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Insurance Basics

Life insurance types simplified

07 March 2015
Broadly speaking, there are only two types of life insurance policies – ones that offer only a death benefit (Term insurance) and others that offer death + maturity or investment benefit (e.g. Endowment Plans or Unit Liked Insurance Plans).
 

Life Insurance is not a single big thing. It is a lot of small things. 

In order to meet the varied needs of the investors, insurance companies offer different types of insurance policies.

Major categories are listed below:

types-symplified1.png

 

1. Term Insurance Plans

As the name suggests, term insurance plans are protection plans availed for a definite number of years (called ‘term’). These are pure protection plans and can offer you a large cover at a low cost. You can opt for a term plan to cover a liability like a home loan or a business loan. Some term insurance policies also provide terminal illness benefits. Apart from being the most cost-effective, term plans are the simplest to understand and can be availed online. Such plans do not offer maturity or surrender benefits.

 

2. Whole Life Insurance

Whole Life Insurance plans offer lifelong cover. They are characterized by level premiums throughout the insured’s life. Based on the nature of the product, it can also serve as a mode of savings for retirement or asset creation or even work as a pure protection plan. 

 

3. Endowment Policy

An endowment plan is a specific-tenure insurance, linked to savings. It provides dual benefits viz:

  • Payment of sum assured to the beneficiary on death or permanent disability
  • Maturity proceeds to the insured on surviving the term. The proceeds are generally complemented with a bonus, which is at the prerogative of the insurer.

 

4. Money Back Plans or Cash Back Plans

Money back plan or cash back plan assures a certain amount of money at pre-determined points in time. The balance amount is paid as a maturity benefit at the expiry of the term. Full sum assured is provided throughout the term irrespective of the paid benefits.

 

5. Unit Linked Insurance Policy (ULIPs)

Unit Linked Insurance Plans are dynamic plans that offer benefits of insurance as well as investment. Here, a part of the premium is allocated towards life cover and the rest is invested in avenues like stocks, government bonds, corporate debt, etc.

Based on your risk profile, investment objective and time horizon, you can select from different types of funds with different levels of risk-return objectives. In case your outlook towards the market changes, you can shift the investments from one fund to another. Additional benefits like riders, top ups and partial with drawal are also available with ULIPs.

 

6. Child Plans

Child insurance plans can help parents to build a financially secure future for their children. In such a plan, the parent is the life assured, while the child is the beneficiary. The money invested throughout the paying term of the policy can be used for future requirements like education, marriage, business, etc. in the child’s life.Such plans also offer premium waiver options in case of an unfortunate death of the parent.

 

7. Annuity/Pension Plans

Annuity/ pension plans are characterized by payment of fixed amount to the insured at old age or at the age of retirement. These plans supplement the insured’s lifestyle by providing a regular income post retirement. Such plans can also be tailored to payout the pension amount to a beneficiary (after the death of the life assured).

There are two types of annuity plans:

  1. Immediate AnnuityAs the name suggests, here the annuity payments start immediately. The premium for this plan is paid as a lump sum.
  2. Deferred Annuity: This plan allows you to pay regularly premiums (till the vesting stage) or even as a single lump sum amount. You can redeem one-third of the corpus along with the tax-free interest on the vesting day, while the remaining two-third is allocated towards annuity (pension).

Annuity/ pension plans are available as traditional insurance plans as well as ULIPs.

Tax benefits for all plans can vary as per the provisions of the Income Tax Act. Consult your tax advisor for guidance.

Use our free Life insurance calculator to find out how much cover you need.

 
 
 

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