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Life Insurance Types in India – Explained

Life Insurance is a contract between the insurance company and the insured customer in which the insurance company agrees to pay the agreed amount known as Sum assured in the event of death or disability of the policyholder due to an insured peril for a consideration from the customer known as Premium amount. Life insurance is considered as one of the best financial tools available in the markets as it covers both the investment and insurance part under a single policy.

Life insurance policies in general are long term insurance policy unlike the general insurance policies which are valid for a single year. The life insurance policies are designed to protect the life of individuals and therefore providing financial security to the deceased family. The maximum liability of the insurance company in case of a life insurance policy is the sum assured selected by the insured customer. Let us understand the types of life insurance policies available in the Indian market and who should take what type of policy.

Term Life Insurance

What is it?

Term life insurance is an agreement between the insurance company and the insured customer in which the term insurance policy company agrees to pay a certain amount known as sum assured in case of the death of the policyholder within the term mentioned in the policy copy. If the policyholder survives the term, no survival benefit would be provided to the policyholder under the term insurance policy.

The term insurance policy as the name suggests is given for a particular period of term such as 5 years, 10 years and so on depending on the requirement of the customer. The policyholder is covered against death and or disability within the term as mentioned in the policy copy.

In the event of death of the policyholder the sum assured is paid to the nominee or legal heir as lump sum or in instalments depending on the option selected by the policyholder at the time of purchasing the policy. The most preferred option of payout is the lump sum option by the policyholders whereas some customers prefer instalment payouts which can cover the monthly expenses of the family after the death of the policyholder.

The pure term insurance policy covers only the death of the policyholder within the term mentioned in the policy. Under the term insurance policy coverage can be extended to the disability and cancer treatment by opting for riders after paying the extra premium with the base term insurance policy.

Who should take it?

The term insurance policy is suggested by many of the financial advisors to be taken to secure your family’s financial future in case of your untimely death. The term insurance policy as mentioned covers only the death of the policyholder during the policy period and no survival benefit is provided in case the policyholder survives the policy period.

Hence, one should consider a term insurance policy only for the purpose of financial assistance to the family in case of policyholder’s sudden demise and not as an investment. The proceedings from the term insurance policy are given to the family of the deceased and therefore it is not considered as an investment.

Illustration:

For instance let us assume that Mr. Ritz is the only bread earner in the family of four and had taken a personal loan recently, he works with a MNC and takes around 10Lac CTC. Assuming he incurs Rs.50k as monthly expenses, without which his family would face financial crunch, he has to take at least Rs.1 Crore sum assured term insurance policy by keeping the future and the inflation in mind.

In case of his sudden demise in the fifth year after taking the policy, the insurance company will settle the claim amount of Rs.1 Crore to the family. In this particular scenario the family can use the amount to clear the loan and utilise the remaining amount for monthly expenditure. As there are no other bread earners in the family, the proceedings from the life insurance policy will act as the source of expenditure amount.

Whole Life Insurance

What is it?

Whole life insurance is the extension of the term insurance policy. In whole life insurance the insurance coverage is provided till the death of the policyholder or till attaining 99 years of age. Since the coverage if for complete life time, it is known as the Whole life insurance. While the term insurance policy has a particular period of time for which the coverage is offered the whole life insurance policy is covered for the life time of the policyholder.

All the other terms and conditions would be same as the term insurance policy except for the fact that the chances of getting the claim is higher in the whole life insurance as the coverage is till the death of the policyholder. Since the coverage is till the death of the policyholder, Survival benefit would be possible under the whole life insurance policy in rare cases if the policyholder survives the policy period.

Who should take it?

Whole life insurance policy is preferred by a person who wants to cover their entire life against any unfortunate events and to pass the proceedings to their grand children. Technically the life insurance coverage should only be up to the age of 60 years or till the age of retirement. The need for financial security to the family arises if a person is working and after retirement there would be retirement income which would be sufficient for the family and one achieves their financial milestones before retirement.

Illustration:

For instance let us assume that a person wants to take a whole life insurance policy, and then he has the option to pay the premium for a particular period of years, say 5 years and enjoy the coverage for whole life or pay the premium in regular instalments. In case of the death of the policyholder at the age of 80 years, the claim proceedings are paid to the family of the policyholder which can act as pension amount to the spouse.

Endowment Life Insurance

What is it?

An Endowment policy is a life insurance plan which apart from covering the life of the insured against uncertain death, helps to save a certain amount of money regularly over a period of time. In short an endowment policy consists of both the Insurance coverage and the Savings option. This amount saved under the endowment policy is known as the maturity amount and is paid to the policyholder in case he/she survives the policy period or dies during the policy period.

This savings component is paid to the nominee in case of the death of the policyholder or to the policyholder in case of maturity if the policy as survival benefit and can be used for Children’s education, Marriage expense or purchasing a home. Thus any term insurance policy with a saving component and insurance component can be considered as an Endowment policy.

Endowment plans are basically two types- with profit and without profit. One can chose the plan depending on the requirement and future planning such as Children Education expenses, Marriage expenses etc. Once upon a time the endowment plans were the most preferred option by the people and also many cases of mis-selling were reported by common people against the insurance agents.

Who should take it?

Endowment plans can be taken by people who require a steady stream of income and need a lump sum amount after a certain period of time. Also people who are not willing to take heavy risks on their investment and are ok with the lesser returns can go for the endowment insurance policies.

However if you are interested in only life cover and not in the savings component, then it is advisable to go for term insurance policy. This is because the term insurance policy offer high sum insured at low premiums compared to the Endowment plans which are costly as the savings component is included in the policy.

Illustration

For example, if you want to get a sum assured of around Rs.20 Lacs after a period of 15 years then you need to pay at least Rs.1 Lac per year under the Endowment plan. But under a term plan for the same sum assured amount you need to pay only Rs.4000 as yearly premium. In case of endowment plans both the death benefit and the survival benefit is paid but in case of Term plans only the death benefit is paid to the nominee of the policyholder.

The endowment plans are quite costlier compared to the term plans and to amass a corpus of Rs.1 Crore one needs to invest a hefty amount of premium every year for a certain period of time.

Unit Linked Insurance Plans

What is it?

A Unit Linked Insurance Policy is an term insurance policy with Insurance coverage and Investment. ULIP policy provides death benefit- in case the policyholder expires within the policy period and also Survival benefit- in case the policyholder survives the policy term. The death benefit provided is with the premium collected under the insurance portion of the policy and the survival benefit is paid with the premium collected and invested by the insurance company.

ULIP policies have the investment component where a part of premium collected from the customer is invested into the debts to purchase units which over a period of time develop in conjunction with the market and generate revenue to the policyholder. The policyholder has the option to decide the funds in which the premium should be invested and also the option of asset class is given to the policyholder. Policyholder can select the funds in which he/she wants the amount to be invested and the returns are purely dependent on the market conditions prevailing at the time of maturity.

Who should take it?

Since ULIPs are considered as the investment options with insurance coverage, people who wish to take risk as per their risk appetite and expect long term returns can go for ULIPs after thoroughly analysing the performance for the past few years. ULIPs also offer protection against certain uncertain events along with the investment option therefore making them a long term financial planning tool.

ULIPs also offer Income tax exemptions depending on the premium paid under the ULIPs. The most important thing to remember while purchasing ULIPs is that these are meant for long term investments where even bonus or additions to your existing portfolio can be availed from the insurance companies. One can switch the fund option between debts, balanced and equity anytime after if he/she is not satisfied with the performance of current portfolio.

Illustration

For example if a customer pays certain amount as premium of which a part of the premium is utilised to purchase the units; this has the Net Asset Value of the fund. The value of the unit increases or decreases depending on the performance of the fund the policyholder has invested. The final amount that the policyholder receives as survival benefit depends on the value of the units which in turn depends on the fund performance. The value is determined by the external factors as well as internal factors. ULIP is purely market oriented policy which performs as per the market.

Money Back Plans

What is it?

Money Back plan as the name suggests returns the money invested by the policyholder. In money back plan the policyholder can get a certain percentage of amounts at regular intervals, instead of getting the lump sum amount at the end of the term. It can be termed as the Endowment plan with liquidity option.

Money back plan also provides sum assured at the time of death of the policy holder or on maturity of the policy apart from the money withdrawn at regular intervals. A certain percentage of money is paid back to the policyholder at certain intervals of time under the Money back policy. In case the policyholder expires during the policy period the entire sum assured under the policy is paid to the nominee irrespective of the benefits paid during the policy period.

A money back policy is preferred by those people who are looking for regular payouts during the policy period in addition to the death benefit. The periodic intervals under the money back policies can be for Marriage purpose or Construction of house or any other purpose.

Who should take it?

Money back plans have the highest liquidity factor compared to any other life insurance policy. It is useful for people who are risk averse and at the same time need regular payouts during different stages of policy period can prefer the money back policies. The greatest advantage of money back policy is that it provides the survival benefits periodically in addition to the death benefit. In other endowment policies the survival benefit is provided to the policyholder only after the policy period whereas in the money back plan the survival benefit is provided periodically.

In case of an unfortunate event the death benefit is paid to the nominee of the policyholder irrespective of the survival benefit paid to the policyholder. Hence the money back plans are costly compared to the other endowment plans due to the advantage of liquidity option.

Illustration:

For instance if you have a money back policy for a period of 15 years then you can opt for periodic instalments every 5 years and if you expire within the policy period then the death benefit will be paid irrespective of the survival benefit. If the money back option opted was Rs.50k and the death benefit opted is Rs.15Lacs, after the second instalment if the policyholder expires then a total of Rs.1 Lac + Rs.15 Lacs would be received by the policyholder and his/her nominee.

Child Plans

What is it?

Child plan is a type of life insurance plan that is a combination of both the investment and the insurance to ensure safe future for your child. The child plans are typically classified into two types- Market linked and Non market linked plans. The market linked plans are similar to that of the Unit Linked Insurance Plans where the final maturity benefit depends on the performance of the funds selected by the policyholder/the parent. Non market linked plans are a form of Endowment plans which offer a fixed rate of return to the customer as maturity benefit after the completion of the policy period.

These plans also provide flexible payout option at certain intervals of the policy period which can be used for the different stages of education of your child. Child plans are plans where the customer can invest his money to secure the future of his/her child against higher education or Marriage. In case of any unfortunate event to you the future premiums can be waived under the child policy without affecting the future of the child.

In a ULIP child plan a part of your money goes into securing your child’s life against any uncertainties and the other part goes into investment for your child’s future. The investment part can be a mix of debts and equities and the final output depends on the fund performance.

Who should take it?

Child plans are the best forms of investment for your children as the plans have the insurance component as well the investment component. The insurance component covers the future against any uncertain events while the investment component grows to take care of the future education expenses of your child.

This plan is preferred by parents who wish to save for the future of their children in particular for educational purpose, where it is possible to make periodic instalments under this plan at different stages of education of the child. Due to the rising education costs & inflation each day it is very much important for parents to consider Child plans for the future of your children.

Retirement or Annuity Plans

What is it?

Retirement plans are insurance plans which help people meet their expenses after their retirement with periodic payments by the insurance company. Retirement plans can generally be of two types: One is where the policyholder will invest the amount over a period of time to attain a corpus and after which the insurance company will pay periodic instalments to the policyholder after his/her retirement. The other is where the policyholder can purchase an annuity plan by paying a lump sum amount and the insurance company will start paying monthly amount immediately or after a period of time as selected by the policyholder.

The major advantage of the pension plans is that the insurance cover is also available with the investment option. The amount collected from the policyholder is invested in safe bonds by the insurance companies and the period instalments are paid to the policyholder. The policyholder can opt for same amount of payout each month or increasing payout depending on the expenses of the policyholder.

Retirement plans also have the option of including your spouse in the same plan in which the survivor will receive the pension amount in case of death of a member. The accumulated amount over a period of years is given back to the policyholder as monthly pension or annuity at regular intervals of time depending on the option selected by the policyholder.

Who should take it?

Any person who wishes to have a steady income after retirement can take the Retirement or Annuity plans. Annuity plans or Retirement plans are the most famous retirement tools which help the customers with their post retirement requirements. The lifestyle after retirement can be balanced by investing in the retirement plans at a very early stage or purchasing the annuity plan after getting the retirement corpus.

In case of long term savings for Annuity plans the premium amount to be paid depends on the sum assured required at the time of retirement. Higher the investment amount, higher would be the payout at the time of retirement.

For best life insurance plans please visit www.policybachat.com where we have a dedicated team of agents to assist you with your life insurance requirements.

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