How does a life insurance policy work?

As a life insurance policy is often the greatest asset we leave behind for our loved ones, it is essential that we understand how the policy works.

In this week’s column, we answer some of the frequently asked questions people have about life insurance, reflecting the areas where they often seek clarity:

What type of life insurance policy should I buy?

People often wonder about the difference between a whole-life and a term life insurance policy.

A whole life insurance policy offers coverage until the age of 100, while a term life insurance policy offers coverage for a specific period.

Is life insurance expensive?

A 2023 Insurance Barometer Study by Life Happens and LIMRA revealed that people think life insurance costs three times more than it really does.

People often inquire about the average life insurance premium, but this is quite tricky to estimate, since one’s premium depends on several different factors – age, health, sum insured and type of policy.

Do I need a medical examination before purchasing a life insurance policy?

Whether you need a medical examination before buying a life insurance policy depends mostly on the insurance company’s guidelines.

Higher sums insured usually require more underwriting and hence a medical is often requested.

The type of policy is also a factor, as some policies do not require a medical examination, but the premiums may be higher and coverage amounts are often limited.

One’s age and health status are also factors, with younger and healthier people sometimes qualifying for life insurance policies without a medical examination.

Will my policy be affected if I develop a health condition later on in life?

People often ask whether a health condition will affect their policy later in life.

Once approved, life insurance policies are generally locked in, so the development of a health issue later in life generally does not affect one’s sum insured or premium.

Can I get a life insurance policy if I have a pre-existing condition?

Yes. You may still qualify for a life insurance policy if you have a pre-existing condition. However, there are a few factors to bear in mind.

Insurance companies assess your risk based on the type of pre-existing condition, its severity and how well it is controlled.

Sometimes, there are also longer waiting periods before which a claim can be made, as pre-existing conditions sometimes make the process more challenging.

You should work with a financial adviser and disclose all details so that the best solution can be found for your needs.

Are the proceeds from a life insurance policy taxed?

No. Generally, life insurance benefits are paid out tax-free in a lump sum, making them a powerful tool for building and preserving generational wealth.

This column by Nutan Ragoobir, a senior insurance professional, author and founder of the Girmitya Foundation, will appear bi-monthly in Business Day.

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