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How does Different Types of Life Insurance Policies Work?

How Life Insurance Works?


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Sep 20, 2021

By : Bajaj Allianz Life

A life insurance plan is one of the preferred financial tool that has the capacity to keep your family protected even when life throws unexpected surprises at you. Though you might know the answer to the question ‘What is Life Insurance?’, chances are that you don’t know exactly how it works. If that’s the case, then this article can help you out. Here’s an overview of the different types of life insurance plans and how they work.

 

How life insurance works?

 

A life insurance plan is essentially a contract between an insurance provider and an individual, where the insurance provider agrees to provide a life cover of a certain sum of money to the individual. And, in return for this life cover, the individual agrees to make periodic payments, known as premiums, to the insurance provider.

A life insurance plan is only valid for a specific period of time. This is known as the policy tenure and can be chosen by the individual at the time of purchase of the plan. That said, there are plans where the policy tenure covers an individual till they attain 99 years of age. This is known as Whole Life Insurance.

Now, in the event where the individual dies during the policy tenure, the insurance provider would pay out the agreed sum of money to the nominee of the deceased as a death benefit. The nominee can then use this death benefit to take care of their living expenses and further their life goals. This is one of the major benefits of life insurance.

Let’s now take a look at a few of the other types of life insurance plans and see how they work.

 

1. Term insurance

 

A term insurance plan is very similar to a typical life insurance plan. The only difference is that in a term insurance plan, the individual doesn’t get to enjoy any maturity benefits in the event of survival till the end of the policy tenure.

However, since there are no maturity benefits, the premiums of a regular term insurance plan tends to be very low and affordable. In fact, it is so cost-effective that you can get a Rs. 1 crore life cover for premiums as low as few hundreds of rupees each month for younger ages.

 

2. Unit Linked Insurance Plan (ULIP)

 

A Unit Linked Insurance Plan is a type of life insurance plan that combines the elements of insurance and investment. The element of insurance in the ULIP works in a way that’s very similar to a typical life insurance plan. The individual gets a life cover that’s valid for the duration of the plan and is entitled to both death and maturity benefits.

The element of investment, on the other hand, allows the ULIP holder to invest in different funds such as equity funds or debt funds. The market linked returns from their investment accumulates and is paid out finally at the time of maturity of the policy.

 

3. Endowment plan

 

An endowment plan combines the elements of insurance and savings. The insurance component of this type of a plan is again quite similar to a traditional life insurance plan. The savings component of the endowment plan helps you accumulate wealth in the long-term, which is finally paid out at the time of maturity of the policy.

 

4. Annuity plan

 

Also known as a pension plan, an annuity plan provides you a steady source of income till the end of your life. Unlike other forms of life insurance, in an annuity plan, you’re required to invest a lump sum amount as premium.

This lump sum amount that you pay is used to provide you a life-long steady source of income that’s paid out to you in the frequency that you choose. There are two different types of annuity plans - immediate annuity plans and deferred annuity plans.

 

5. Child plan

 

Child Insurance Plans are special life insurance policies that are designed to help you meet your child’s future requirements.

With this plan, you can schedule the maturity of the policy to coincide with an important milestone in your child’s life. This puts you in a better position to be able to satisfy your child’s life goals without much financial distress.

There are two types of child plans available - child ULIP plans and child savings plans. A child ULIP plan combines the aspects of insurance and investment, whereas a child savings plan combines the elements of insurance and savings.

 

Conclusion

 

As you can see from the above, the benefits of life insurance are a plenty and change slightly depending on the type of plan that you choose. Now that you’ve been made aware of a typical life insurance plan and the various other types, all that’s remaining for you to do is to consider investing in one. But before doing so, ensure to take some time out to determine the type of insurance plan that’s suitable for you.

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The above information is for general understanding and is meant to educate the general public at large. The reader will have to verify the facts, law and content with the prevailing tax statutes and seek appropriate professional advice before acting on the basis of the above information.