Life Insurance is not a single big thing. It is a lot of small things.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).
To meet the different needs of the investors, insurance companies offer different types of life insurance policies.
Below are the major categories of life insurance in India.
1. Term Insurance Plans
As the name indicates, 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.
- Term Insurance plans are pure protection plans which provide life cover at a nominal cost. These plans are the simplest type of life insurance plans.
‘Term Insurance’ is something that you hear often when you are looking to buy insurance. Your advisor would have mentioned it multiple times, and a casual Internet search brings it up in loud colors. What is it, really?
Term insurance is the simplest form of life insurance. It is a simply a contract between you and the insurance provider for a specified term (duration), which states that as long as you pay the premiums, the company offers you a life cover. In case you do not survive the specific -duration or ‘term’ of the contract, your dependants receive a lump sum amount. However, in case you survive the policy term, you do not receive any maturity benefits.
- What are the different kinds of Term Insurance?
Broadly speaking, there are four kinds of term insurance.
- Level Term Insurance
Here, the policyholder pays a fixed premium throughout the term specified. The premium to be paid and the coverage are decided at the time of buying the policy and do not change.
- Decreasing Term Insurance
The decreasing term insurance policy gives you a cover that decreases over time. The idea behind this is that your needs are different at different stages of life. When you are young, you might need a cover that can insure your children’s education, cover your home loans and other expenses. When you are older, the education expenses, home and car loans and other debts might be paid off, and you will only need a cover that helps your partner during retirement. The premium remains constant throughout the term.
- Increasing Term Insurance
The increasing term insurance policy offers a cover that increases over the span of the term, with a constant premium. Inflation can cause the value of money to drop. In such a scenario, the cover you fixed many years ago might not be sufficient when your dependants eventually need it.
- Return of Premium Term Insurance
Traditionally, term insurance policies do not offer maturity benefits. However, some insurance companies now offer ‘Return of Premium Term Insurance’ plans where all your premiums are returned in case you survive till the end of the policy period. These policies tend to have higher premiums as compared to a level term policy for the same term.
In case you are the major earning member in your family or have some financial liabilities, opting for a term plan can be the smartest thing to do. This is the most cost effective way to safeguard your dependents and get some tax benefits too.The benefits can vary as per the provisions of the Income Tax Act. Consult your tax advisor for guidance.
Whole Life Insurance plans offer lifelong cover. They are characterised by leveled premiums throughout the insured’s life. Based on the nature of the product, whole life insurance plans 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 specified-tenure insurance, linked to savings. It provides dual benefits viz:
Payment of sum assured to the beneficiary on death or permanent disability
Life insurance maturity for endowment policy proceeds to the insured on surviving the term. The proceeds are 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 duration irrespective of the paid benefits.
- These are the new-age term plans that, along with the usual benefits of a term plan, return all the premiums in case the policyholder survives the policy term.
Term plans are popular because they are cost-effective, easy to understand and easy to avail online. They can offer higher life cover (compared to endowment plans and ULIPs) at a fraction of the cost and the beneficiary gets a death benefit in case the policyholder does not survive the term (duration of the policy). Simple enough!
However, what happens if the policyholder survives the term? In such a scenario, the term plan does not give any maturity benefits. The premiums paid toward the cover are gone. In hindsight, the premium payments might look like money wasted.
This is why some companies offer a return-of-premium term plan. Let’s -learn more…
- What is Return-of-Premium Term Plan?
These are the new-age term plans that, along with the usual benefits of a term plan, return all the premiums in case the policyholder survives the policy term. Yes! All the premiums paid toward the life cover are returned (–excluding tax).
However, it is important to note that return-of-premium plans tend to have higher premiums as compared to the traditional term plans for the same sum assured and policy term.
- Features of Return-of-premium Term Plans
- High sum assured
- Premium returned in its entirety (excluding tax) after policy term
- Premiums need to be paid throughout the term of the policy
- The Math
As discussed, return-of-premium term plans have a higher premium compared to traditional term plans for the same sum assured and policy term. This means shelling out a bigger amount toward life insurance every year. However, the premium that is spent toward the cover is returned to you by the end of the policy (excluding tax). Consider the following scenario.
- Policyholder details at the time of purchase:
Age: 30
Policy Term: 20 years
Sum Assured: Rs 75 lakhs
- Illustrative plan working if policyholder survives the policy term:
| Policy Type |
AnnualPremium (indicative) |
Total Premium Paid |
Returns After 20 Years |
| Regular term plan |
Rs 5,000 |
Rs 1,00,000 |
0 |
| Return-of-premium term plan |
Rs 15,000 |
Rs 3,00,000 |
Rs 3,00,000 |
As illustrated, the regular term plan does not have maturity benefits, i.e. no returns. However, a return-of-premium term plan pays back the all the premiums.
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 varying 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 life insurance riders, top-ups and partial withdrawals are also available with ULIPs.
A Unit Linked Insurance Plan (ULIP) is an insurance product that combines life cover as well as investment.
What is a ULIP?
A Unit Linked Insurance Plan (ULIP) is an insurance product that combines life cover as well as investment.
Part of the premium paid goes toward allocation, administration and mortality charges, as in regular insurance policies, while the rest of the premium is invested by the insurance company. The allocation of funds toward investment units can be personalized according to the needs of the policyholder and at varying levels of risk.
What are the fund options for ULIPs?
There are four types of ULIP fund options:
These are high risk avenues that allocate funds in shares. The expected returns from this kind of policy are high and are ideal for long term wealth creation.
Such a fund distributes a part of the premium toward high risk equity units and the rest toward fixed interest units. This has medium risk, because the high risks of the equity units are balanced by the lower risk of the fixed interest units.
These invest the premium in corporate bonds, government securities and other fixed income instruments. As a consequence, these have medium risk.
This type of fund carries incredibly low risk. The funds are invested in instruments like cash and bank deposits. Returns from these plans are comparatively low.
6. Child Plans
Child i
nsurance 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 the unfortunate death of the parent.
- A glimpse into the features of a Child Plan.
On a baby’s first birthday, his father gifted him an insurance policy. On seeing this, the mother said that it was a waste of money, as the baby had neither debts nor liabilities. On the face of it, this sounds like a valid argument. However, her confusion prompted a series of Questions & Answers as follows:
Q: Why invest in a Child Plan?
A: In this plan, I am the insured person while our son is the beneficiary. The idea here is to safeguard his future in case something happens to me. In addition, it also helps us save for his higher studies/marriage, etc.
It is better to start early so that we can take advantage of compounding. Don’t see it as an insurance taken to pay off liabilities but as a plan to safeguard our baby’s castle of dreams.
Q: So is it an insurance plan or an investment plan?
A: There are different types of insurance plans, with and without investment.This child policy comes with a ‘life cover’ as well as a ‘sum assured at maturity’. We have the flexibility to choose the tenure as well. And yes, we get immediate tax benefits up to a certain limit.
Q: How will the premiums be paid if something happens to us?
A: Don’t worry. I have opted for the waiver of premium rider, which means that if I am no longer there, the future premiums will be waived off and paid by the insurance company. Hence, the policy will continue and on maturity, a lump sum amount will be paid to our son.
Q: All this makes sense but why the urgency? Can’t we spend the money now and buy a plan later?
A: Let’s face it, life is unpredictable. You never know what will happen to us tomorrow. Road accidents, air accidents, terminal medical conditions, lifestyle diseases... all this is very scary and there are many what-ifs. We need to be wise and protect our child’s future, even if we are not around. And, of course we are looking only at the worst case scenario. In all probability, we will be healthy and this money will grow into a handsome lump sum amount for all of us to utilize. I think this will be our greatest gift for him.
The explanation greatly satisfied the mother. She was happy with her husband’s decision to invest in a Child Plan, as this would secure their baby’s future.
7. Annuity/Pension Plans
Annuity/ pension plans are characterized by payment of a fixed amount to the insured at old age or 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 Annuity: As 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 premiums regularly (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-thirds 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.
If you want to find out how is
life insurance premium calculated and how much cover you need, use our free Life insurance calculator.
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