Types of Life Insurance Policies: How to Choose the Right Type of Life Insurance Policy?
Types of Life Insurance Policies: An Overview
Insurance is basically an agreement in which the insurer guarantees compensation for a specified loss of the insured, in return for a series of payments in the form of a premium. A person can buy insurance for various things such as life, health, and automobiles. The insured protects himself from a possible event of loss. For example, if someone gets his car insured and meets with an accident, then he can claim for the damage by the insurer, if and only if the loss is as specified in the agreement. This article talks about life insurance policies. You will also read about the various types of life insurance policies in India, and how can you choose the right policy for you, based on your needs and goals.
What is a Life Insurance Policy?
As mentioned above, insurance is an agreement in which the insurer guarantees compensation for a specified loss of the insured, in return for a series of payments in the form of a premium. One can ensure his life as well, and when he does that, he has to sign an agreement with the insurer, which mentions all the details of the contract, and this is called a Life Insurance Policy.
In this policy, the insured pays a premium in a lump sum amount or in a series of small payments in which he insures his life. And when he dies, the beneficiaries mentioned in the policy get an amount from the insurer. One has the option to invest in various types of insurance products, but the type of life insurance products are the most widely invested in.
Types of Life Insurance Policies in India
There are various types of Life Insurance Policies. The following will give you an overview of the different types of life insurance policies in India:
Term Life Insurance
The first type is term life insurance. In this, the insurance provides a death benefit to the insured, i.e., if the insured dies during the mentioned period in the policy, the insurer will pay the specified amount to the beneficiary mentioned in the policy. But, if the insured survives the mentioned period, then the insurer does not have to pay any money to the insured or it's beneficiary. The insured can not raise a death claim for the insurance money. Term life insurance is one the most affordable options available to people. It is also considered the simplest form, which is why it is the one that is mostly used by people. As, it restricts the payment to one sole condition of the death of the insured within the specified period of time, which is an unpredictable outcome and can happen at any time. This type of insurance can be further classified into three more types, i.e., Level Term Insurance, Decreasing Term Life Insurance, and Increasing Term Life Insurance.
Whole Life Insurance
In this type of insurance policy, as the name suggests the policy covers the entire life of the insured. The policy provides coverage throughout your lifetime until the policy is active, unlike the term insurance plan which is for a specified time mentioned in the policy. The premiums in this type are higher than that of term life insurance as it provides coverage for a longer period of time, even up to 100 years. This insurance policy also contains a cash component, which increases over time and can be withdrawn/taken out against a loan in times of need. One can opt for a participating or non-participating policy.
Endowment Policy
This plan offers dual features to the insured. It offers life coverage along with savings. A part of the premium paid is invested as savings, while the other is used for life coverage. At the maturity of the policy, the insured gets a lump sum payment, which will be helpful when needed by you or your family members. If the insured dies before the maturity of the policy, the nominees not only get the coverage amount, but also the money earned from the savings part of the premium along with the bonus if any. It is a low-risk investment that also provides insurance. It is suitable for people who are looking for a low-risk investment option for a long period of time.
Money Back Policy
This policy is very different from the above-mentioned types. In this policy, the insured gets a percentage of his investments in the form of periodic intervals. These money-backs are also called survival benefits. The remaining percentage of the premium paid is received by the insured upon maturity, along with the bonus, if any.
If the insured dies before the maturity of the policy, then the beneficiaries are entitled to receive the entire amount.
As this policy comes with the feature of money-back during the policy period, the premium for this policy is comparatively higher. It is mostly used for short-term investment periods, for short-term goals.
Retirement Plans
As the name suggests, this type of plan is specifically designed for retirement purposes. The idea behind this plan is to have a sum of money that the insured received after he retires so that he can use it for his necessities as he would no longer enjoy the benefit of active income. The same can be received in a lump sum amount or in regular intervals.
Unit Linked Insurance Plans (ULIPs)
This plan provides dual functions of coverage along with flexibility. Here, the value of the investment is linked to the value of the underlying asset. Hence, the cash value of the policies varies based on the net asset value of the underlying asset. A part of the premiums that the insured pays are used for insurance coverage of the insured, while the other part is used to invest in assets such as equities and bonds. The income earned from long-term capital gains is exempted from taxation. Here, the insured enjoys the flexibility of deciding which securities to invest in. It is a great option for long-term investment and a person has the option to change his risk as per his risk appetite.
Child Insurance Policy
As the name suggests, this policy is designed for children. It is designed to meet the child’s future needs such as education. The maturity date of this policy is when the child reaches adulthood, although some policies offer the option to withdraw some amount at certain intervals.
Group Life Insurance
When a group of people invests together for their life insurance, it is called group life insurance. Generally, it is made by employees working in the same company. Upon the death of a member of the group, the sum assured to him will be provided to his family/beneficiaries. Some of the policies also offer coverage for outstanding loans.
How to Select the Best Life Insurance Policy?
Now that you know about the life insurance types, you should also learn how to select the right policy for your needs and goals. One should keep the following points in mind while selecting a life insurance policy:
- Set your goals, income, expenses, and standard of living in order to get clarity on the amount you should invest.
- Get knowledge about all the different types of policies available and figure out which one matches your goals.
- Do not forget to check the details of the policy such as policy inclusions and exclusions, life coverage, company records, solvency ratio, and claim settlement ratio.
- Compare various policies offered by various institutes, especially the sum assured and other benefits in order to find the best option available.
- Consult an advisor if necessary.
Key Takeaways
- .A life insurance policy is a legal binding between the insurer and the insured.
- One can claim tax exemption under section 80C of the Income Tax Act.
- There are various types of life insurance policies, designed for different kinds of people and their needs.
- Term Insurance policy, the most common policy expires after the maturity date and the insured gets no money if he is alive after the maturity of the policy.
- The beneficiaries get the sum assured after the insured dies.
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Conclusion
Life Insurance is an important investment in every individual’s life. One should learn about all the options available and then make an informed choice. There is no one plan which fits all. Every person is different and has different needs and goals and should invest according to that.
One should invest in a couple of policies to cater to various needs so that one can be ready for unexpected events and stay insured whenever needed. Keeping yourself and your family safe is really important and the decision should be made by thinking properly and wisely.
There are many companies that offer Life Insurance Policies. Each of them has various features in the different types of policies and hence one should consider and compare them all before investing.
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What is the advantage of investing in a life insurance policy?
Investing in a life insurance policy has various benefits such as protection from unexpected events, life coverage, a good investment option, provides long-term savings, and provides tax benefits.
How much tax exemption can be claimed?
One can claim tax exemption up to Rs.1,50,000 of investment in Life Insurance Policy, under section 80C of the Income Tax Act. Also, in the case of ULIPs, one can enjoy additional tax exemption on long-term capital gains as well.
Can I buy multiple life insurance policies at the same time?
Yes, you can buy a number of life insurance policies at the same time. It is suggested to do so to have a diversified portfolio while staying insured and safe.
Are two life insurance plans permissible?
There are no restrictions on the number of life insurance plans you may purchase. Although many life insurance companies don't pay much attention to how many policies you possess, they could pay more attention to the overall benefits you receive.
What is the purpose of life insurance?
The main goal of life insurance is to give financial support to dependents in the event of an insured person's early passing. When the insured person passes away, the insurance pays the designated beneficiary a certain sum known as a "death benefit."
Are two life insurance plans permissible?
There are no restrictions on the number of life insurance plans you may purchase. Although many life insurance companies don't pay much attention to how many policies you possess, they could pay more attention to the overall benefits you receive.
What is the purpose of life insurance?
The main goal of life insurance is to give financial support to dependents in the event of an insured person's early passing. When the insured person passes away, the insurance pays the designated beneficiary a certain sum known as a "death benefit."
When should I buy life insurance?
Even if you don't "need" it, your 20s is the right age to purchase modest term life insurance coverage. In general, when you're younger and healthier, you pose a lower risk to an insurer, which is why you get the best prices.
What are the drawbacks of life insurance?
These are the drawbacks of life insurance:
- If you're ill or older, life insurance may be pricey.
- Getting whole life insurance is pricey no matter your age.
- The cash value factor is a poor kind of investing.
- If you don't have enough knowledge, it's simple to be mislead.
When should a person purchase life insurance?
When you just need the death benefit for a short number of years rather than your entire life into old age, term life insurance may be the most cost-effective alternative. This will be determined by each person's personal evaluation and financial circumstances. Consult with an insurance agent or broker to determine what is best for you.
Why does life insurance sometimes fail to pay out?
Suppose you lie to your insurance carrier about any risky hobbies, health conditions, travel plans, or the family's medical history. In that case, the insurance company may opt not to pay the death benefit.
Does life insurance generate income?
The four most common options for customers to withdraw money from insurance policies include taking out a loan against a policy, converting the cash value into an annuity (a series of regular payments), surrendering a policy, or utilizing riders such as increased long-term care coverage.
Is purchasing life insurance essential?
- To make sure your close relatives would receive some financial help in the case of your passing.
- To pay for the necessities of your children, including their education.
- Should have a future savings strategy so you may continue earning money after retirement.
Is 50 too late to purchase life insurance?
The key outcome is that most people may still obtain life insurance in their fifties without it being too late or too expensive.
What details are required to purchase life insurance?
Your name, location, phone number, date of birth, state or country of birth, civic participation, marital status, conquest (including specifics regarding job responsibilities and salary), bank balance, driver's license number, and social security number are all apparent pieces of information that the life insurance provider will need.
Do you receive your money back when a short life insurance policy expires?
If you terminate or outlive your life insurance policy, you won't receive a refund. The payments will be reimbursed if you purchase a "return of premium" clause and outlast the coverage. You can sell your convertible term life insurance policy rather than cancel it.
Which life insurance policy is ideal for those over 50?
Term life insurance will often be the most cost-effective choice for receiving the death benefit required to guarantee your family is taken care of after you reach the age of 50.