Life insurance is one of the key components of financial planning as it provides financial security and peace of mind to you and your loved ones. There are different types of life insurance products focused on various goals an individual may have; such as life insurance coverage, children’s education or marriage, regular income, retirement solutions, etc. Hence, it is important to understand these plans and select the best fit for your requirements.
In this blog, we will help you understand different types of life insurance plans and their benefits so that you can make an informed decision. But first, let’s understand what a life insurance policy is.
What is a life insurance policy?
Life insurance is simply a contract between the policyholder and the insurance company. The policyholder pays a premium to the insurance company for a specific number of years (or for life), and in return the insurance company promises to pay a sum assured to the nominee upon the death of the policyholder. For some policies, the insurance company pays a maturity benefit to the policyholder, if he/she survives the term. However, these terms differ for different policies.
Top 5 Types of Life Insurance Policies and their benefits:
Term Plan:
A term insurance policy is a pure life cover and its structure is very simple to understand. You pay a premium to an insurance company for a specific number of years, and in return, in case you were to meet with an untimely death, the insurer promises to pay the sum assured to your family. It does not come with any maturity benefit (apart from a Term Plan with Return of Premium or TROP).
Many term plans come up with additional riders, such as accidental death benefits, critical illness, permanent disability benefits, etc. You can choose these riders while buying term insurance if needed, but you must pay the extra premium above the base plan.
Benefits of Term Insurance Plan:
- It provides higher cover for lesser premium as compared to other life insurance products.
- TROP comes with a maturity benefit, which is the sum total of all premiums paid. No interest amount is paid on that.
Whole Life Insurance Policy:
As the name suggests, a whole life insurance policy gives you a cover for life. If the premium amount is paid regularly, the insurer promises to pay the sum assured to the nominee of the policyholder after the death of the policyholder. Apart from the sum assured, it also includes a saving component.
Benefits of Whole Life Insurance Policy:
- Unlike other insurance policies, it does not have a defined term. The sum assured is paid to the dependent upon the death of the policyholder.
- Apart from the sum assured upon your death, it also has a saving component. You can re-invest it letting the cash amount grow or can remit a part of the cash value during your lifetime. You can also avail a loan against the saving component.
Endowment Policies:
Endowment plans are again a combination of savings and protection. If the premiums are paid on schedule for a specific number of years, insurers promise to pay the assured sum to the nominee in case of the untimely death of the policyholder. Meanwhile, if the policyholder survives the policy term, he/she receives a lump sum payout as the maturity benefit.
Benefit of Endowment Policies:
Apart from the sum assured there is a saving component. You can use this to make goal-based savings and in case of financial emergencies, you can avail of a loan against it.
Moneyback policy:
Moneyback policies are also a combination of savings and protection. But the key advantage of this policy is that a portion of the sum assured is paid to you at a regular interval during the policy tenure. The remaining amount along with the bonus is paid at maturity. This benefit is not available for any other life insurance policy. However, if the policyholder dies during the policy tenure then the entire sum assured is paid to the nominee, this is despite the survival benefits that the policyholder has already received.
Benefit of moneyback policies:
The biggest advantage of moneyback policies is the liquidity it provides, i.e. you receive a percentage of the sum assured at the regular interval.
Unit Linked Insurance Plans (ULIPs):
Unit linked insurance plan, better known as ULIP, is a combination of insurance and investment. The investments are made in debt and equities by a fund manager assigned by the insurance provider. However, the policyholders can choose whether he/she wants to invest in debt or equity and in what proportion. Though there are no guaranteed returns, a lump sum amount is paid to the policyholder at maturity. However, if he/she dies during the policy tenure, the insurer pays him/her a sum assured.
Children Insurance Plan
Children’s insurance plans are specifically designed to fund the children’s education or marriage. The parents can buy these plans on behalf of their children by paying the regular premium. In these plans, the maturity amount is paid to the children once they reach different age levels.
In case of the unfortunate death of the parents, children receive the lumpsum amount to meet their expenses. Also, some insurance companies provide premium waivers in case of the unfortunate death of the parents, and children receive the maturity amount as per the insurance plan.
Benefits of Children’s Insurance Plan
- Your children receive funds regularly, which they can use to fund their education costs.
- Also, if you have a daughter, consider investing in such plans to save for her marriage.
Annuity (Pension) Plan
Annuity plans are also known as retirement plans, specifically designed for retirement planning. Under these plans, you have to invest regularly for a predetermined period, and in return, you receive regular income post-retirement. Besides a periodic contribution, you can invest a lumpsum amount, wherein you can deposit a big chunk of your money in one go and enjoy the benefits of an annuity.
These plans also come with death benefits and the nominee receives the sum assured in case of the policyholder’s unfortunate death.
Benefits of Annuity (Pension) Plan
- You can accumulate a good corpus for your retirement, which will help you to earn regular pension income.
- Knowing that you will have a steady income stream in retirement can give you peace of mind. You can enjoy your retirement years without being concerned about your finances.
Benefit of ULIP:
Though there is no guaranteed return, ULIP provides a higher return than traditional policies with a savings component.
Bottom Line
A term plan is a pure life cover that focuses on offering your dependents the sum assured in case you were to die. Hence, it is a must-have for every earning member of a family.
However, if you plan to buy a second life insurance policy, try to assess what you need it for. Once you know the purpose, evaluate different types of life insurance policies
to understand which one will benefit you most. Your decision to buy life insurance should be determined by three factors – requirement, the benefits you get from the policy, and your ability to pay the premium.