Life Insurance can be defined as a contract between an insurance policy holder and an insurance company, where the insurer promises to pay a sum of money in exchange for a premium, upon the death of an insured person or after a set period. You pay premiums for a specific term and in return, insurance company provides you with a Life Cover. This Life Cover secures your loved ones’ future by paying a lump sum amount in case of an unfortunate event. In some policies, you are paid an amount called Maturity Benefit at the end of the policy term.
Here are the different types of life insurance plans and their features and benefits, so you can pick the most suitable one:-
1. Term Insurance Plans
Term insurance protects your family’s financial future if something were to happen to you. Designed as a simple and affordable way to give financial cover, a term plan is a vital part of financial planning for the primary wage earner in a family.
Term insurance is a pure protection plan and is not market-linked. Moreover, the premiums for term insurance are lower as compared to any other life insurance product. The premiums are also more affordable if you buy them early in life. Experts often suggest that term plan should be a priority for you as soon as you start earning.
Term insurance can be used for various purposes. In the absence of an income, your family can use the cover from the insurance to pay for their day to expenditure, education costs, or wedding expenses. If you have any outstanding debts, such as home loan, car loan, etc., your family can pay them off with the cover.
Some term plans also give you the option to add riders, like critical illness^ coverage (providing a lump sum for the treatment of specified critical ailments) and accidental death benefit+ (paid over and above the sum assured in the unfortunate event of death due to an accident). These riders can provide you and your family with an extra layer of protection at a nominal increase in the premium.
Let’s understand with an example. A 25-year-old Fatima wants ₹ 1 crore term insurance till she turns 60. She buys (XYZ) Term Plan with an annual premium of ₹ 9225 for a premium paying term of 35 years and with the regular income payout option. She also buys ₹ 50 lakhs accidental death cover (premium: ₹ 3540) and ₹ 50 lakhs critical illness cover (premium: ₹ 7657). So, the total premium for this comprehensive package turns out to be less than ₹ 63 a day or ₹ 20422 a year for Fatima, inclusive of all taxes. Term Insurance Plan
2. ULIPs – Unit Linked Insurance Plans
A unit linked insurance plan (ULIP) is a combination of insurance and investment. A ULIP provides life cover that offers financial protection for your loved ones. In addition to this, it also gives you the potential to create wealth through market-linked returns from systematic investments.
A ULIP offers you the opportunity to invest your money in different fund options, depending on your risk appetite. ULIPs come with a 5-year lock-in period, and the money can be invested in bonds, equities, hybrid funds, etc. If you are looking for safer options, bonds can be a good choice. On the other hand, if you are open to more risk, hybrid funds and equities have the potential to offer better returns.
Since each individual is different, ULIPs allow great flexibility for investment. Your risk appetite and investment preferences are likely to change with age. ULIPs permit you to take these factors into consideration and alter your investment strategy accordingly.
ULIPs also provide flexibility in terms of partial withdrawals and fund-switching. They offer interesting benefits like loyalty additions and wealth boosters to help you generate more wealth over time. Additionally, the maturity amount from ULIPs is tax-free* subject to Section 10(10D) of the Income Tax Act of 1961.
Let’s understand with an example. Ritesh is a 30-year-old male who purchased the (XYZ) Plan with a policy term of 20 years. He decided to pay ₹ 5000 per month as a premium for 20 years. The life cover for this plan was ₹ 3.6 lakhs. On maturity, Ritesh will get returns according to the performance of the funds he had invested in. This implies that the maturity benefit at a 4% return would be ₹ 9.05 lakhs and at an 8% return would be ₹ 13.9 lakhs. In the case of Ritesh's unfortunate demise, his nominee will receive the death benefit as a lump sum payout.
3. Endowment Insurance Plans
Endowment plans are ideal for people who want guaranteed returns along with the protection of life insurance. An endowment plan is a life insurance policy that provides life coverage along with an opportunity to save regularly. This enables you to receive a lump sum amount on the maturity of the policy. In case of death during the policy term, your nominee(s) also receives a death benefit.
Just like ULIPs, endowment plans are quite flexible too. You can choose a suitable method and time frame to pay the premium. Endowment plans also give you a chance to benefit from bonuses, that are paid additionally over and above the sum assured of your policy.
Lastly, the returns generated on maturity from an endowment plan are tax-free* subject to Section 10(10D) of the Income Tax Act of 1961. The premiums paid can also be claimed as a deduction under Section 80C* of the same Act.
Let’s understand with an example. Mohit, aged 35, buys (XYZ) Savings Suraksha Plan for a policy term of 20 years and a premium paying term of 10 years. He pays an annual premium of ₹ 30,000 and has a sum assured of ₹ 3 lakh. At an 8% return, the maturity benefit would be ₹ 7.21 lakhs. At a 4% return, his estimated maturity benefit, including guaranteed additions, and terminal bonus, will be ₹ 4.47 lakhs.
4. Money Back Insurance Plans
A money back plan is a life insurance policy where the insured person gets a percentage of sum assured at steady intervals. Since you save regularly, the money back plan rewards you regularly. In simple words, a money back plan is an endowment plan with the benefit of increased liquidity with systematic payouts. Money back plans are designed to help you meet your short-term financial goals. The money back feature can add to your monthly or yearly income.
The regular pay-outs, which are tax-free subject to Section 10(10D)* of the Income Tax Act of 1961 makes the process of investing highly rewarding. This is because you can benefit from the policy with immediate effect
Money back plans also have a maturity benefit. So, you get a lump sum payout at maturity that can be used to secure your future or help you fulfill your family’s dreams.
In addition to the above features, the insurance component of a money back plan allows you to lead a stress-free life. Such plans secure the financial future of your loved ones, even in your absence. Hence, with a money back policy, you can get all-round protection for yourself and your family. In case of an unfortunate event during the policy term, your family will also receive a lump sum amount. Moreover, if you survive the term, you can get regular payouts along with lump sum benefits. Returns generated from money back plans are also tax-free* subject to Section 10 (10D) of the Income Tax Act of 1961.
Flexibility is another important component of money back plans and you can choose how to pay the premium as per your suitability.
Let’s understand with an example. Anshul is a 35-year-old corporate employee who was recently blessed with a baby boy. He understands his responsibilities towards his son’s education and wants to protect his child’s future against all possible adversities. Keeping in mind these requirements, he buys the (XYZ) Cash Advantage Plan with a premium paying term of 10 years and an annual premium of ₹ 50,000. His policy benefits include a guaranteed cash benefit of ₹ 30,447 per annum, a guaranteed maturity benefit of ₹ 2.64 lakhs, and additional bonuses of ₹ 1.08 lakhs (at 4% return) that can be used for his son's education expenses. Anshul can also benefit from a life cover of ₹ 5 lakhs for himself for the next 20 years.
5. Whole Life Insurance Plans
A whole life insurance plan is a life insurance policy that gives you life coverage for 99 years. Unlike other policies that have a relatively shorter term of 10-30 years, the long coverage period of such plans ensures protection for your family for an extended period of time.
With coverage of up to 99 years, whole life insurance is ideal for those who have financial dependents even in their old age. The biggest advantage of this product is that not only does it provide lifelong protection to the insured but also provides a simple way to leave behind a legacy for their children.
Whole insurance plans offer a lot of stability. After paying the premiums for 5 years, you get a guaranteed income on maturity. Moreover, the income received from a whole life insurance policy is tax-free* subject to Section 10(10D) of the Income Tax Act of 1961.
Whole life insurance policies are beneficial for those who want to leave a financial legacy for their legal heirs. In the case of death of the policy holder during the term, the nominee receives the policy benefits, including a bonus for the total premiums paid.
Let’s understand with an example. 35-year-old Badrinath invests ₹ 1,00,000 per year in the (XYZ) Plan for a period of 10 years and chooses a policy term of 64 years. Badrinath pays ₹ 10 lakhs as premium and qualifies to get ₹ 1,50,000 lakhs at the age of 50. Post this, he will continue to receive income in the form of guaranteed income and cash bonus every year until the policy matures. On the day of maturity, he will receive the remaining income as a lump sum. However, an important thing to note is that the amounts received each year will depend on the rate of return and the future performance of the insurer.
6. Child Insurance Plans
Children deserve the best, and a child insurance plan helps to build a corpus for your child’s future. A child plan is one of the most vital financial planning tools for parents. These plans can help you build a significant sum for your child’s education and marriage expenses.
A child plan provides maturity benefits either in the form of annual installments or as a one-time payout after the child turns 18. There is also in-built insurance coverage for the parent. Protection is an important part of a child plan because the premium is paid by the parent. In case of an unfortunate event where the insured parent passes away during the policy term, child plans can give immediate payment to cover a child’s expenses.
One of the most important features of a child plan is that it allows you to choose how and where your money is invested. The premium you pay is invested in your choice of equity, debt, or balanced funds. ULIP child plans also ensure that, over time, your returns are adequate to counter inflation. As compared to fixed return avenues that often fail to beat inflation, child plans allow plenty of room for rising costs. You can also choose from a collection of fund options to invest and switch between them without worrying about their tax* implications. ULIP child plans offer dual tax savings. This includes benefits on premiums paid under Section 80C* and the maturity proceeds under Section 10(10D) of the Income Tax Act of 1961 subject to conditions provided therein.
Child plans also offer loyalty additions and wealth boosters that add to your overall savings. Moreover, you can either pay regular premiums or a single premium, based on your capacity. You can also use these plans as an emergency fund and make withdrawals from your investment on the completion of 5 policy years. Lastly, child plans allow you to get wider coverage with critical illness and accidental death benefits.
Let’s understand with an example. Tina, a 30-year-old new parent, invests in the (XYZ) Plan for her daughter. She selects a premium of ₹ 5,000 every month and chooses a policy term of 18 years. With an 8% expected return, she can get ₹ 24.16 lakhs after 18 years. Similarly, at a 4% expected return, she can get ₹ 15.83 lakhs after 18 years.
7. Retirement Insurance Plans
Retirement plans are designed to help you build a sizeable corpus for your post-retirement days. They help you gain financial independence in your non-working years. A retirement plan allows you to save and invest for the long-term, thereby offering the potential to accumulate a significant amount of wealth. Since retirement plans offer insurance benefits, you can also ensure financial security for your loved ones by investing in these plans.
Retirement plans give you the opportunity to get potentially better returns. This is done by investing your money in a mix of equity and debt. Moreover, the money you get on maturity is tax-free* subject to Section 10(10D) of the Income Tax Act of 1961. Retirement plans also allow you to move your money between funds tax-free*.
Lastly, retirement plans offer you multiple options to withdraw your money, such as regular income, lump sum payment, or a combination of both.
Let’s understand with an example. Jatin, a 35-year-old IT engineer, buys (XYZ) Retirement Plan with the regular premium option. The policy term is for 30 years with a premium payment term of 10 years. His assured benefit is ₹ 10.10 lakhs for an annual premium of ₹ 1 lakh per annum. Jatin chooses an easy retirement balanced fund. At a 4% return, Jatin’s retirement corpus can be ₹ 19.62 lakhs that can generate an annual income of ₹ 0.97 lakhs**.
Factors that affect life insurance premium:-
Age: One of the prime factors that affect the premium for a life insurance plan is your age. The life insurance premium is lower for younger people and gradually increases with age.
Gender: Studies have shown women live longer than men 1. Therefore, the life insurance premium is lower for women as compared to men.
Health conditions: Your present and past health conditions can determine the premium for your life insurance plan. If you have any pre-existing illnesses or have suffered from an illness in the past that may resurface or affect your present health, you would be charged a higher premium.
Family health history: The chances of suffering from a disease that runs in your family are considerably high. So, if any hereditary illnesses run in your family, you may have to pay a higher premium.
Smoking and drinking alcohol: Lifestyle habits like smoking and drinking alcohol can impact your health and lead to multiple health issues. Therefore, insurance companies charge a high premium for individuals who smoke or drink alcohol.
Type of coverage: The type of coverage you opt for can increase or decrease the life insurance plan’s premium. If you add any riders to your plan, the premium would increase. A longer policy term can also result in a higher premium compared to a shorter term. In addition to this, the type of life insurance plan you select also impacts the premium. For instance, term life insurance is the most affordable form of life insurance.
Amount of coverage: A higher sum assured would result in a higher premium and vice versa.
Occupation: If you work in a high-risk job, the premium for your life insurance plan would be higher than others. For example, if you work in construction or if your job puts you at any kind of risk, such as regular exposure to chemicals, the insurance company will charge a higher premium.