What is life insurance?A life insurance policy is essentially a contract between the insurer and the insured wherein the former promises to provide a lump sum amount to the nominee of the policyholder in the event of the death of the policyholder. The death of a breadwinner is an irreplaceable loss for the family, and it may leave the dependents vulnerable to uncertainties.
This is where life insurance plans play an important role; it guarantees to provide financial assistance to the dependants to live a financially independent life and maintain their standard of living.
Types of life insuranceIf you are looking to buy a life insurance policy in India, you will find that are different life insurance types in India and choosing the best one can be an overwhelming task. Although the main purpose of a life insurance policy is protection, there are many other insurance products in the market that allow you to use for as a long-term savings and wealth creation tool.
Life insurance typescan be broadly classified into two types. One based on the customer segment they cater to like retirement plans, child insurance plans, and investment and savings plans and two based on the benefits or coverage the offer like endowment plan, term plan and whole life plan. Let us look at the different types of insurance policies in detail below:
Term Insurance PolicyTerm insurance policy is one of the most popular types of life insurance plans in India. It provides a death benefit to the nominee of the policyholder only in the event of the death of the policyholder before the end of the insurance tenure. As a policyholder, if you survive the insurance term, the cover ceases, and you cannot claim any death benefit. The term life insurance is one of the most affordable types of life insurance plans, and it can be further classified into:
Level term life insurancethe death benefit remains the same throughout the policy term, and in case if you choose to renew the policy, the premium too remains constant
Decreasing term life insuranceas the term itself suggests, under this plan, the death benefit decreases over a period. However, the premium for this policy too remains constant at the time of renewal
Increasing term life insuranceunder this plan the premium, as well as the coverage amount, increases over time
Benefits of term insurance plan• Provides financial security to the insured’s family
• The premium rates are extremely affordable; you can buy a term insurance policy for a premium as low as Rs. 500
• Among the different types of life insurance plans, term insurance offers higher coverage
• It offers flexible payout options to the insured
Whole Life InsuranceThe whole life insurance policy provides you coverage throughout your lifetime provide the policy is active. One of the significant features of a whole life insurance policy that distinguishes it from other policies is that it has a cash value component, which keeps increasing over a period. You can withdraw the cash value at any time you want. You can also avail a loan against the amount.
Benefits of whole life insurance plan
• You get coverage against death for your lifetime.
• The premium paid towards whole life insurance policy is tax deductible under Section 80C
Endowment PolicyAn endowment policy is a type of life insurance plan that pays to the insured if they are alive on the maturity date of the policy or to the appointed beneficiary. It is one of the most sought-after life insurance policies because it gives the dual benefit of saving and protection. If you are not sure how life insurance work in endowment scheme, it is quite simple – in the event of the policy holder’s demise, the beneficiary receives the sum assured as well as the bonus. The bonus is paid only for the number of years that the insured survived while the policy was active.
Benefits of endowment policy• You can avail tax benefit under Section 80C and 10(10)D of the Income Tax Act
• It is an excellent long-term savings-cum-protection plan
• It comes with an additional bonus facility as a revisionary bonus and terminal bonus, which increases the payout at maturity
• Endowment policy allows you to opt for additional riders to increase the coverage
Unit Linked Insurance Plans or ULIPSIf you are looking for an insurance plan that offers the benefit of protection as well as investment flexibility, ULIPs are your best bet. It is a type of insurance plan where the cash value of the policy varies as per the prevailing NAV (net asset value) of the underlying investment assets. Under this plan, a certain part of the premium you pay is used to purchase investment assets that you choose; you can choose to invest in different assets based on your risk appetite.
Types of ULIPsUnit Linked Insurance Plans are classified into two types – based on the investment and based on death benefits
• Aggressive ULIPs – invests 80-100% of the premium in equities
• Balanced ULIPs – invests 40-60% of the premium in equities
• Conservative ULIPs – invests up to 20% of the premium in equities
• Type I ULIP – Under the policy, the insurer pays either the sum assured or the fund value, whichever is higher as a death benefit
• Type II ULIP – Under the policy, the insurer pays both the sum assured as well as the fund value as a death benefit
Benefits of ULIPs• You can switch between the investment funds
• The premium paid is eligible for tax deduction under Section 80C
• You can opt for additional riders to increase the coverage
• ULIPs allow partial withdrawal of the funds during the policy tenure
Money Back Life Insurance PolicyA money back life insurance policy pays a part of the sum assured during the policy term at regular intervals. If you outlive the policy tenure, you will get the remaining portion of the corpus along with the accrued bonus on the maturity of the policy. However, in the event of your unfortunate death before the end of the policy term, the beneficiary will receive the full sum assured irrespective of the number of the payouts you may have received earlier.
A lot of people in India do not opt for money back life insurance policy because it is one of the most expensive insurance policies, and it has a high premium rate. But, with the regular payout received, it can help you plan your finances well and meet important expenses like your child’s education or marriage in a better way.
Benefits of money back policy• It is a low-risk savings option that also offers the benefit of protection
• It provides regular pay-outs at certain intervals in the form of survival benefit
• It can help you meet your short-term financial goals
• You can avail tax benefit for the premium paid towards money back insurance plan under Section 80C and Section 10(10)D
• You can opt for additional riders to increase the coverage
• It offers risk-free returns
Retirement PlanA retirement life insurance policy is a savings and investment plans that provide you with income during retirement. Many insurance companies in India offer retirement plans to help you build a corpus fund to be used when you attain the retirement age. On the maturity of the plan, the accrued corpus is invested in various investment assets to generate a regular income stream, which is called the pension or annuity.
Benefits of a retirement plan• Helps you a create a financial cushion for the future and secure your post-retirement life
• You are entitled to get tax benefit under Section 80C. Additionally, if you have contributed towards other retirement pension schemes like NPS (National Pension Scheme), APY (Atal Pension Yojana), you are eligible for tax deduction under Section 80CCD
• It helps you accomplish your long-term financial goals
Child Insurance PlanA child life insurance plan is an investment-cum-savings plan that is specially designed to help meet the child’s future financial needs. It allows you to start investing for the child’s future right from the time they are born, and it also gives you the withdraw the savings once they become an adult. There are also some child insurance plans that allow intermediate withdrawal at certain intervals.
Benefits of child plan• It helps you secure the future of your child even in your absence
• It offers premium waiver benefit in the event of the demise of the insured during the tenure of the policy
• Loan facility is available under the child insurance plan
• Offers flexible premium payment options
So, now that you know the different types of life insurance plans in the market and how they work and their benefits, you may be wondering how to select the right type of insurance. Here are a few tips that can help you make an informed decision.
• First and foremost, have a clear picture of your financial goals, and determine the expenses that may crop up during your lifetime
• Look for plans that will provide your family with a complete coverage as well as provide the financial stability when you are not around
• Do a thorough comparison of the policies offered by the different insurance companies and choose the best one that suits your needs
• While doing your comparison pay close attention to the policy details like inclusions, exclusions, settlement record of the company, and settlement ratio
• It is always advisable to consult a financial advisor to get full details of the various insurance policies and how it will benefit your financial goals and meet your needs
Learn more about different OnlineTerm Insurance Plans here.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
Are Savings Enough for Retirement?
Financial discipline and life aspirations determine whether your savings are going to be enough for retirement.
5 Benefits of Health Insurance that Makes it a Must Have Cover
Here are the 5 benefits of health insurance that makes it a must to cover
When Should You Withdraw Money from a Mutual Fund?
In case of a sudden change in fund strategy or an underperformance scheme for more than 3-4 years, it makes sense to withdraw money.
How To Apply For Personal Loan
Applying for a personal loan has become extremely easy these days. With the increase in applicants, banks and other financial institutions have made the process very simple.