Types of Life Insurance Policies

Types of Life Insurance Policies in India

Purchasing a life insurance policy is essential for the financial protection of your dependents in the face of unforeseen circumstances like death. At a basic level, you will be paying premiums to cover certain risks during your policy tenure. When an unfortunate event occurs, your beneficiaries will be provided a lump sum amount by the insurer. If the policyholder is alive till the maturity of the policy, he will receive the returns that the policy has accrued over the years.

Today, insurance providers offer multiple variations to the basic structure of a life insurance policy to cater to a variety of needs. Listed below are the various types of life insurance policies offered by insurers in our country:

• Term Insurance Policy: A term insurance policy is also referred to as E-term insurance policy. It is an exclusive risk cover policy that offers protection to the life insured for a specific duration of time.Key Features:
  • If the policyholder loses his life within the policy term, his beneficiaries will receive a fixed amount of money, referred to as the sum assured.
  • If the policyholder survives till the maturity of the policy, the premiums that were paid by him are not reimbursed. The policy does not offer any maturity benefits, as it only offers life insurance cover.
  • The financial security that the policy provides during unfortunate events is the main advantage of this plan.
  • The premiums that the policyholder pays during the policy tenure are exempt from tax.
  • These plans provide 100% risk cover to the life insured; hence there are no additional charges involved here. The premiums paid for term insurance policies are the lowest among all life insurances.
  • Most of the leading insurance providers offer term insurance policies with policy terms of 10, 20 or 30 years. These plans can also be converted into permanent life insurance policies, if needed.
  • The premium amount and payment frequencies can be configured by the policyholder. Premiums can be paid annually, semi-annually, quarterly or monthly.
  • Most policyholders today prefer to enhance their term insurance policies through add-on covers that provide protection in the event of accidental death, critical illnesses, total disabilities, etc.
• Whole Life Policy: A whole life policy offers protection to the policyholder throughout his life. When an individual purchases this policy, he would be required to pay premiums regularly until his death. When the policyholder loses his life, the corpus is paid to his beneficiaries.There are two types of whole life policies, i.e., Non-Participating whole life insurance and Participating whole life insurance.Key Features:
  • Non-Participating whole life insurance - This type of life insurance plan has a level premium during the entire life of the policy. This policy is defined by its low premium values and fixed costs. Since it is a non-participating policy, there are no dividends paid.
  • Participating whole life insurance - The advantage of this type of policy is the fact that it pays dividends from investments. When the policyholder receives dividends, these will be in the form of cash, which can be used for reducing the premium liability or can be accumulated to attract interest. These dividends can alternatively be used to purchase additional insurance coverage to enhance the policy.
• Endowment Policy: Endowment policies are some of the most popular life insurance policies as these combine financial savings and risk coverage. Hence, policyholders benefit two-fold from these plans.Key Features:
  • If the policyholder loses his life during the tenure of the policy, his beneficiaries can avail the sum assured. However, if the policyholder survives till policy maturity, he receives the sum of all premiums paid, bonuses accrued and returns from investments.
  • For endowment policies, some insurance providers offer several other benefits such as double endowment, marriage endowment, etc.
  • Insurance companies have recently introduced improved versions of endowment policies. These policies provide the customer an option of investing their premiums based on their risk appetite. The insurer provides the available fund options for investment, and it enables the customer to benefit from the improvement in market performance.
  • The premiums borne by the policyholder and the returns accrued through endowment policies and their ULIP variations are exempt from tax.
  • Endowment policies enable savings on a long-term basis, and the risks associated with these are comparatively lower than those in the case of other investment options like mutual funds. Lower risks also contribute to lower returns on investment when tallied with the returns from equity and debt-related instruments.
  • Policyholders can opt for additional riders that may offer protection from disabilities or critical illnesses.
• Unit Linked Insurance Plans (ULIP): These are market-linked products that protect the policyholder with life insurance and provide options for wealth generation. The premiums that are paid towards a ULIP are divided into two parts. One portion is accumulated for honouring the life cover of the policyholder, while the remaining funds are invested in debt, equity, or a combination of both. The returns are determined by the performance of the investments at the marketplace.Key Features:
  • Unit Linked Insurance Plans provide the policyholder a variety of fund options for investment based on his risk appetite. He has the flexibility to choose from aggressive or conservative funds. Aggressive funds are those invested predominantly in the equity market for achieving high capital appreciation. The funds invested in bank deposits, the debt market, or as cash are conservative funds, as they aim to preserve the existing capital while facilitating a steady stream of returns.
  • ULIPs can be utilised for the achievement of long-term financial goals that include marriage expenses, retirement planning and cost of children’s education.
  • The double benefit of insurance coverage and the flexibility to choose your investment channel makes Unit Linked Insurance Plans extremely popular among customers.
  • As ULIPs are life insurance products, they are liable for tax rebates. However, the extent of tax benefit depends on the investments made as well. For instance, equity funds are known to attract taxes of 15% on fulfilling certain conditions.
  • According to the annual charges put down by the IRDA, ULIPs have lower associated charges.
  • These long-term investment plans lock the capital for extended durations, and hence, provide greater returns.
  • ULIPs enable policyholders to switch between investment options. This facilitates in the maximisation of gains when the market is conducive.
  • ULIPs assure death benefits and maturity benefits. If the policyholder faces death, the death benefit provided is the sum assured plus the value of funds. However, the cause of death could dictate variations in death benefits. If the policyholder survives till the maturity of the policy, he receives the fund value as maturity benefit. Additional benefits may also be offered at maturity, based on the terms and conditions in the policy documentation.
  • ULIPs can be enhanced with riders such as the add-ons for critical illnesses, waiver of monthly premium, accidental death/permanent disability, etc.
• Money Back Policy: The money back policy has garnered a lot of popularity owing to the periodic payments that it provides during the policy term. This implies that a part of the sum assured is paid out to the policyholder at regular intervals. If the policyholder survives till the end of the policy term, he receives the remaining sum assured. Since the benefits are staggered throughout the life of the policy, the money back insurance plan can be equated to an endowment policy with regular liquidity.Key Features:
  • If the policyholder succumbs to death during the policy term, his beneficiary receives the entire sum assured.
  • Several life insurance providers are coming up with ULIP versions of money back life insurance policies. These policies provide insurance benefits and investments at low risk to policyholders.
  • The premiums that were paid and the returns that were accrued through a money back life insurance policy or the ULIP versions of the same are exempt from tax.
  • Periodic payouts ensure that policyholders have a steady source of income, i.e., survival benefits, during the policy term.
  • Some money back insurance plans extend the guaranteed death benefits beyond the maturity date and the last survival period till the policyholder reaches the age of 100.
  • The money back life insurance policy can be enhanced with riders such as the accidental death rider, term rider, hospitalization cover and critical illness cover.
• Annuities and Pensions: These types of pension life insurance policies assure the policyholder a fixed sum of money on a periodic basis. These protect the insured against financial risks by providing funds regularly in the form of pension.Key Features:
  • These are long-term contracts that have a few limitations. In case the policyholder withdraws early, he is liable to pay penalties. Earnings under annuities in such cases will be taxed like ordinary income.
  • Annuities are flexible, as they allow customers to pay the premium as a lump sum amount or as smaller payments over a period of time. Policyholders can also decide the frequency at which payouts shall be made.
  • One of the most noteworthy advantages of a pension plan is its ability to provide an income to the policyholder post retirement.
  • Some of the pension plans provide lump sum payments at fixed intervals throughout the policy term, as opposed to regular intervals after retirement. This is particularly useful in meeting major expenses that occur in life before the retirement period of an individual.
  • Investing in a pension plan early in life can help you save on tax payments to a large extent. Premiums for these policies are exempt from tax under Section 80C of the Income Tax Act.
  • Apart from the pension facility, these plans also provide insurance protection to the policyholder. In other words, if the life insured faces death, the policy will offer financial protection to the beneficiaries.
  • Pension and annuity life insurance plans can be enhanced through the purchase of riders such as accidental death or dismemberment cover, critical illness rider, term rider, and premium waiver add-on cover.