Types of Life Insurance in India- Risks and Benefits

There are various types of Life Insurance present in market, Each having its own risks and benefits. In life, unplanned expenses are a bitter truth. Even when you think that you are financially secure, a sudden expenditure can shake you up financially and it can also leave you in huge amount of debts.

Since, we cannot plan ahead for contingencies arising from such incidents, insurance policies offer support to minimise financial liability from unforeseen occurrences.

Life Insurance is a policy in which the policyholder can ensure financial freedom for his/her family members after death. Suppose you are the sole earning member in your family, supporting your wife and children. In an event of your death, your family would be left financially devastated. Life insurance policies ensure that such a thing does not happen by providing financial assistance to your family in the event of your passing.

There are 7 types of life insurance policy. These are:

Term Insurance or Term Plan: It is a life insurance plan that provides financial coverage to the beneficiary of the insured person for a definite period of time. In the event of the death of the policyholder during policy term, the beneficiary can claim death benefits from the insurance company.

Risks: In this term plan, no payout is provided to the insured person or beneficiaries if the insured person outlives the policy term.

Benefits: It is a pure death risk cover plan that offers high coverage or sum assured at low premiums.

Whole Life Policy: Whole Life Insurance Plans are insurance plans which provide insurance cover to the policyholder for the rest of his/her life provided the premium is paid on time. Policyholder receives maturity benefit in case he/she survives the policy term. The nominee appointed receives the death benefit in case of death of policyholder. A whole life policy is a type of life insurance that provides guaranteed death benefits during the entire life of the policyholder. The coverage is extended for as long as the insured lives, as long as the premiums are paid up and the policy is not surrendered. These plans are designed to cater to those who do not want a fixed tenure, but rather have insurance cover till whenever they meettheir demise. The policy will also build up a cash value which makes the premiums higher than some other plans.

Risks: If the insurance company changes its policies or policy terms, goes bankrupt, or has some bad years, the return to policyholder will be impacted negatively. Investing a large amount of money in this single policy exposes the policyholder to a larger risk.

Benefits: This policy covers whole life of the assured, or for up to 100 years in some cases. This insurance policy also offers partial withdrawals on completion of certain premium payment term.

Endowment Plan: An endowment policy is essentially a life insurance policy which, apart from covering the life of the insured, helps the policyholder save regularly over a specific period of time so that he/she is able to get a lump sum amount on the policy maturity in case he/she survives the policy term. This maturity amount can be used to meet various financial needs such as funding one’s retirement, children’s education and/or marriage or buying a house. A life insurance endowment policy pays the full sum assured to the beneficiaries if the insured dies during the policy term or to the policy holder on maturity of the policy if he/she survives the term.

Risks: Protection is provided only for the specified period. Premiums are usually much higher than a whole life or term insurance plans. Many insurers do not provide the renewability facility for endowment policies. Returns are usually low.

Benefits: If the assured outlives the term of the policy, the insurer offers the maturity benefit. These plans may offer periodical bonuses (paid either on maturity of the policy or to the beneficiaries under death claim). Endowment plans have surrender values, paidup values, and loan values.

Unit Linked Insurance Plan: It is a market-linked product that aggregates the very best of investment and insurance. It is a plan that links to the capital market and offers flexibility to invest in equity or debt funds as per the risk appetite of the investor. Such a dual benefit of ULIP makes them attractive in terms of investment.

Risks: The returns cannot be guaranteed. Returns are poor because a host of charges are associated with the scheme, such as administrative charges, mortality charges, and so on.

Benefits: If the market does well, profits are good. It provides mortality insurance cover. ULIP investments are flexible, the policyholder can switch from one policy to another. ULIP provides tax exemption benefits to the policyholders under section 80c. Even the sum assured received by the nominee after the demise of the policyholder is tax free.

Money Back Policy: These plans protect the insured and his/her family’s financial interests from death or critical illness of the policyholder. These include both investment and insurance and it starts to pay an amount that is called a “survival benefit” over the lifetime of the policy. The survival benefit is given after a few years from the start of the money back plan and continues till the maturity of the policy. In case of the death of the policy holder, the nominee receives whole of the maturity amount irrespective of number of the “survival benefits” paid.

Risks: Tenure is very long (usually up to 20, 25, and 30 years).

Benefits: Survival benefits paid at regular interval during the policy tenure. On maturity of the plan, the remaining part of the sum assured is paid (known as maturity benefit). In case of death of the assured, insurer pays the entire Sum Assured to the beneficiaries.

Children Policy: It serves two purpose that is insurance cum investment. It financially secures the child’s future and also finance the turning points in his/her life such as higher education and marriage. These plans are best designed to ensure the future of the child in the event of the unfortunate demise of the parents and also build a corpus over a time so as to utilize it at prime moments.

Risks: Considering an additional charge such as premium allocation charges, and others, returns could be low return in the initial stage and lead to additional loss on leaving policy before tenure’s completion.

Benefits: Helps in building the corpus for your child’s education and marriage. Most child plans provide one-time pay-out or annual instalments after the child turns 18. Some child plans even waive off the payment of future premiums on demise of the life insured. The Policy continues till it’s maturity.

Retirement Plan/ Annual Plan: An annuity is a plan that helps the policyholder/ insured to get a regular payment for life after making a lump sum investment. The life insurance company invests the money of the investor and pays back the returns generated from it.

Risks: Annuity plans are one of the costliest types of investment. Most plans charge surrender penalty for early withdrawal.

Benefits: Guaranteed pay-out. Some annuity plans pay out a higher income than available standard annuities if during the occurrence of health issues.