A life insurance policy is a must for every family member, especially a single earning member. Through life insurance, one can always ensure the family’s financial security in their absence. These policies come with several advantages for the insured person and their families. But within life insurance also, there are several classifications. Read on to know more about the types of life insurance policy if you are planning to buy one.
Classification of Life Insurance Policies
One can classify life insurance policies into several categories according to their customizable features. So even if there are only a few types of policies, you can further classify each one of them based on these features. The number of add-ons and options within an insurance policy can make them unique for each policyholder. Several major insurers allow the customers to customize and make their plans based on their requirements and premium paying ability. These customizations make having a life insurance policy easier on the customers’ pockets. Given below are some of the common features through which you can further classify every type of life insurance.
Premium Payment Frequency
The premium payment frequency of policies allows you to choose the interval between two premium payments. The available frequencies are one-time, monthly, quarterly, semi-annual, annual, or multi-annual payments.
Premium Payment Term
Policy term is the duration for which you have to continue paying regular premiums. In the case of a life insurance policy, the payment term can increase or change depending on the policy and the insurer.
Policy Coverage Term
The policy coverage term is the duration you get life coverage from a policy. For most policies, the coverage term ends with the premium payment term. Only a few insurers provide lifetime coverage or coverage up until a certain high age limit. Some insurers even give life coverage till the policyholder reaches 100 years of age.
If your chosen life insurance has a money-back policy, then at the end or maturity of the policy, you will get back the entire premium payments back. This repayment comes with no extra charges and is fully tax-free as it is a type of repayment. And as per the income tax laws, all repayments have tax exemption.
Some insurance policies with higher premiums and longer durations give the policyholder interest on the premium money received.
Market-dependent policies invest your premium payments into securities like bonds or mutual funds. The insurer then gives you the return on investment from these instruments. Market-dependent plans can cause losses if the product doesn’t perform well in the future.
Mortality benefit is common in all life insurance policies as it is the purpose of having a life insurance policy. But you can choose between high mortality benefits providing policies to maximize the benefits to one’s survivors.
The waiting period is like a precautionary period for the insurer and the insured. You cannot raise a claim during the waiting period, but you can terminate the policy if it is unsatisfactory. Waiting periods can change from insurer to insurer, either a few days or up till a few months.
With the help of a partial withdrawal facility, you can withdraw a portion of your invested money in case of an emergency. There are several eligibility criteria for a partial withdrawal facility.
Sometimes, if there is insufficient money accumulated in your life insurance policy, you can get a loan facility. Several banks provide loans against the maturity amount of a policy. They also have the benefit of a low-interest rate.
With the facility of rider addition, you can enhance your coverage spectrum. The benefit of such plans is that even though you get two covers, the premium amount of the plan will be lower than having two separate plans.
The Income Tax Act of India, 1961, has several tax benefits on premium payments made towards a life insurance policy. You can deduct your taxable money through various sections of the act and pay a lower income tax. However, tax laws are subject to change from time to time.
The 9 Types of Life Insurance Policies in India
As discussed in the previous sections, all these classification points increase the types of life insurance. But you can find nine major types of life insurance based on the policies that different insurers provide. These policy types are the main category that insurers use to differentiate life insurances. A brief discussion of these nine types of life insurance is as follows.
Term Life Insurance
A term life insurance has a range of limited term. You usually have to pay a premium during the term, and at the end of the term, the policy will expire without providing any returns to the policyholder, if the policyholder outlives the policy term. In case of sad demise of the policyholder during policy term, the insurer will provide mortality benefits to the nominee. These life insurance plans have low premium payments as there is no money-back clause. Several insurance companies don’t prefer marketing term life insurance due to the low income and high risks these plans have.
Saral Jeevan Bima Yojana
In 2020, the Insurance Regulatory and Development Authority of India (IRDAI) issued a circular to all life insurers to create a basic life insurance policy. The name of this policy is to be Saral Jeevan Bima Yojana, preceded by the insurer’s name. Through these policies, with the lowest premiums, IRDAI gave several low-income households across the country access to life insurance. These plans, too, don’t have maturity benefits but provide adequate life cover at a very nominal price.
Term Life Insurance with Moneyback Guarantee
With the help of a money-back guarantee, you will get the entire amount that you invested in your life insurance. These policies have a bit higher premium and much higher mortality benefits.
Term Life Insurance with Return on Investment
Term Life Insurance with Return on Investment is a type of combination between insurance and a fixed deposit. With the help of these policies, you will get back your paid premiums and a pre-decided interest on the accumulated premiums. Thus, converting insurance into investment plans.
These insurances are for around 10 to 20 years, and most insurers apply compound interest during this period. The interest rate is about 6 or 7%, which is enough to beat inflation rates. The interest rates for senior citizens are much higher than these. The benefit of such plans is that you can use them as a long-term investment for personal or business needs. While the premium return is tax-free, the interest return may not have tax exemption.
Unit Linked Insurance Plan (ULIP)
ULIP is an integration of Insurance and securities investment. The insurer invests your funds into nationalized security bonds when you invest in these plans. These plans also have a long-term payment term of more than ten years. Such ULIP plans have several benefits. There are tax benefits on the premium payments, premium returns, and interest returns.
Child Life Insurance
All life insurance plans are for individuals for more than 18 years. If you plan to get life insurance for a child, you will have to go with child-specific life insurance. The main purpose of these policies is the betterment and financial wellbeing of children when they grow up. These have a fixed term, decided in a manner such that the maturity date intersects when the child reaches 18.
Such child plans have several benefits associated with them. Some common advantages of a child life insurance policy are high-interest rates, maximum tax deductions, several tax benefits, lower premiums, and regular pay-outs at the child’s important life stages. Several people use these child plans as a future fund for education and other costly occasions.
People invest in endowment plans to obtain a greater return quickly. These plans don’t have interest, but they provide a guaranteed return of premiums. So, you can use this money for some business requirements or as a backup fund. For example, if you have some surplus money from any income source, you will have to pay taxes on it. But if you invest this money in an endowment life insurance policy in one-time or regular payments, you can get tax benefits on premium payment. And when the policy matures, you can get back the money which is occasionally tax-free.
Retirement/Monthly Income Plan
Retirement plans are endowment plans but with the added advantage of interest returns and monthly pay-outs after maturity. You can choose the mode of repayment at maturity in monthly pay-outs. Having such plans is extremely beneficial if you have a job that doesn’t have a pension or if you are not a part of EPF or PPF pension funds. Even if you don’t use these as pension funds, such schemes are targeted at senior citizens, and senior citizen plans have some of the highest returns.
Group Life Insurance
Group life insurances are plans suitable for families, company employees, and similar close groups. The main advantage of having group plans is that it is far more reasonable when a single earning member or a company has to pay for the premiums. It heavily reduces the premium burden on the payer. Another benefit is that all the people come under a single life insurance policy, so you won’t have to go through the mess of handling multiple policy documents.
Knowing these types of life insurance policies will help you when you want to purchase a policy for yourself or others. A clear understanding of the type will allow you to know which policy to purchase for a particular age group, expected returns, investment possibility, number of people, etc. After knowing these types, please don’t waste time and purchase a life insurance policy today itself. It will allow you to enjoy life without any worries about tomorrow.
The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale.
Make responsible financial decisions. Consult with your financial advisor before making any decisions on insurance purchase.