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Useful articles for your finance management by our team of experts

Different Life Insurance Policies in India

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life insuranceThe purpose of Life Insurance is to protect people who depend on you financially in case of your unfortunate demise. People also invest in insurance in order to save money for retirement, children’s education, and to pay off debts. Whether you need life insurance or not depends on the answer to the following questions:

  • Are people financially dependent on you?
  • Is your partner working?
  • Do you have enough money to fulfill your needs post retirement?

We will try to analyse various types of life insurance policies in India. You can use this article as a reference while buying insurance.

Types of Life Insurance

Traditional Life Insurance products can be categorized into the following types based on features and the benefits they provide:

  • Term Insurance
  • Whole Life Insurance
  • Endowment Insurance
  • Annuities

There is a non traditional insurance plan called ULIP (Unit Linked Insurance Plan) and their returns are linked to the market returns. Let’s discuss important features of life insurance policies such as traditional insurance and ULIP’s one by one.

Term insurance

Term life insurance provides protection for a specified period of time and default in a premium payment ends the policy coverage. At the end of the term, policy can be renewed to extend the coverage period. You can buy term insurance for the number of years as per your requirement. Death Benefit is paid to the nominee in case of unfortunate demise of the life insured during the policy term. Insured is not liable to any benefit at maturity if he survives the term of the policy.

 

Features1. Complete protection at low cost
2. Cover can be enhanced with appropriate rider options
3. Income Tax benefits as per prevailing norms
Pros and ConsPros:
1. Considerably lower cost to the insured than the other options as one can buy more insurance protection for the given amount of premiumCons:
1. Premiums paid represent insurance only with no maturity benefits
2. Temporary, providing death benefits only over the policy term
3. Term plans do not offer loans, surrender value or paid-up value
Premiums and CostTerm insurance is quite cheap and you can get a cover of 1 crore by paying premium of Rs. 15,000 to 30,000 per year.
Why to InvestTerm insurance is for those who plan to invest their savings in high risk high return financial products like stocks and mutual funds. It is recommended to invest in a term plan for everyone who has dependents.

Whole of Life Assurance

Whole life insurance comes packaged with a death benefit (a feature of term insurance) and a savings component. Whole life plans build a tax sheltered cash corpus for the future use of policy holder and pays death benefits to nominee in case of unfortunate demise of the policyholder. The protection is provided over one’s lifetime. Whole life plans are of two types i.e. Participating and Non-Participating. In case of Participating plans, returns paid to the beneficiary fluctuates (higher or lower) as per fund return while non-participating ones get the same benefit over the life.

Features1. Comes with death benefit and saving component
2. Cover can be enhanced with appropriate rider options
3. Income Tax benefits as per prevailing norms
Pros and ConsPros:
1. The beneficiary gets death benefits and accumulated cash value
2. You can take a loan against the cash value or draw it out at retirementCons:
1. Survival benefit is nil for the insured.
2. Rate of return is quite low as compared to other options
3. Policy terms are complex which leaves room for misrepresentation by agents
4. Premiums are costly
Premiums and CostAmount of premium depends on your age when you start the policy and you pay a premium as long as you live
Why to InvestIt’s recommended to choose this insurance above term insurance in case you have a very low risk appetite. Choose other investment options if you can spend time on research.

Endowment Insurance

Feature wise Endowment plans are mixture of term and whole life insurance. It is a level premium plan and benefits are paid to the nominee on the unfortunate demise of the policy holder within the policy term. If the policy holder survives the term benefits are paid at the end of the policy term. Similar to whole life insurance, endowment insurance also come in two flavours i.e., Participating and Non Participating. Although cash corpus gets built by the end of the term, this is not the most efficient way of generating returns.

Features1. Choice of Policy Term and Pay Term
2. Flexibility of directing your savings as per your risk appetite
3. Enhanced financial security for your loved ones
4. Accrued bonuses

5. Income Tax benefits as per prevailing norms

Pros and ConsPros:
1. Policy holder friendly as he gets survival benefits
Cons:
1. Rate of return is quite low as compared to other options
2. Policy terms are complex which leaves room for misrepresentation by agents. The wide variety of plans also adds to the confusion.
3. Premiums are costly
Premiums and CostAmount of premium depends on the Sum Assured chosen by you.
Why to InvestIt’s recommended to choose this insurance above term insurance in case you have a very low risk appetite. Choose other investment options if you can spend time on research. A combination of term insurance and investment in a good mutual fund could beat this product return.

Annuities

An annuity is a policy where the insurance buyer pays money in for a predefined period and after a certain date, gets regular payments back in his lifetime. These are also known as pension plans. Investment in annuities is a source of regular income through your lifetime once you retire. In case of any unfortunate demise, annuity savings are returned to the nominee.

Features1. Annuities give you guaranteed income over your entire life
2. In case of unfortunate death of the policy holder, annuity purchase price is paid to the nominee
3. Annuities offer convenient payout options like monthly, quarterly, half yearly and yearly
4. Medical Examination is not required to purchase annuities
5. The annuity holder gets tax benefits under Section 80CCC.
Pros and ConsPros: Annuities prove handy in ensuring income when you are not in a position to work post retirement
Cons: The investment returns are low as compared to other options
Premium and CostPremium depends on the amount you expect to receive as regular income post retirement.
Why to InvestPeople invest in annuities in order to supplement retirement income. Annuities are best suited for people of age between 50 and above
TypesFollowing types of annuities are available for investment
1. Annuity for Life
2. Joint Life last survivor annuity
3. Annuity guarantee for certain periods
4. Life annuity with return of purchase price
5. Increasing annuity

ULIP’s

New ULIP plans post IRDA reforms are getting popular again. Returns from ULIP vary as per market returns. Normally long term ULIP provides better returns as compared to traditional insurance plans. Traditional plans provide low rate of returns as they invest the majority of their corpus in Government debt. ULIPs investment corpus goes mainly to stock market and hence one witness’s large fluctuations in their performance. Although this sounds risky, but if you treat ULIP as a systematic investment, this risk can be minimized. The features mentioned below apply to new ULIP’s. People who are holding old ULIP’s are advised to liquidate them and invest into new ULIP’s.

Features1. Minimum investment period of 5 years
2. Flexibility of directing your savings as per your risk appetite
3. Features of both life cover and health cover
4. Guaranteed return in case of Pension Plans
Pros and ConsPros:
1. Liquid
2. Potential of high returns in the long run
3. Flexible and transparent
Cons:
1. Management Fees are quite high
2. The returns are quite volatile
3. Premiums are costly
Premiums and CostAmount of premium depends  on the plan you choose
Why to InvestThis product is ideally suited for investors with high risk appetite, liquidity preference and long term time horizon. ULIP is just like a mutual fund with insurance cover. If you are conservative, you may like to go for a ULIP product that has major part invested in the debt market.

Final Word

So, we have seen different types of life insurance policies in India. One very important point to keep in mind is not to mix insurance and investment. Both of them have different objective that has somehow been skewed by unprofessional insurance agents. Beware of such insurance agents.

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