Simply put, a life insurance policy is essentially a contract between a policy buyer and an insurance company. Under the contract, the policy provider promises to pay a predefined sum assured to the policy nominee in case of the untimely death of the insured. To avail of the promised sum, the policyholder has to pay a fixed premium amount to the insurance provider for a given period.
However, one should note that some insurance policies may even pay a maturity benefit to the policyholder in case he/she survives the term. Hence, it is crucial to pick a life insurance policy based on one’s requirements. However, one can make an informed decision only if they know more than what is insurance and check out the different types of life insurance policies in India to understand their prospects.
Read along to know more about life insurance and its different types.
Types of Life Insurance Policies in India
Almost everybody knows what is insurance, but rarely do people know the types of insurance available in the market. In this section we will check out the 5 types of life insurance policies in India and their features.
Term Plan Insurance
A term insurance plan is essentially a pure life cover. To avail of the coverage individuals have to pay a premium amount to the insurance provider for a set period. Notably, only in case of the sudden death of the insured, the insurance company pays a sum assured to the nominee of the policy. In other words, this insurance plan does not extend any mature benefit unless it’s a term plan with a return of premium. When compared to other life insurance plans, a term plan offers higher coverage at a lesser premium amount. Additionally, term plans with return of premiums extend maturity benefit which is the sum of all the paid premiums. However, it doesn’t pay any interest amount.
Whole Life Insurance Policy
This type of life insurance policy offers a cover for life. If the policyholder pays the premium regularly, then the insurance provider promises to pay the policy nominee a sum assured in the event of the insured’s death. Besides the sum assured, a whole life insurance policy includes a saving component.
However, whole life insurance plans do not come with a defined term. Notably, individuals can reinvest their savings component of the policy to generate wealth or remit a portion of the cash during the insured’s lifetime. A whole life insurance policy also allows individuals to take out a loan against their savings.
Endowment Policies
This insurance policy is a combination of protection and savings. If the insured pays timely premiums for a given period, the insurance provider promises to pay the policy nominee a sum assured in the case of the insured’s untimely death.
However, in case the insured survives the policy term then he/she is entitled to receive a lump sum amount as the insurance plan’s maturity benefit.
Additionally, there’s a savings component of the plan that helps individuals to achieve their goals or account for emergencies. Endowment plans also allow policyholders to avail of a loan against the savings component of the insurance.
Moneyback policy
This policy is a combination of protection and savings. Notably, in moneyback policies, a part of the sum assured is received by the insured at regular intervals throughout the tenure. The remaining portion and the bonus amount are paid to the policyholder at maturity. Such a benefit is not allowed in other insurance plans. In case the policyholder dies during the tenure the total sum assured is paid to the policy nominee and the money. Such an amount is paid despite the survival benefit paid to the insured before. Hands down, the key advantage of any moneyback policy is its liquidity.
Unit Linked Insurance Plans
Unit linked insurance plan, or ULIP is a blend of investment and insurance. ULIP allows the policy buyer to invest money into debt and equities via fund managers. However, the choice of investment options and their proportion is decided by the policy buyer as per their need and risk appetite.
Notably, there are no guaranteed returns in ULIPs. However, the policyholder is entitled to receive a lump sum amount at maturity. In case the insured dies during the tenure, the insurance company pays a sum assured to the nominee. Additionally, the returns on ULIP are higher than returns on any traditional insurance policies with savings components.
Things to Consider Before Getting a Life Insurance Policy
Knowing what is insurance and the types of the same is not enough. Individuals also need to consider a few factors to determine their effectiveness.
Here’s a list of a few factors that one should consider when selecting a life insurance policy –
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The coverage amount
Opt for a large coverage amount, which will be enough to safeguard your family’s financial future and help them meet their goals. It is often recommended that the life cover should be at least 10-15 times one’s annual income. However, you should make sure the coverage is within your financial capacity and does not strain your income. For a better understanding of coverage and the cost involved, one can use a life insurance premium calculator and plan their insurance plan accordingly.
- Type of insurance policy
As discussed, there are several types of insurance policies in India, and each accompanies a set of unique features and benefits. To decide which type of insurance policy is most suited for you, it is recommended to identify your financial goals and requirements.
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Policy tenure
All life insurance policies except the whole life insurance plans offer coverage for a fixed term. Since most cover death during the policy term, it is crucial to opt for an insurance plan with a longer tenure. The thumb rule is to pick insurance that is valid at least till your retirement.
Besides these, one should also check out the rider benefits and the charges levied by the insurance company. This will help them determine the overall cost they could bear if they decide to increase their insurance coverage down the road. Last but not least, individuals must also read the terms and conditions of the life insurance policy carefully to understand the full scope of the coverage and potential restrictions on claims. Collectively, these aspects will help pick a suitable insurance policy and provider.