Types of Life Insurance – A Complete Guide
Today, a vast number of options exist to help you with your financial planning. From investing for wealth creation to safeguarding your loved ones’ financial wellbeing with insurance products such as a child plan & a ULIP policy – avenues towards building a secure future are plenty. But in your effort to create wealth, you should not compromise on the protection aspect. Protection forms the base of a financially stable future. Therefore, it is crucial to own a life insurance policy.
Life Insurance plans can broadly be categorised into two types. One is purely about risk coverage. The other is a combination of insurance and investment. The second broad categories can further be broken down into seven different types of insurance plans.
What are the major types of life insurance policies?
- Term Life Insurance – Protects finances against eventualities
- Whole Life Insurance – Coverage up to 100 years of age
- Endowment Plans – Offers combined benefits of saving and life insurance
- Money-Back Plans – Provides dual advantages of regular income and life cover
- Retirement Plans – Helps to build a retirement corpus for financial freedom after the work-life ends
- ULIP Plans – Offers the chance of earning market-linked returns on investment with life coverage.
- Child Plans – Secures your child’s future in case of an unforeseen event, ensuring their education continues unimpaired
1. Term Life Insurance Plan:
This life insurance plan offers monetary compensation to the beneficiary only if the policyholder meets with an untimely demise during the policy period. If the insured survives until the policy end date, the coverage ceases. There may be variants, such as term plans with return of premium, where the premium amount is returned upon maturity of policy.
This plan does not feature any investment component or maturity benefit. Therefore, it is the cheapest form of life insurance.
2. Whole Life Insurance Plan:
This kind of insurance plan ensures coverage for a lifetime, provided the policy is in force. Apart from providing a death benefit, a whole life insurance policy also contains a savings component. The cash value accumulates on a tax-advantaged basis. You may choose to withdraw the accrued cash value or even take a loan against it. However, in case of the insured’s unfortunate demise before the loan is repaid, the death benefit the beneficiary receives is proportionally reduced.
3. Endowment Policy:
In an endowment plan, the insurer provides a pay-out to the insured if he or she survives until the maturity date. Otherwise, the sum assured is paid to the beneficiary.
This insurance option offers dual benefits of protection and savings. Along with providing life cover, it also helps the policyholder save regularly over time. A lump sum amount accumulates by the time the policy matures. Most insurers also offer guaranteed additions to the invested sum or declare bonuses, increasing the returns from such policies.
Endowment plans are also commonly known as traditional plans since these are not market-linked. While these serve as investment vehicles, the risk associated is far lower than most investment products. Although more expensive than a term plan, endowment plans can help achieve financial goals like a child’s higher education, marriage, buying property, etc.
4. Money-Back Insurance Plan:
In a money-back plan, the money you invested as premiums comes back to you at regular intervals as a guaranteed income. You are also eligible to receive bonuses declared by the insurance company. Such policies can meet your interim needs for funds.
5. Retirement Insurance Plans:
With these plans, you can create wealth and get a fixed income after your regular salary stops. This is because the premiums you pay build up a sizeable amount through the accumulation phase of such plans. After that, during the vesting period, you start getting regular pay-outs from the accumulated sum.
In case of the policyholder’s unfortunate demise during the accumulation phase, the nominee receives a death benefit. The annuity pension plan also allow you to make provisions for your spouse to continue receiving the income after an unwanted event.
6. Unit Linked Insurance Plans (ULIPs):
ULIP benefits are not limited to protection and wealth creation. Your premium is divided into two parts. One part goes towards securing your life cover. The other is invested in market-linked instruments.
If you survive the ULIP policy period, you receive the prevalent market value of your investment. The capital market offers the possibility of generating inflation-adjusted returns through long-term investment. Insurers also add extra units to your investment as loyalty rewards when you remain committed to your policy for a long duration. A ULIP plan calculator helps you gauge the amount you need to invest in building the wealth required to fulfil your life goals. Also, in financial emergencies, you can withdraw a part of your accumulated units after the five-year lock-in phase.
In case of an undesirable event, your nominee receives a lump sum amount.
7. Child Plans:
You can invest in the plan in your child’s infancy and withdraw the savings once your child reaches adulthood. If an unwanted event occurs during the policy period, the child plans’ death benefit takes care of your child’s financial needs. But most child plans also continue premium waivered until maturity, providing a pay-out to your child to meet their future monetary requirements.
All types of insurance plans come with a specific benefit. With so many available options, you need to select a life insurance plan that best suits your family’s needs. For example, a term plan is essential if you are your family’s primary breadwinner. Likewise, if you are likely to have financial dependents even at an advanced age, a whole-life insurance plan may be helpful.
However, it is advisable to look into the insurer’s credibility and not settle for a policy based only on low premium rates. Tata AIA Life Insurance premiums are not only affordable, but the company has also paid 99.06% of the life insurance claims in FY20. Moreover, as of June 30, 2020, the company’s solvency ratio stood at 2.14, well above the IRDAI-prescribed minimum of 1.50. Such high figures indicate the insurer’s capability to honour its commitments towards policyholders. Thus, with a TATA AIA Life Insurance plan, you can rest assured of timely pay-outs in your hours of need.