Types of Life Insurance
What is a life insurance policy?
A life insurance policy provides financial protection to your family in the unfortunate event of your death. At a basic level, it involves paying small sums each month (called premiums) to cover the risk of your untimely demise during the tenure of the policy. In such an event, your family (or the beneficiaries you have named in the policy) will receive a lump sum amount. In case you live till the maturity of the policy, depending on the type of life insurance policy you have opted for, you will receive returns the policy may have earned over the years. Today, there are many variations to this basic theme, and insurance policies cater to a wide variety of needs.
What are the various types of life insurance policies?
Given below are the basic types of life insurance policies. All other life insurance policies are built around these basic insurance policies by combination of various other features.
Term Insurance Policy
- A term insurance policy which is now also available as E-term insurance policy is a pure risk cover policy that protects the person insured for a specific period of time. In such type of a life insurance policy, a fixed sum of money called the sum assured is paid to the beneficiaries (family) if the policyholder expires within the policy term. For instance, if a person buys a Rs 2 lakh policy for 15 years, his family is entitled to the sum of Rs 2 lakh if he dies within that 15-year period.
- If the policy holder survives the 15-year period, the premiums paid are not returned back. The advantage, apart from the financial security for an individual’s family is that the premiums paid are exempt from tax.
- These insurance policies are designed to provide 100 per cent risk cover and hence they do not have any additional charges other than the basic ones. This makes premiums paid under such life insurance policies the lowest in the life insurance category.
Whole Life Policy
- A whole life policy covers a policyholder against death, throughout his life term. The advantage that an individual gets when he / she opts for a whole life policy is that the validity of this life insurance policy is not defined and hence the individual enjoys the life cover throughout his or her life.
- Under this life insurance policy, the policyholder pays regular premiums until his death, upon which the corpus is paid to the family. The policy does not expire till the time any unfortunate event occurs with the individual.
- Increasingly, whole life policies are being combined with other insurance products to address a variety of needs such as retirement planning, etc.
- Premiums paid under the whole life policies are tax exempt.
- Combining risk cover with financial savings, endowment policies are among the popular life insurance policies.
- Policy holders benefit in two ways from a pure endowment insurance policy. In case of death during the tenure, the beneficiary gets the sum assured. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses.
- In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/ education endowment plans.
- The concept of providing the customers with better returns has been gaining importance in recent times. Hence, insurance companies have been coming out with new and better ULIP versions of endowment policies. Under such life insurance policies the customers are also provided with an option of investing their premiums into the markets, depending on their risk appetite, using various fund options provided by the insurer, these life insurance policies help the customer profit from rising markets.
- The premiums paid and the returns accumulated through pure endowment policies and their ULIP variants are tax exempt.
Money Back Policy
- This life insurance policy is favoured by many people because it gives periodic payments during the term of policy. In other words, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.
- In case of death during the policy term, the beneficiary gets the full sum assured.
- New ULIP versions of money back policies are also being offered by various life insurers.
- The premiums paid and the returns accumulated though a money back policy or its ULIP variants are tax exempt.
- ULIPs are market-linked life insurance products that provide a combination of life cover and wealth creation options.
- A part of the amount that people invest in a ULIP goes toward providing life cover, while the rest is invested in the equity and debt instruments for maximising returns. .
- ULIPs provide the flexibility of choosing from a variety of fund options depending on the customers risk appetite. One can opt from aggressive funds (invested largely in the equity market with the objective of high capital appreciation) to conservative funds (invested in debt markets, cash, bank deposits and other instruments, with the aim of preserving capital while providing steady returns).
- ULIPs can be useful for achieving various long-term financial goals such as planning for retirement, child’s education, marriage etc.
Annuities and Pension
- In these types of life insurance policies, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against financial risks as well as provide money in the form of pension at regular intervals.