay the entire coverage amount to the nominee. When you are buying a life insurance policy, you must read the fine prints, which include the inclusions and exclusions. 

Life insurance is a huge decision that directly affects everyone you love. You must choose a reputed life insurance provider before buying a policy. Check the plan options available and your needs before narrowing down your options.