What is a life insurance policy?
A life insurance policy offers life insurance coverage to the life insured. In exchange for a premium, the policy offers to pay a death benefit to the nominee of the insured in the case of death of the insured within the policy term. Moreover, many life insurance plans also offer a maturity benefit which is paid if the insured survives the tenure of the plan.
Types of Life Insurance Plans in India
There are different types of life insurance policies in India. These are discussed as follows –
1. Whole Life Insurance Plan
Whole life insurance plans are those that provide coverage till the age of 99 or 100. These plans, thus, provide lifelong protection, hence the name. If the insured dies any time during the tenure of the plan, the death benefit is paid, subject to the terms and conditions under the policy.
2. Term Insurance Plan
Term insurance plans are protection-oriented life insurance plans that cover death within a chosen policy term. Pure term plans do not offer maturity benefit and usually offer a sum assured at affordable premiums.
3. Endowment Plan
Endowment plans are protection-cum-savings plans. Under these plans, a guaranteed* benefit is paid either on death or maturity. Some endowment plans also allow you to earn bonuses, if any declared by the insurer, during the policy tenure.
4. Money-Back Plan
Money-back plans are like endowment plans but with the added benefit of liquidity. Under these policies, you get a portion of the total sum assured paid in instalments at predefined intervals. On maturity, you receive the remaining amount of the sum assured along with the bonus; if any declared by the Insurer, that you earned during the policy tenure. . On death, the sum assured along with any bonus or additions, if any, are paid.
5. Child Insurance Plan
Child insurance plans are simple life insurance plans designed to create a secured corpus for the financial future of a child. Some child plans, depending from insurer to insurer, come with a waiver of premium benefit wherein the insurer pays the premiums for the remaining term if the parent dies during the policy tenure and the policy continues to be in force. When the plan matures, the maturity benefit is paid as per schedule. Child insurance plans, thus, help in creating a corpus for the financial benefit of the child, even in the absence of the parent.
6. Unit-Linked Insurance Plan (ULIP)
Unit Linked Insurance Plans (ULIPs) are investment-oriented plans that invest your premium in market-linked securities. You can invest the premium in different types of market linked funds as per your risk appetite and earn market linked returns.
ULIPs also provide flexible benefits like fund switching, premium redirection, top-ups and partial withdrawals subject to terms and conditions of the plan.
7. Pension Plan
A pension plan is a retirement-oriented life insurance policy that allows you to save up for retirement and create a source of guaranteed* income for your golden years.
What is term insurance?
A term insurance plan is a type of life insurance plan that offers financial protection in the form of life cover to the nominee mentioned in the plan. The policy offers a death benefit if the insured dies within the policy tenure. Usually, pure term plans do not pay any maturity benefit since they are protection-oriented. The objective of a term insurance plan is to provide financial security so that in the absence of the policyholder, his family’s expenses can be taken care of.
Term insurance plans have affordable premiums since they usually cover the risk of only death during policy tenure, without any investment component involved.
Types of Term Insurance Plans in India
There are different types of term insurance plans that you can find in the market. Some of these include the following –
1. Level-Term Insurance Plan
Level-term insurance plans are the common and widely available plans in India. These plans offer a uniform amount of sum assured throughout the policy tenure. If the insured dies during the term, the promised sum assured is paid (provided all due premiums are paid) and the plan is terminated.
2. Increasing Term Insurance Plan
Increasing term insurance plans are those wherein the sum assured increases every year. The increase is either at a flat rate or a flat amount. For instance, say the sum assured increases by 5% every year, and you opt for an original sum assured of Rs.10 lakhs. In the second year, the coverage would increase to Rs.10.50 lakhs. In the third year, it would be Rs.11 lakhs and so on. In the case of death, the increased sum assured on the date of death is paid, and the plan is terminated.
These plans are suitable when you have increasing responsibilities or when you want to keep your sum assured inflation-proof.
3. Decreasing Term Insurance Plan
Contrary to increasing term plans, decreasing term plans witness a reduction in the sum assured every year. These plans are usually taken with loans, and the reduced sum assured reflects the reduced balance of the loan. As such, decreasing term plans are also called mortgage redemption plans.
In the case of death, the reduced sum assured as on the date of death is paid. This takes care of the outstanding loan amount and prevents the loan burden from falling onto your family’s shoulders.
4. Return of Premium Term Plan
Return of premium term plans are different from pure term plans in the sense that these plans have a maturity benefit. Under these plans, the premium paid throughout the policy tenure is refunded back, post deduction of applicable charges, if any, if the insured survives till maturity. Thus, the return of premium plans offers death benefit as well as maturity benefit.
Features of Term Insurance Plan
Let’s assess the various features of term insurance plan –
1. Death Benefit
Pure Term insurance plans usually pay only the death benefit. Term plans with return of premium option have a maturity benefit wherein the premiums paid are refunded back if you survive the policy term subject to certain deductions.
Other life insurance plans might also have a maturity benefit if the plan matures, depending upon the type of plan and its features.
2. Risk covered and Savings component
Term insurance plans cover the financial future of your loved ones, especially in your absence. Generally, pure term policy offers no benefits if you were to survive the policy tenure except in case where you opt for term insurance with return of premium.
Other types of Life insurance plans may provide life cover along with facility to invest and build your wealth over time.
3. Flexibility
Term insurance plans usually do not have a surrender benefit, or paid-up value.
Some other types of life insurance plans, however, have an element of flexibility. Traditional life insurance plans like endowment plans, whole life plans, money back plans, etc. offer a paid-up value and surrender benefit and also allow you to avail of a loan against the policy. Moreover, if you opt for a unit-linked plan, you get flexibility through partial withdrawals, fund switching, and other features.
4. Tenure
Term insurance plans are suited for long-term tenures so that you can avail higher coverage for the maximum possible age at affordable premiums. However you can choose the tenure of your term plan after considering your requirements.
There are other life insurance plans can be taken for a medium to a long-term period depending on your financial goals. ULIPs are even available for a short-term period starting from five years. On the other hand, if you want longer coverage, you can opt for whole-life plans that offer lifelong protection.
5. Tax Benefit
The tax benefits under term plans are similar to those available under other life insurance plans except pension plans, and are subject to the provisions stated under the Income Tax Act 1961. Pension plans are taxed differently1.In the case of ULIPs issued on or after 1st February, 2021, with aggregate annual premium exceeding Rs.2.5 lakhs the maturity benefit attracts capital gain tax under the Income Tax Act 19612.
Suitability of term plans and other types of life insurance plans
Both term and life insurance plans have their respective uses and benefits. That being said, a term insurance plan is important because it fulfils one basic need – financial security for your family. If you are your family’s breadwinner, you may invest in a term plan so that, in your absence, your family’s financial needs can be met.
However, to create a secured corpus for your long-term financial goals, you can also consider opting for other life insurance plans listed above.
So, assess your needs and then find a suitable life insurance policy.
FAQs
1. What is the difference between Term Insurance and Whole Life Insurance?
A term insurance policy provides risk protection up to a chosen term, like 30 years or 35 years. A whole life plan, on the other hand, runs till 99 or 100 years of age.
2. What happens to Term Insurance at the end of the term?
After the term comes to an end, a pure term insurance plan is terminated. You usually do not get any maturity benefit. However, if you have chosen the return of premium term plan, your premiums would be refunded back at the end of the term subject to certain deductions.
3. What is the term duration of the Longest Term Life Policies?
The term duration depends on the insurance company and the maximum age up to which coverage is provided. If the term plan has the whole life option, you can choose the option to enjoy coverage up to 99 or 100 years of age.
4. Which is better - Term Insurance or Other Types of Life Insurance?
A term insurance plan helps fulfil your protection needs. Besides a term insurance policy, you can choose from the different types of life insurance policies to save for your financial goals. For instance, if you have a child, a child insurance plan would be preferable in securing a corpus for your child’s financial future. Similarly, for retirement, you may invest in pension plans. So, the choice of a plan depends on your financial goals and needs.
Reference links
1. https://cleartax.in/s/section-80ccc
2. https://cleartax.in/s/unit-linked-insurance-plan-taxation-rules#:~:text=(As%20per%20the%20rules%2C%20where,financial%20years%20during%20their%20term).
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