A life insurance policy is generally considered to be one of the most important requirements for a comfortable, hassle-free life. Not only does a life insurance policy guarantee that one’s dependents will be well looked after even if they are no longer around, but it can also contribute to building a substantial corpus to fulfill their future financial goals.
One of its primary benefits is the plethora of different types of life insurance plan and policies on offer to prospective policyholders. One can choose their preferred plan based on their unique individual requirements.
Life insurance policies have a broad scope. The main objective of a life insurance policy is to ensure the financial safety of the family after you are gone. But within life insurance, you have many policy options, with fulfilling a different financial goal.
Thus, before deciding to buy a life insurance plan, it is important to know the types of life insurance policies available in India.
Term insurance is widely considered to be the simplest form of life insurance. It is a pure cover plan which offers protection for a specified time period. If the life insured passes away during that period, the nominee receives the predetermined death benefit. The most distinctive feature of a term insurance plan is the high amount of coverage offered at extremely nominal premium rates. Certain term plans also offer maturity benefits, i.e. the return of premiums if the policyholder outlives the policy term. One can also increase the amount of coverage offered by a term plan by opting for additional riders, such as Accidental Death Benefit or Child Support riders.
Unlike term insurance, wherein the insured has coverage only for a specified period of time, whole life insurance offers coverage right until the death of the policyholder. You can opt for either a participating or non-participating policy, as per your financial needs and risk appetite. Though the premiums for participating whole life insurance are higher in comparison, dividends are paid out at regular intervals to the policyholders. The premium rates for a non-participating policy are lower, but the policyholder generally cannot avail the benefits of regular dividends.
Among the different types of life insurance policies available, ULIPs enjoy a high amount of popularity owing to their versatile nature. ULIPs come with the two-pronged benefits of both investment and insurance. A portion of the premiums paid towards ULIPs is directed towards ensuring insurance coverage, while the rest of the premium is invested into a bouquet of investment instruments, which can include market-backed equity funds, debt funds and other securities. ULIPs are extremely flexible instruments since investors can easily switch or redirect their premiums between the different funds available. ULIPs are also touted as having an edge over other market instruments in terms of tax-saving benefits, since their proceeds are exempted from LTCG (Long Term Capital Gains).
A child insurance plan is one of the different types of life insurance available. Such a plan is tailored to fulfill one specific goal: to ensure financial protection for the policyholder’s child upon the unfortunate demise of the policyholder. It is ideal for ensuring the future needs of the child are well taken care of, even in the absence of the life insured. Parents can invest in the best child insurance plans, in order to meet the financial requirements for their child’s education, marriage or to fulfill a multitude of other financial goals their child might have.
This is another type of life insurance policy which acts as, both, an instrument for insurance and saving. Endowment plans aim to provide maturity benefits to the life insured, in the form of a lump sum payment at the end of the policy tenure, even if a claim hasn’t been made. Endowment plans are ideal for people looking to get maximum coverage alongside having a sizable savings component. They help the policyholder inculcate the habit of savings, even while providing financial security to their family. Endowment plans can broadly be classified into two types: with profit and without profit. Policyholders can choose from these two types based on their risk appetite.
Being one of the best types of life insurance policies, a money-back policy offers policyholders a percentage of the total sum assured at periodic intervals in the form of Survival Benefits. Once the policy reaches maturity, the remaining amount of the Sum Assured is handed over to the policyholder. However, if the policyholder dies while the term is ongoing, their dependents are given the entire Sum Assured without any deductions.
A retirement plan is a type of life insurance that focuses on providing you financial stability and security post your retirement. After you retire, you lose your regular income from employment. Investing in retirement plans can help you create a stable regular income stream. If you continue to invest until retirement, the plan will help you take care of your expenses after retirement. A retirement plan requires you to invest a certain part of your income regularly during your working life. At the time you retire, the amount that you create over the years will be converted into a regular income stream.
Retirement plans also involve death benefits. Thus, if the policyholder passes away during the course of the policy, their beneficiaries will be provided with an assured sum.
A group life insurance policy covers a group of people inside a single plan. Unlike individual life insurance policies, which cover one person for a period, group insurance covers a minimum of 10 members.
Employers, banks, corporates, and other homogeneous groups of persons can buy group Life Insurance policies for their employees and customers. While employers would want to offer financial protection to their employees' families banks and lending institutions aim to keep the debt off the borrowers’ family after their death.
a) The plan under which the group is covered is called the Master Plan.
b) The policy is issued to the manager of the group (master) but will remain in the name of the group only.
For example, Ram is the manager of a firm, to protect his employees, he has taken a group insurance policy. Now the policy will be issued to Ram in the name of the firm.
Note that you will be covered under the group insurance till the time you are part of the group. If you leave the group, your cover ceases to exist.
The idea of the right policy differs from person to person. What will be a good option for someone else, may not be as attractive for you. Thus, it becomes important to choose the policy that suits you the best.
Here is how you can choose the right type of life insurance policy:
Different life insurance policies can help fulfil different goals. You should be clear about the goal that you want to achieve with your life insurance policy.
Ascertain the needs and wants of your family members as well as the daily expenses and choose a cover that can fulfil all these. The general rule that goes is that you should select a sum assured which is at least 10 times your annual income.
While some policies are made to achieve long-term goals and have a longer time frame, some policies have shorter terms as well. Select a policy that has multiple time frames.
Riders can enhance your sum assured and can cover those occurrences which the basic policy doesn’t. Choose a policy with maximum riders.
Apart from the policy, research about the company that provided the policy as well. Check out for the following:
FAQs on Different Types of Life Insurance Policies
Life insurance policies, apart from the long-term financial safety of your family, provide the following benefits:
a) Protect a particular financial goal of your family in your absence
b) Provides peace of mind and reduces stress
c) Builds a habit of saving
d) Helps in disciplined investing which can build a sufficient corpus.
e) Can help you save tax
Yes, you can opt for more than one life insurance policy. You are more likely to have multiple goals to achieve in your life. So, it is better to have multiple life insurance policies that can cater to different goals.
For example, buying a term plan and a ULIP. While a term plan takes care of your life, ULIP will help build your wealth at the same time.
Whole life insurance policies do come with premiums that are higher than term life insurance. This is because unlike term insurance:
a) Whole life insurance covers your life for a longer period, i.e., 99 or 100 years.
b) The whole life policy has an investment component and acquires cash value over time
c) A whole life plan may return your premiums at retirement
On the other hand, a term life insurance policy will expire without a maturity benefit, and never acquires a cash value. Thus, term insurance premiums are always lower than any other life insurance plan.
Term insurance with a return of premium feature is also a term plan, but with the exception of maturity value. This plan aims to refund all your premiums if you survive the policy term.
Thus, effectively turning the cost of long-term financial safety for your family to zero in case of your survival.
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