Life insurance, an important part of financial planning, is a contract between the insurance company and an individual. On buying a life insurance plan, the company provides monetary support to the family in case an unforeseen incident like death or disability strikes the earning member of the family. The payout by the insurance company is made according to the conditions mentioned in the contract. In return, the insured or the policyholder pays a fixed amount of money called premium at regular intervals to the insurance company.
Types of Life Insurance
Various types of life insurance policies are available in the market that cater to different kinds of needs and financial requirements of people. To take an informed decision before buying a suitable plan, you should be aware of the 7 types of life insurance available in the market in India.
- Term Insurance: It is one of the cheapest life insurance plans available in the insurance industry. Here, the insurance company pays a specified amount of money to the beneficiary or nominee on the death of the insured during the term of the plan. However, there is no benefit, if the insured happens to outlive the plan.
- Whole Life Plan: This policy gives coverage for the whole life. Here, the claim is sure to be made because the duration of coverage is the entire life, and the beneficiary is sure to get the maturity benefit on the death of the insured. The premium is higher because it covers more risks.
- Endowment Plan: It is a combination of protection as well as saving. Here, the insurance company pays a fixed amount either on the death of the insured or on the maturity of the policy. The usual duration for these policies is 10, 15 or 20 years and the premium is high.
- Money Back Plan: It is apt for people who want both protection for their family as well as some fixed amount of money during the policy tenure to meet various financial needs. In this policy, the insurance company pays a lump-sum amount on the death of the insured and certain amount at certain intervals like 5 years and 10 years. The premium is high for this type of plan.
- Unit Linked Insurance Plan (ULIP): The plan is a mix of protection and a means of investment. Here, the premium received by the insurance company is divided in two parts. The first part is sent to the pool of the insurance company for meeting the death claims. The second part is invested in the market as per the preference of the insured. On the death of the insured, the sum assured along with the returns from the investment is given to the beneficiary. Initially, a major portion of the premium amount is given to the insurance pool.
- Retirement Plan: This plan provides protection to both the family and the insured. The retirement plan is meant to financially secure the old age of the insured. According to this plan, one can start investing through annuity plans to accumulate an amount from where he/she would get pension every month after a certain age. An individual can also make a single payment under retirement or annuity plan from where he/she would get the monthly pensions.
- Child Plans: This type of life insurance policy provides financial security to manage the future requirements of the child. As part of the policy, the child gets a fixed amount of money at certain intervals that helps meet various financial needs of the child like paying fees for higher education, etc.
How to Choose Best Life Insurance Policy
A life insurance policy is an important part of financial planning. Thus, before choosing one, you should understand the plans well and keep these points in mind.
- Analyze and evaluate the financial requirement of the family
- Some of the life insurance plans provide protection along with acting as a means to save or invest. Thus, aware of different types of plans
- Compare the plans offered by different insurers on the basis of various parameters like coverage amount or sum assured and the duration of the policy
- An important parameter to be taken care of includes the premium or the cost of the insurance to be paid
- Also, it is important to understand the importance of riders or additional benefits in order to include them with the base plan and enhance the coverage of the plan
Comparing Different Types of Life Insurance
|Types of Plans||Details||Features||Who Should Buy?|
|Term Plan||It offers coverage only if the insured passes away during the policy term. if the insured lives through the plan, no benefit is provided.||Available at affordable premium rates|
Offers rider or additional benefits to the policyholder by paying extra premium
Nominee receives financial support in case of death of policyholder
|Individuals with dependents and loan liabilities.|
Individuals who want pure protection and are not looking at any kind of saving or investment.
|Unit Linked Insurance Plan (ULIP)||It is a combination of insurance and investment under which some portion of the premium amount is invested in funds and some is used to secure life insurance.||Offers the investors to invest in equity or debt|
Save tax on investments and returns
Flexibility to make changes in funds thereby securing money from market ups and downs
|Individuals who wish to invest in market along with getting an insurance.|
Individuals who have high risk appetite.
|Annuity/Retirement||It is form of contract under which insurer pays the insured regular annuity/pension for the rest of life post retirement after making lump sum investment.||Regular annuity/pension payout till the insured is alive.|
Money can be withdrawn under certain special conditions.
Under section 80CCC of the Income Tax Act, 1961, tax benefit is available on premium paid.
|Individuals who would not have any regular source of income after retirement.|
Individuals who would need pension or regular income during retirement for themselves or for their spouses.
|Child Plan||It is an insurance plan that helps individuals build a corpus to meet children’s future needs over a period of time.||Loan facility is available under child insurance plans|
Premium is waived off in case of demise of the insured
Tax exemption under section 80C of the Income Tax Act for the premiums paid
|Individuals who wish to financially secure their children’s future by providing money at their important milestones like higher education or wedding.|
|Endowment||It is a life insurance policy which offers combination of life insurance cover and savings. Insured receives lump sum amount on the maturity of policy.||Death benefits along with survival benefits|
Helps build corpus for future and provides financial protection to family
Less riskier than other investment option such as Mutual Fund, ULIPs
Tax benefits under section 80C and section 10 (10D) of the Income Tax Act for premiums paid and maturity payout, respectively
|Individuals who want to save money along with getting insurance.|
Individuals who wish to create a corpus for various financial requirements.
|Money Back Plan||It is a type of life insurance plan which offers money back at regular intervals. This money back is paid as a percentage of sum assured during the policy period.||Guaranteed returns from money back plans|
In case of death of the insured, entire sum assured is paid to the nominee
Riders facility for the insured to increase cover
|Individuals who need liquidity for at regular intervals of time.|
Individuals who want to save money.
|Whole Life||It is a type of life insurance policy which offers coverage for the whole of life, i.e. up to 100 years. This insurance offers death benefits anytime till the maturity age.||Loan facility can be availed through whole life insurance plans|
Creates corpus for family which includes sum assured along with bonus
Death benefits along with maturity benefits
|Individuals who wish to leave behind a corpus for their heir.|
Individuals who wish to save money along with getting insurance.
Riders/Add-ons with Life Insurance Plans
Riders are additional benefits offered with life insurance plans. Available on extra payment, these benefits are included with the base life insurance plan and provide extra coverage to the policyholder.
Here are the different types of riders offered by life insurance companies in India:
- Accidental Death Benefit Rider: In this type of rider, the nominee gets the sum assured and the rider benefit in case of the death of the insured due to an accident.
- Accidental Total and Permanent Disability Rider: In case the insured meets with an accident and suffers total permanent disability, such as loss of legs and arms, he/she gets financial benefit as discussed at the start of the policy.
- Critical Illness Rider: This rider covers critical illnesses like heart attacks, cancer, kidney failure, coma and others, if diagnosed. As part of this rider, the policyholder gets compensated immediately to meet the treatment expenses.
- Waiver of Premium Rider: Under this type of rider, if the premium is not paid due to conditions covered under the plan, the insurance company waives off all future premiums to be paid and the plan continues to remain active.
- Term Rider: This rider offers lump-sum or regular monthly income to the nominee in case of the death of the insured.
Terms Related to Life Insurance
To understand life insurance better, it is important to be aware of some commonly used terms in the arena of life insurance. Here are some of the terms.
- Annuity: It is a type of life insurance which provides regular income or pension to the policyholder during retirement.
- Beneficiary/Nominee: Person or legal entity who would receive the coverage amount on the death of the policyholder.
- Death Claim: It is a kind of claim request made by the nominee/beneficiary on the death of the policyholder.
- Life assured/insured: Person whose life is insured under the life insurance policy.
- Policyholder: Person holding the policy. The person may and may not be the life insured.
- Maturity benefit: The money that the policyholder receives at the end of the policy term, if the insured survives the policy term.
- Premium: It is the cost of the insurance. In other words, it is the amount that the policyholder pays to the insurance company to keep the policy active till the maturity of the policy or the death of the insured, whichever is earlier.
- Rider: Additional benefits offered by insurance companies to policyholders along with the coverage. These are available on payment of extra cost.
- Surrender value: Amount received by the policyholder on discontinuing the policy before the expiry of the policy. It is the total premium paid till date minus the surrender charges.
- Survival benefit: Money received by the policyholder, if the insured survives the term period of the policy.
Q1. How can I pay the premium for my life insurance plans?
Premium for life insurance plans can be paid through two different modes – online and offline. As part of online mode, customers can pay premium via credit card, debit card, ECS and net banking. On the other hand, under offline mode, premium can be paid through cash by visiting the nearest branch office of the company.
Q2. Does smoking affect life insurance premium rates?
Yes, smokers pay higher premium compared to non-smokers.
Q3. What should be the best age to purchase life insurance plan?
Customers should purchase life insurance plans as early as possible so that they get to pay lower premium.
Q4. Is it safe to purchase life insurance online?
Yes, it is completely safe and secure to purchase life insurance policy online. Customers willing to purchase life insurance plan online are required to visit the official website of the insurer and purchase the plan.
Q5. When does the life insurance cover begin?
The plans starts on the date of commencement of the policy after the insurer has verified all the documents.
Q6. Can I avail loan under life insurance plans?
Yes, policyholders can avail loan under some life insurance plans.