Premiums paid towards Life Insurance policy come under Section 80C up to the specified limit of the section. Also, the return on the investment, i.e., all kinds of payouts from the insurance policy, are tax-free under Section 10 (10D).
Types of Life Insurance Policies in India
When choosing Life Insurance, the financial security of your dependents must be the utmost priority. However, saving for wealth creation and other long-term goals must be addressed in today's time of inflation and the rising cost of living.
Assessing the different requirements and then choosing an insurance policy is a crucial financial decision that needs a lot of research and assessment.
Let's look at India's most common types of Life Insurance policies.
What are the Different Types of Life Insurance Policies in India?
Depending on the investment goal and a few other features, Life Insurance can be broadly classified into the following types:
- Term Life Insurance
- Whole Life Plan
- Endowment Life Insurance
- Money Back Insurance
- ULIP Insurance
- Child Insurance
1. Term Life Insurance
Term Life Insurance is the basic insurance plan with no investment component attached to it. It acts as financial cover for a family in case of the unfortunate demise of the policyholder.
Some term plans also offer the option of riders that provide an additional benefit over and above the standard coverage of the term plan.
There are a few types of Term Plans that provide an option of Return of Premium. These plans, also known as TROP (Term Plans with Return of Premium) return all the premiums paid at the end of the policy term, in case the policyholder survives the complete term.
Features and Benefits of Term Life Insurance:
Affordable: Since Term Plans have no savings component attached to them, their premiums are very low for a certain sum assured compared to any other insurance plan.
Multiple Death Benefit Pay-outs: Multiple death benefit pay-out options provide different payout options for the policyholder. Some options are staggered payout, fixed monthly payout, and lump sum payout.
Return of Premium Option: Term Insurance Plans do not provide any maturity benefit. An additional rider of ROP can be added to the base plan that allows the additional benefit of return of all premiums on surviving the complete insurance term. Alternatively, there are plans called TROP (Term Plans with Return of Premium) that have this option in the base plan itself.
The Flexibility of Adding Riders: The policyholder can add various riders, such as critical illness, disability, accidental death, etc., to customise the benefits as per their requirements.
2. Whole Life Plan
Whole Life Insurance Plans provide coverage for the insured's entire life. Hence, they are also known as Permanent Life Insurance.
In usual cases, the tenure of an insurance policy ranges between 10-30 years; however, in Whole Life Plans, the tenure is relatively longer and extends up to 100 years of age, thus ensuring financial protection for the family for a longer term.
The Whole Life Plan is an excellent option for individuals looking for wealth creation for retirement and who want to be financially covered for the future. Even in the later stages of life, people with liabilities must consider buying a whole life plan.
Features And Benefits of Whole Life Insurance:
Lifelong Protection: The policyholder's dependents are financially protected for longer than any standard insurance policy.
Guaranteed Premium: The premium paid towards this policy remains the same throughout the tenure of the policy.
Periodic Payments: Some policies offer the option of paying maturity benefits in the form of regular income. Thus, the policyholder can opt for either receiving the maturity benefit as a lump sum at the time of maturity of the policy or as regular payouts.
Loan Facility: A policyholder can avail loan against the policy since it offers coverage for 100 years. However, the loan can be availed only after the completion of 3 years of the policy.
3. Endowment Life Insurance
One of the most popular and appropriate kinds of Insurance plans is the Endowment Plan. They provide the benefit of financial coverage and the much-needed wealth creation for long-term goals in life.
It helps an individual save regularly over time and create a corpus that can be availed as a Maturity Benefit at the end of the policy term. However, if there is an unfortunate demise of the policyholder during this tenure, the Sum Assured, along with accumulated bonuses, if any, is paid to the nominee.
Features And Benefits of Endowment Life Insurance:
Wealth Accumulation and Death Benefit: The policyholder receives a Maturity Benefit if he completes the policy term. However, in case of an unfortunate demise of the policyholder, the beneficiary receives the Death benefit and accumulated bonuses, if any.
The Flexibility of Adding Riders: The policyholder can add various riders, such as critical illness, disability, accidental death, etc., to customise the life cover as per their requirements.
Low-Risk Investments: If you are looking at investing for the long term, they are safer options than ULIPS, Mutual Funds, Equity, etc., since they provide a guaranteed maturity benefit. As a risk-averse individual looking forward to goal-based savings in a disciplined manner and having a life cover for uncertain circumstances, Endowment Plans are a perfect choice.
4. Money Back Insurance Plan
Money Back Insurance Policy can easily be termed as an Endowment Plan with the benefit of liquidity. In Money Back plans, the Sum Assured is paid regularly during the policy tenure, and these payouts are known as survival benefits. The amount of these payouts is a pre-decided percentage of the Sum Assured, and they start a few years after the policy's start.
In case of the policyholder's unfortunate demise during the policy's term, the whole maturity amount is paid to the nominee, irrespective of the number of payouts already paid.
Features and Benefits of a Money Back Insurance Plan:
Guaranteed Regular Income: This can be a good choice for retirement plans since they give guaranteed regular payouts in addition to the maturity amount.
Act as a bucket of Investments: Money Back Plans serve a three-pronged purpose:
• Provide regular income during the term of the policy in the form of regular payouts.
• Provide a lump sum amount at the maturity of the policy.
• Act as financial coverage to meet the unexpected condition of the policyholder's demise.
Riders available: A Money Back Insurance also has options of riders available like Critical Illness Rider, Accident or Disability Benefit Rider, Waiver of Premium Rider, Hospital Cash Benefit Rider, and many more, depending on your insurance provider.
5. ULIP Insurance Plan
ULIP - Unit Linked Insurance Plan is a combination of Insurance and Investment. It's a kind of insurance where part of the premium is utilised in providing life cover, and the other portion is invested in financial instruments, i.e., equity and debt.
ULIP insurance is a perfect product if you are looking for wealth creation but at the same time also need to secure your family against unforeseen circumstances.
Features And Benefits of a ULIP Plan:
Life coverage along with Investment: ULIP is the only investment where you can avail of market-related returns on your investment and have life coverage to protect your loved ones against life's eventualities.
The benefit of Market Linked Return on Investment: ULIP plans allow you to maximise your returns by investing your premiums into market-linked instruments like equity and debt in certain selected proportions.
Flexibility: ULIP plans allow you to switch between investment funds as per your choice and needs. Thus, you can maximise the returns on your investment. They also provide a choice to make additional investments alongside the regular premium, an opportunity to increase your investment portfolio.
6. Child Insurance Plan
As per general statistics, education costs increase 6 times the average wage increase. This means that it is almost impossible for an ordinary person to afford a proper complete education depending on a regular income. Hence, meeting these higher education expenses requires financial planning from a very early stage.
Child Insurance Plans are designed to do just that: meet the seemingly magnanimous education expenses, even in the case of the unfortunate demise of the parent.
Features and Benefits of a Child Insurance Plan:
Waiver of Premium Benefit: In the unfortunate event of the death of the policyholder parent during the term of the policy, the sum assured is paid to the beneficiary, and the insurance provider undertakes to pay all the remaining premiums of the policy to complete the tenure successfully. On the policy's maturity, the beneficiary child receives the maturity amount.
Partial Withdrawal: Many Child Insurance Plans provide the option of partial withdrawals once the child attains the age of 18 years. This is helpful to meet the immediate expenses during higher studies or any other requirements that need to be met before the complete maturity of the policy.
Flexibility to optimise the Returns: Most Child Insurance Plans are ULIP plans that allow you to choose where the money is invested. Compared to fixed return schemes, the ULIP Child Plans will enable many opportunities to maximise your return and thus build enough corpus to beat inflation. You can select Equity, Debt, and Balanced Funds to maximise the return on your investment.
Flexibility in Premium Payment: Most child plans allow the premium payment option to be customised. You can choose the amount of premium based on the Sum Assured and the payment frequency, viz. monthly/quarterly/semi-annually/ annually or even once.
How to Choose the Best Life Insurance Plan?
The best plan for anyone is the one that is completely suited to their requirements. Hence a wise and informed decision is necessary to provide adequate coverage and optimised return on your investment.
Choosing the best life insurance plan requires careful consideration of several factors. By following these steps, you can make an informed decision that aligns with your goals and provides adequate coverage for your needs.
1. Assess Your GoalsBegin by evaluating your financial goals and priorities. Consider your current financial situation, responsibilities, and long-term objectives. Determine what you want to achieve with your life insurance plan, such as protecting your family's financial future, paying off debts, or funding your children's education. This assessment will help you identify the type and amount of coverage that suits your needs.
2. Consider the Sum AssuredThe sum assured is the amount paid to your beneficiaries in the event of your demise. Calculate the sum assured based on your financial obligations and future expenses, including outstanding debts, mortgages, education costs, and living expenses. Ensure the chosen policy provides sufficient coverage to meet these requirements.
3. Policy TenureEvaluate the policy tenure or duration for which you need coverage. Determine the time frame during which your dependents will be financially vulnerable or until you reach a specific milestone, such as retirement. Longer policy tenures may be preferable if you have long-term financial commitments or if you want to secure coverage for an extended period.
4. RidersConsider additional benefits offered through riders. Riders are optional add-ons that enhance your policy's coverage. Examples include critical illness riders, accidental death benefit riders, and disability riders. Assess your needs and choose riders that provide extra protection against specific risks.
5. Insurer DetailsResearch and compare the reputations, financial stability, and claim settlement records of various insurance companies. Look for insurers with a strong track record of prompt and hassle-free claim settlements. Check their customer reviews, ratings, and market reputation to ensure you select a reliable and trustworthy insurer.
6. Consultation with a Professional
Consider seeking guidance from an expert. They can help assess your financial situation, understand your needs, and provide personalized recommendations. An expert can offer insights into different policy options, explain complex terms and conditions, and assist in choosing the best plan for you.
Remember, life insurance is a long-term commitment, so it is crucial to make an informed decision. By assessing your goals, considering the sum assured, policy tenure, riders, insurer details, and consulting with a professional, you can select a life insurance plan that provides comprehensive coverage and peace of mind for you and your loved ones.
FAQs About Types of Life Insurance Policies in India
No. Riders are an add-on that can be purchased with the primary insurance policy to increase and customise the benefits offered by the policy.
Term plans, the most basic and affordable insurance plans, are the most commonly bought insurance policy. However, ULIPs are preferred mainly by people looking for long-term investment options.
Yes. Since the Whole Life Plan comes with a savings component, usually it's more expensive than the Term Plan that does not have any savings component and provides only death benefit.
“Fully Paid Up” means you have made enough premium payments to cover the cost of insurance for the rest of its tenure. Thus, even though you have stopped paying any further premiums now, you are covered for the complete policy tenure.
Important Guides related to Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.