Different Types of Life Insurance Policy

A Life Insurance policy is not an option anymore; it is a necessity. While we can never replace the loss of our loved ones, a Life Insurance policy supports the essential needs of grieving family members during challenging times. Financial security provided by the insurance helps them to continue their everyday living with their self-esteem unaffected.Losing a primary provider within a family can be an irreparable setback, leaving dependents vulnerable to financial uncertainties. Here, Life Insurance plans assume a crucial role, guaranteeing financial support to dependents, enabling them to sustain a self-sufficient life and uphold their prevailing standard of living.

Buying a life insurance policy is beneficial as it provides financial security and life coverage to the policyholder’s family and helps the policyholder meet their long-term financial goals. Life Insurance Policies offer tax benefits per the Income Tax Act and give you peace of mind on retirement. So, to choose the right type of Life Insurance policy, you first need to decide the amount of life cover required, which depends upon the number of dependents in your family, your income, and future expenses. You must decide on the policy duration and premium payment term to manage the premiums effectively. You should also review the claim settlement ratio and additional benefits such as accidental death and critical illness coverage offered by different insurance companies. Also, you must go through the terms and conditions related to the policy and understand them well.

In simple words, a Life Insurance policy is an agreement between two parties, where one agrees to pay a sum of money to the other at regular intervals, who then, in exchange, pledges to provide a predetermined collective coverage over and above the premiums paid. This money goes to the designated nominee or beneficiary in the unfortunate event of the policyholder's demise.Life Insurance policies can also be great instruments for saving taxes.Also read: How Does Life Insurance Help in Tax Saving?

Different insurance policies work on different fundamentals. The primary categorisation focuses on the type of benefits or coverage provided, encompassing endowment, term, and whole-life plans. The target customer segment determines the second categorisation, including retirement, child insurance, investment and savings plans.A lot of Life Insurance policies are available in the market. All of them serve specific needs. One should know a few basics before deciding on the best. In India, Life Insurance plans fall into two main categories. The first category caters to investments for retirement or child plans. The second encompasses term policies and whole-life plans.Here's a concise overview of various types of insurance policies. Various types of Life Insurance policies are available. Each caters to a different need.

1. Term Life Insurance

It is India's most preferred Life Insurance plan of all the different insurance policies. Term Life Insurance ensures coverage for a specific period. As the policy takes effect, the coverage varies with each decade. Some policies also set terms with intervals of every five years. The beneficiary receives a death benefit when the policyholder dies within the term. Term Life Insurance is usually more affordable and straightforward compared to others. Some advantages of term Life Insurance are:

• It provides death benefits to the nominee of the policyholder. The nominee gets the death benefits if the policyholder does not survive the full term.
• This plan coverage is valid for a specific period. Term period time and coverage vary with the policy provider.
• The policy is beneficial if you seek maturity, tax, and death benefits.

2. Unit Linked Insurance Plans (ULIPs)

• ULIPs are meant to provide insurance coverage as well as investment benefits.
• It helps to fulfil your long-term goal of wealth creation and life coverage.
• ULIPs provide a unique combination of insurance coverage and investment opportunities, leading to flexibility and protection at the same time.

The insurance company uses a portion of the premium to purchase units or investment assets of your preference. The Net Asset Value (NAV) is detrimental in deciding the cash value of the invested assets or the policy's value. Policyholders can decide which asset they want to invest in, depending on their needs and risk-taking capacity. ULIP is a unique insurance plan because of its flexibility and its combination with protection.When you buy a unit-linked insurance policy, the insurer allocates a portion of your premium to acquire the investment assets you select. The ultimate value of the policy varies based on the prevailing value of the assets. You can choose different assets to invest in based on your risk appetite. There are other ways of generating wealth with life insurance; read more about them in our article here.

3. Endowment Policy

This insurance type guarantees a fund for beneficiaries if the policyholder dies. If the policyholders outlive the maturity date, they also collect the guaranteed payouts. Endowment Policy has the following advantages:

• It is a very effective policy when protection and saving benefits are required
• It ensures that, with the policyholder's demise, the nominee gets all the bonuses accumulated during the investment period. The bonus varies because it depends upon the active years of the policy and the time the policyholder survived
• The long-term saving option, along with the coverage, makes it more popular with investors
• It is Life Insurance that offers protection and savings benefits
• If the insured person survives until the policy's maturity date, the policy provides a payout to them. However, if they pass away, the designated beneficiary receives the payout

With an endowment policy, the sum assured and any accumulated bonus is paid in the event of the policyholder's demise. The bonus amount is calculated based on the years the policy was active and the insured individual survived. Hence, endowment policies are an attractive option since they allow long-term savings and a death cover.

4. Money Back Policy

Coverage with regular income is the mantra of this policy. This policy hands out an amount from a certain sum of the assured money at a regular frequency. The investor receives the remaining amount upon maturity. If the policyholder does not outlive the policy's tenure, the nominee will receive the entire assured amount, irrespective of the previous handouts.This policy offers a unique feature where:

• The policy pays out a portion of the sum assured at regular intervals during its term.
• If the insured outlives the policy period, they receive the remaining amount and any accrued bonuses upon maturity. However, in the unfortunate event of death before the end of the policy term, the beneficiary will receive the entire sum assured, regardless of the payouts already received.

5. Child Insurance Plan

Another investment policy that enables you to invest and plan for unfortunate events together.A Child Insurance policy aims to:

• Save for their financial needs, and, most importantly, provide protection.
• It provides the flexibility to withdraw money as the child becomes a major.

There are some plans where you can start drawing money in between. This unique investment and savings vehicle aims to meet a child's future financial needs. By starting investments early, parents provide a financial cushion that grows as the child ages. Child insurance plans offer the flexibility to withdraw savings when the child reaches adulthood. Some plans even allow for intermediate withdrawals at specific intervals.Also read: Reasons Why You Need Life Insurance In College

6. Whole Life Insurance

Whole-Life Insurance offers lifelong coverage. Along with providing a death benefit, it accumulates cash value over time. Whole Life Insurance plans typically have higher premiums than term Life Insurance, but they accumulate a cash value, so you can borrow against or withdraw it when needed.

7. Retirement Plan

In India, many insurance companies provide various types of insurance policies for retirement plans that aim to help individuals accumulate substantial funds for their post-work years. These plans serve as savings and investment options, ensuring a consistent income stream throughout retirement. When the retirement plan reaches maturity, the accumulated capital is strategically invested in different financial instruments to generate a reliable pension or annuity.

Based on terms, one can invest in three different kinds of insurance. These include:1. Level-term Life Insurance provides a consistent death benefit and a fixed premium throughout the policy term.2. With decreasing term Life Insurance, the death benefit decreases over time, but the premium remains constant upon renewal.3. Increasing term Life Insurance offers a gradually increasing coverage amount and premium as time goes on.

Life Insurance can have two possible claim scenarios:

1. Death claims Suppose the insured individual passes away during the policy term. In that case, the beneficiary or nominees named in the policy can file a claim to receive the death benefit, the sum assuredly mentioned in the policy. The insurance company verifies the claim and disburses the death benefit to the beneficiaries upon approval.
2. Maturity claims A maturity claim is made when the policy reaches its maturity date. Maturity claims apply to policies where the insured individual survives the entire policy term. Upon maturity, the insurance company pays out the maturity benefit, which includes the sum assured along with any accrued bonuses or returns as specified in the policy.

It's important to note that depending on the insurance companies, the claim settlement process may vary slightly, but the general distinction between death and maturity claims remains consistent.Investing in a Life Insurance policy is an intelligent decision, irrespective of whether you have people dependent on your income. While women traditionally haven't been significant purchasers of insurance policies, our article explains why it's time for them to bridge this gap and identify the right insurance solution for their income.There are a series of Life Insurance policies, but the key is to choose the right one that matches your financial needs and long-term goals.Also read: What Is Bonus In Life Insurance Policy?