Life Insurance as the term suggests is a product that insures you against the inevitable risk of death. However, there are too many products trying to offer the risk cover with too many features. Choosing from the different types of life insurance is an important financial decision, as it helps you protect your loved ones from life’s uncertainties. It also takes care of your liabilities & unfinished goals in case of your early demise.
Let's try to understand to understand different types of life insurance policies offered in India.
Term Life Insurance
This is one of the cheapest & simplest form of life insurance policy offered in India. An individual can cover himself for a specific term by paying premiums to insurance company in exchange of a very high coverage for his life. Eg: for a healthy person aged 25, an insurance cover of Rs. 1,00,00,000 till the age of 60 would cost Rs. 13,000 per annum (varies based on companies). This means that if this person dies before the age of 60 then insurance company will pay the insurance cover amount of Rs. 1,00,00,000 to the legal nominee of the person.
The premium calculation varies from company to company and is based on following factors:
- State, Country
- Pre-existing Medical History
- Drinking Habits
- Smoking Habits
Further, there are two types of term insurance policies:
1) Pure Term Insurance Policy: As discussed in the above example, the person pays premium every year till the term of policy & if he passes away during the term then claim is settled with his nominee. If the person outlives the term of policy then no benefit is incurred & all the premiums paid are kept by insurance company. This is purest form of insurance that pays out only in case the risk materializes.
2) Term Insurance Policy with Return of Premium: This is similar to pure term insurance with a guarantee to return the entire premium paid at the end of policy term in case the insured person outlives the policy term.
READ MORE: At what age should I get life insurance?
Unit Linked Insurance Plan (ULIP)
Unit Linked Insurance Plan or ULIPs as they are generally known, is a type of life insurance which combines the investment and insurance aspects into a single product. It offers life cover along with investment opportunities. Life cover offered is a multiple of yearly premium. This is usually 10 times the premium amount.
This premium has a small component of insurance and remaining component is invested as per fund managers’ investment policy. Units are allotted just like a mutual fund scheme but these come with a certain lockin period.
All the tax benefits applicable to other insurance products are also applicable to ULIPs. These policies have a defined maturity & on the date of maturity, the value of your investments is transferred to your bank account and policy ceases to exist.
In case of death before the maturity, nominee gets the sum assured of insurance policy. Policy holders should keep in mind that a certain portion of your premium is invested in market linked securities hence there is no guarantee of returns on this investment amount. These policies are complicated in nature & one should take help of advisor to check the product suitability.
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Endowment Insurance Policy
Endowment policy or savings plans as they are generally known, is a type of product that offers guaranteed returns along with risk cover in case of early demise. In these policies, the insured pays premiums for a certain term and then gets the benefit in form of regular returns for a specific term in future. The risk cover continues till the premium paying term post which the regular income starts flowing in. There is an option to take a lumpsum maturity benefit or regular pay-outs as per investors choice or needs. These are long-term policies and usually run for over 20 years. Investors should keep in mind that the money is locked in for very long duration and these are illiquid products. The surrender value comes at a heavy discount to invested amount in case you withdraw them pre-maturely. These policies are complicated in nature & one should take help of advisor to check the product suitability.
Whole Life Insurance Policy
The difference between other polices & whole life insurance policy is that a whole life policy provides a coverage of life up to the age of 100 years. This can be considered as an insurance for your entire lifetime. The death benefit accrues to nominee of policy holder in case of death of policy holder before 100 years of age. In case the policy holder survives then he gets the maturity benefit of the policy. This again is a very illiquid product and comes at cost of heavy discount in case you plan to withdraw pre-maturely.
There are multiple other insurance products that have complex features. It becomes very important to study them carefully before committing to the product as the cost of surrendering the policy is always very high. One should not shy away to consult an advisor apart from the one who is pitching the product to take a second opinion before buying the policy except in case of pure term insurance where things are quite simple.
CA Rohit J. Gyanchandani is Managing Director, Nandi Nivesh Private Limited, A Pune based Wealth Management Company.