Know the Different Types of Life Insurance in India

Life insurance plans help in financial planning by creating a secured corpus on unfortunate death of the life assured during the policy term. With a life insurance policy, you can get financial security for yourself and your family. Life insurance plans provide a financial benefit if the insured passes away during the term of the policy. Moreover, there are different types of life insurance plans with their own set of benefits and relevance. You can choose from these policies basis your financial goals, investment horizon and needs. So, let’s assess the different types of life insurance plans available in the market and what each plan means.

Types of Life Insurance

1. Term Insurance Plans:

As the name suggests, term insurance is purchased for a specific tenure. If the insured dies during the plan's tenure, the nominee of the insured receives a death benefit.

Check out the various features of the plan:

• A term plan is purchased for a fixed tenure
• Term insurance is a life cover offering death benefits if the insured dies during tenure
• There are various types of term insurance plans, such as level cover, increasing cover, decreasing cover and term plan with a return of premium.
• The plan may give you a choice to add riders on payment of additional nominal premium, such as:
  • Accidental Permanent Total and Partial Disability Rider
  • Waiver of Premium
  • Accidental Death Benefit
  • Critical Illness Rider, among others
• A term insurance calculator helps you calculate the coverage you may need for your family in your absence
• Pure term insurance plans do not offer any maturity benefit. TROP (Term Plan with Return of Premium) has a maturity benefit wherein the premium paid for the plan is returned to the policyholder if he survives the policy tenure subject to certain deductions.
• Tax Benefit:
  • The premium paid towards a term insurance plan is deductible under Section 80C of the Income Tax Act, 1961 up to Rs 1.5 lakhs per annum, subject to the provisions stated therein
  • Maturity benefit, in the case of term plans with return of premium, is also tax-free under section 10(10D) subject to satisfaction of conditions mentioned therein.
  • As per section 10(10D) of the Income Tax Act, 1961, the death benefits received by your nominee under the plan are tax-free.

2. ULIPs – Unit Linked Insurance Plans:

ULIP stands for Unit Linked Insurance Plans. If you are looking for a comprehensive insurance plan that offers both life cover and investment component, ULIP can be a suitable choice. Through ULIPs, the premium you pay is invested in market-linked funds, post deduction of applicable charges. Along with market-linked returns, ULIPs also provide a life cover to the policyholder. It is essential to note that ULIP is a type of life insurance suitable for those who want a long-term investment plan as it comes with a 5-year lock-in period.

Let's have a look at some of the features of ULIPs:

• ULIP provides both life cover component as well as an investment component. The policyholder can choose from various market-linked funds as per requirements.
• Money can be invested in different funds like equity funds, debt funds, hybrid funds or balanced funds as per your risk appetite. Over time, you may switch your funds under ULIP depending on terms and conditions of the plan.
• You can use the ULIP calculator that uses data provided by you to give an idea of the estimated returns. The expected rate of return, premium amount and duration can be modified to get different results as required.
• Tax Benefit:

  ULIPs offer three types of tax benefits:

  • The premium is deductible under section 80C of the Income Tax Act,1961, up to Rs 1.5 lakhs a year
  • For ULIPs issued on or after February 1, 2021 the maturity amount remains tax free if the aggregate annual premium in any financial year during tenure of the policy/policies, does not exceed Rs2.5 lakh
  • For ULIPs issued before February 01, 2021, the maturity benefits are exempt from tax subject to satisfaction of conditions mentioned in Section 10(10D) of the Income Tax Act, 1961
  • However, for ULIPs issued on or after February 01, 2021 with annual premium more than Rs. 2.50 lakhs, gain will be taxable as Capital Gain. The LTCG will be tax-free up to Rs.1 lakh for given financial year for Equity Oriented ULIPs.
  • Moreover, LTCG gains beyond the exempted limits will be taxable @ 10% for equity oriented ULIPs. For Debt Oriented ULIPs, capital gains tax would be taxable at the rate of 20%.
  • The death benefit is tax-exempt under section 10(10D) of the Income Tax Act 1961 irrespective of date of issuance of ULIP policy.
  • ULIPs give you the option to switch the funds you invest in during the policy term subject to policy terms & conditions. These switches are not taxable.

3. Endowment Insurance Plans:

Some people want a life cover that can also offer a savings option. Under an endowment plan, you get both of these options. However, if the insured passes away during the tenure, the nominee receives the sum assured and the savings components & the periodic bonuses if any, depending on the Insurer and policy terms and conditions. This way, an endowment plan ensures both life cover and savings benefits. Take a quick look at the various features of an endowment plan:

• The premium paid for the endowment plan is used to provide life insurance cover to the insured and also offer a savings component.
• Tax Benefits:
  • The maturity benefit is tax-free under section 10(10D) of the Income Tax Act, 1961, subject to satisfaction of conditions mentioned therein.
  • The policyholder can claim deductions on the premiums paid under Section 80C of the Income Tax Act, 1961 up to Rs 1.5 lakhs a year, as per the provisions stated therein.

4. Whole Life Insurance Plans:

A whole life insurance plan, as the name says, is an insurance plan that provides cover for your whole life i.e up to the age of 99 or 100 years, depending upon the insurer. This is a type of life insurance plan that has both survival benefits and death benefits. A whole life insurance plan provides a death benefit to your nominees after you are no longer around for them. Here is a quick look at some of the features of the whole life insurance plan:

• A whole life insurance plan provides coverage to the policyholder until he/she turns 99 or 100 years old.
• Upon the insured's death during the plan's tenure, the family receives a death benefit
• The plan may also pay out a survival benefit paid if the policyholder survives the policy term depending on the terms and conditions of the policy.
• Tax Benefits:
  • The premiums paid under the policy are deductible up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961, subject to provisions stated therein.
  • The death benefit as well as the maturity benefit of a whole life insurance plan are exempted from tax under Section 10 (10D) of the Income Tax Act, 1961, subject to satisfaction of provisions stated therein.

5. Child Insurance Plans:

Once a child is born, parents experience a lot of responsibilities. To fulfil a number of these, parents may require adequate finances. Some new parents may start investing for their children as soon as they are born. Child insurance plans are one such investment. These plans provide a combination of protection and wealth creation to ensure a secure financial future for your child. A child insurance plan helps builds a steady corpus that can be used to finance your child’s life goals. The life cover that comes along with it offers a death benefit to your nominee(s) if something happens to you.

A child insurance plan provides payouts at different milestones of your child’s life. It may be for their higher education, wedding, etc. Some child insurance plans to offer single or limited premium-paying facilities as well.

Some of the features of the plan are:

• A child insurance plan provides a maturity benefit to the child and a life insurance cover to the insured parent
• Some child insurance plans have a premium waiver benefit, wherein if the insured parent dies within the policy tenure, the future premiums are waived and the plan continues as per the original schedule.
• The child/nominee receives a death benefit if the insured passes away during the tenure. However, the plan continues to pay the survival/maturity benefit of the plan as per the plan’s terms & conditions.
• The premium paid is eligible for tax benefit under Section 80C, and Maturity or Death benefit and surrender value give you tax benefit under Section 10(10D) of the Income Tax Act, 1961 subject to satisfaction of conditions mentioned therein.

6. Retirement Plans:

Planning for your retirement life is an important investment. Managing various financial commitments and ensuring stability for yourself and your loved ones is easy until you are on the job. However, post-retirement, things can be vague. To help you keep your post-work life easy and smooth like before, you need to plan for sources of income post retirement. Retirement insurance plans can come in handy for such times.

Retirement plans help you build a corpus during your earning years when you are able to save, and invest towards building your retirement corpus. These plans provide you with financial support through your retired years. Such an investment plan may help you stay financially independent even after your work life ends.

Check out some of the features of the plan:

• Annuity plans can help you build a corpus of funds which can be used to satisfy your financial needs post retirement.
• In the post-retirement phase, through an annuity product, you can get regular income for life.
• Tax Benefits:
  • Under Section 80CCC of the Income Tax Act, 1961, the premiums you pay for retirement plans are eligible for deductions upto Rs. 1.50 lakhs.
  • Moreover, under Section 10(10A), on maturity any commutation of retirement savings you get are tax-free. However, the said tax benefits are subject to the provisions contained in the Income Tax Act, 1961

7. Group Insurance Plans:

As the name suggests, a group insurance plan is meant for a group of people. Under a single life insurance plan, a group of people are covered. Under employer-employee group life insurance scheme, an organization purchases a group life insurance plan to provide its employees’ life insurance coverage. In the case of a company, a group life insurance is taken by the employer to offer life insurance coverage to its employees and the premium for the same is paid by the employer. However, in some cases, a part of the premium is shared between the employee and the employer as well. An employee is covered under a group life is only till they are in employment with the company.

Some of the features of Group Insurance Plans under Employer-Employee Scheme:

• A group life insurance covers a whole group under a single life insurance plan.
• The employer or the group leader is the master policyholder and typically pays the premium on behalf of its employees
• A group life insurance is one of the ways to provide a better work environment for employees and ensure that their family has a source of income if their bread earner passes away during the employment years
• Providing group life insurance can give a sense of financial security to the employees
• Tax Benefits:
  • If an employee contributes towards the premium for the plan, they can claim the premiums paid as deductions under Section 80C of the Income Tax Act, 1961
  • The death benefit payout is also completely exempt from taxation under section 10(10D) of the Income Tax Act, 1961. subject to the provisions mentioned therein.

Conclusion

Making an informed decision is important when purchasing a life insurance plan. The sections above explain different types of life insurance and some of the benefits of each one of them. Before you choose a plan, you need to analyze your preferences and your family's requirements. Figure out the financial coverage you want for your family, your premium budget, and the benefits offered by a specific life insurance plan. This way, you can land on a plan that suits your requirements the most.

BJAZ-WEB-EC-02365/23