Life insurance is the most common type of insurance policy in any person’s portfolio. The basic meaning of life insurance is the safety net provided by the insurer in the event of any unforeseen event or death of the insured person. However, in most cases, the insured person survives the tenure of the policy and there is no need for a death payout.
While this may be the most common meaning or implication of a life insurance cover, there are many types of life insurance available for individuals depending on their specific needs. Some of the common types of life insurance covers are discussed below.
Types of Life Insurance Policies
Term insurance, as the name suggests, provides insurance cover for a fixed tenure. Under this tenure, the insurer is liable to pay the insurance cover in the event of the death of the insured person. However, if the individual survives the tenure, there is no payout and the cover will cease to exist.
This is one of the simplest and cheapest forms of life insurance available to investors. The sum insured under this policy is paid to the nominee of the insured person only in the case of the death of the insured person. Otherwise, this policy has no maturity benefits. This type of insurance offers life cover only and is not a corpus-building investment instrument like many other insurance covers.
Term insurance with return of premium
Term insurance provides only life cover and no maturity benefits when the insured person services the tenure of the policy. When the insured person is a healthy individual without any obvious concerns about their health, the chances of them surviving the term insurance plan are high. In such a case, term insurance with a return of premium is a better option than a plain vanilla term insurance policy. This policy will provide the benefit of returning the premium paid by the insured person when there is no case of claim payment till the end of the policy term.
Unit Linked Insurance Plans (ULIPs)
Insurance is often used as a synonym for investments. Unit Linked Insurance Plans (ULIPs) provide the benefit of both insurance and investment under a single plan. The plan uses the amount of premium paid for two aspects namely insurance and wealth building. The insurer will invest a portion of the premium paid to take units of the investment chosen by the insured person. These plans come with a minimum lock-in period of 5 years and risk protection for the investor.
Moneyback policy as the name suggests gives the benefit of paying back the investor’s money during the tenure of the policy. This policy provides a fixed percentage of the sum assured to the policyholder at regular intervals. At the time of maturity of the policy, the insured person received the balance amount of the policy along with the accrued bonus. If during the tenure of the policy, the insured person is no more, the nominees will receive the entire sum insured irrespective of the number of payouts during the tenure of the policy.
Whole life insurance
A whole life insurance policy can provide coverage for the entire lifetime of the policyholder. In the event of the death of the policyholder, the amount of cover is paid to the nominee. If the policyholder survives the tenure of the policy, i.e., 100 years, the entire amount is paid in the form of maturity benefits. Many plans under this type of policy offer the insured person the option to pay a premium for the first 10 to 15 years of the policy term and enjoy the benefits of the policy for their lifetime.
This is another type of life insurance policy that combines the benefits of insurance and investment. This policy helps the investor build their corpus fund through regular investment in the plan to get a lump sum benefit at the time of maturity. Endowment policies can be used to build a cushion for the various investment goal of the family like children’s education, wedding, any emergency fund, etc.
Child insurance plans
The child insurance policy also comes under the category of insurance cum investments. This policy can be started from the time of birth of the child to gradually build a fund for their education or higher education needs. Some policies provide the benefit of withdrawal from the policy at regular intervals. Once the child reaches adulthood, the entire amount of the policy can be withdrawn and used to meet the needs of the children.
Group life insurance
A group life insurance provides cover for multiple persons under a single plan. Such plans are usually provided by employers for their employees. A person under this plan is insured till the time they are part of the group. Once the person leaves the group or the employment, the policy will no longer provide life cover to such person. However, most insurers provide the employees the benefit of converting the group life insurance to individual plans as per their specific guidelines and at the discretion of the employee.
Retirement plans are designed to provide financial security to the investors along with life cover. The insured person receives a fixed amount of money in the form of a pension in the vesting period. In the event of death of the insured person, the nominee will receive the amount insured in the form of a death benefit
What are the benefits of life insurance plans?
Investing in life insurance policies has multiple benefits. Some of such benefits are discussed below.
- Security for the family members of the insured person in the form of monetary compensation.
- Tailor-made plans meeting the specific needs of the policyholders.
- Wealth building and a regular savings option providing long term benefits
- Option to avail loans against the life insurance policy by a majority of lenders
- Most covers also provide cover for hospitalization and critical illnesses of the insured person.
- Tax savings option with the benefit of tax deduction up to Rs. 1,50,000 under section 80C of the Income Tax Act, 1961.
What are the points to consider while taking life insurance?
Multiple insurers are providing many types of insurance plans today. Hence it is very common to make an error in buying the right plan that caters to all the needs of a person. Hence, it is essential to consider a few basic pointers while buying a life insurance cover.
- Premium payment options
Most policies provide for a flexible premium payment option. Policyholders can make premium payments on a monthly, semi-annual, or annual basis. It is essential to consider a plan that provides these benefits and meets the requirements of the investor.
- Comparing various policies
As mentioned above, there are multiple insurers providing a variety of life insurance policies. A person needs to make a thorough comparative analysis of these policies to ensure that they get the policy that meets their needs better in terms of the cover provided, tenure of the policy, amount of premium to be paid, any additional benefit provided by the insurer, etc.
- Having a thorough knowledge of the terms and conditions of the policy
The policyholder needs to be aware of all the terms and conditions of the policy before investing in it. This will ensure that there are no confusions regarding the settlement of claims and the policyholders do not have to regret purchasing the policy.
- Disclosing all the relevant information
It is essential for the policyholder to disclose all the relevant information at the time of purchasing the life insurance policy. Any misinformation or failure to disclose relevant information may exempt the insurer from making the settlement of the claim in the event of maturity or death of the policyholder.
A person should take a life insurance cover not only with the view to meet daily expenses of the family in their absence, but also to meet any major unforeseen expenses. Investors can take more than one life insurance cover and get the benefits of such cover at the time of maturity or in the event of death to safeguard the future of their family members.
1. Can a life insurance policy be used as a savings instrument?
A. Yes, many life insurance policies provide the benefit of gradually building a corpus fund for meeting future financial goals.
2. What is the right age to get a life insurance cover?
A. Life insurance coverage can be purchased at any age. However, as a general rule in the case of any insurance policy, the earlier a person takes an insurance cover, the lower is the premium payment.
3. Is life insurance coverage necessary for a person in their 20s?
A. Most young people do not view life insurance cover as an essential investment option and instead focus on high risk high return options like mutual funds, equity instruments, etc. however, getting a life insurance cover in their 20s provides multiple benefits like an increased cover, lower premium payments, increased tenure of the policy, etc. Hence is it also a necessary investment option for a person in their 20s.