What is a life insurance plan?
A life insurance plan or policy allows a policyholder to enter into a formal contract with a life insurance company where the insurer agrees to pay a mutually agreed sum to the beneficiary in the event of the life assured's death or upon maturity of the plan.
If the policyholder fulfils the terms of the contract, such as timely payment of premium and correct disclosure of important information, the insurer is also bound to honour the terms of the contract. In India, there are numerous types of life insurance plans available for people according to their needs and life goals. Life insurance is not only used for getting a life coverage but it also considered as an effective investment option to secure your loved ones and plan for your life goals.
India has a booming and large life insurance industry where you can find life insurance policies in all shapes and sizes. In terms of total premium collected, India ranked 10th in the life insurance segment in 2018. The country has 24 life insurance companies and in FY19 total life insurance premium collection was Rs. 4,08,000 crore ($58.5 billion).
Types of life insurance policies available in India
• Term insurance plans
Term insurance is one of the most popular types of life insurance plans available in India. It provides life cover to the life assured for a specific term and pays the death benefit or sum assured to the nominee in case of the life assured’s death. Term insurance plans are one of the most cost-effective life insurance products as it allows the insured to get a higher sum assured by paying a nominal insurance premium as compared to other life insurance products. To ensure that you have adequate term insurance cover for your family, you should use a term insurance calculator to analyse your premium and required sum assured according to your income and liabilities.
• Unit-linked Insurance Plans (ULIPs)
ULIPs are types of life insurance policies that have the features and benefits of a life insurance and investment product. When you buy a ULIP plan, your money is used to provide life insurance protection and invested in a variety of funds to help you reap market-linked returns. ULIPs are an effective long-term investment tool. They have a minimum lock-in period of 5 years and investors get the freedom to allocate their money in a fund of their choice. Additionally, ULIPs provide tax benefits to policyholders under Section 80D and 10(10D) as per the Income Tax Act 1961, subject to the provisions stated therein.
• Traditional Endowment Plans
Traditional Endowment plans are type of life insurance products that provide life insurance cover and savings opportunity to policyholders. One such type is participating plans, where the sum assured and bonus is paid as death benefit to the nominee in case of the life assured’s unfortunate death during the policy term. In case the life assured survives the policy term, he is still eligible for the sum assured amount plus bonus.
Unlike ULIPs, where daily NAV is published, in endowment plans the policyholder receives periodic bonuses that are accumulated and paid on maturity or in the event of death of the policyholder.
• Whole Life Traditional Endowment Insurance Plan
Another type of Traditional Endowment plan is a Whole Life insurance plan. A whole life insurance cover provides life insurance protection to the life assured during his entire lifetime, up to a maximum of 100 years. If the life assured dies, the sum assured is paid to the nominee. In case he/she survives the policy term, sum assured and bonuses are paid to the policyholder. Whole life insurance premiums are slightly higher than term insurance plans.
• Child Insurance Plans
Child insurance plans are savings plans that help build a corpus for your child’s education. In case the policyholder parent passes away, death benefit is paid to the beneficiary. Some insurance plans, instead of paying the amount on death of the parent, will waive off the premium payment and pay the entire amount on maturity. Some child plans provide a lump sum payout after the age of 18 of the child or as annual instalments after maturity.
• Pension plans
Pension plans are insurance plans that provide life insurance protection and help the policyholder to save wealth for a comfortable retirement. You can opt for a one-time payout on retirement, fixed monthly income or annual payouts after the age of 60.
In case the insured outlives the policy term, he will have to invest a certain portion of the retirement in an annuity plan to receive a monthly pension.
How to select the right type of life insurance plan
You should certainly devote some time, thought and proper planning before selecting the right life insurance plan for yourself – a plan that is according to your profile and needs.
• Policy term
The term of your life insurance plan depends on your current age and your life goals. For example, a 30-year term plan could be ideal for newlyweds, breadwinning members of the family and homeowners. If you are in your late 40s, a life insurance policy that provides 20-year coverage may be adequate. One should decide their policy term based on their own risk appetite and needs. Note that your premium costs increase as you age hence it is advised to plan earlier in life.
Many people miscalculate the amount of life insurance coverage that they need to secure the lives of their loved ones. Generally, speaking you could consider having a cover of at least 10 times your annual income to ensure that your loved ones can meet their life goals without any hindrances in your absence. You should take into account inflation, newer responsibilities, healthcare costs and increasing expenses as per your life stages to arrive at a correct figure and make a decision on the coverage required. The easier way to identify the correct life insurance coverage amount is by using a life insurance calculator.
Apart from the types of life insurance plans discussed above, there are other types of policies that cater to the different needs of the customer. The main objective of life insurance is to provide financial security and to ensure that your life goals are met despite life’s difficulties. You may also choose to enhance your policy with common life insurance riders such as critical illness, accidental death benefit and waiver of premium among others at a nominal extra cost.