Life Insurance is a protection-based product but it is misunderstood as either an expense or a saving-linked product.
As has been mentioned in the latest economic survey 2022–23; the insurance penetration in India is growing.
Insurance penetration is the ratio of Insurance Premiums collected to the Gross Domestic Product (GDP).
As more Indians are now becoming aware of insurance. It has now become necessary to take informed decisions.
Informed decisions are possible only through correct knowledge and understanding of various life insurance products.
Benefits of Life Insurance
Insurance mainly provides two types of benefits. (1) Death Cover (2) Survival Benefit
Death Cover
Under this, in the case of any mishappening with the policyholder, the nominee or the beneficiary is paid the amount assured in the policy.
Survival benefit
Under this, the assured amount in the policy is paid to the policyholder in the case of survival of the policyholder up to the policy term. i.e. up to the specified period of the policy tenure.
Types of Life Insurance Plans
Term Life Insurance Plans
Term insurance plans are death cover plans.
These are pure insurance plans in which a premium is paid by the policyholder and in return, a life cover is provided to him/her.
Under a term insurance plan the amount of the sum assured is paid to the beneficiary/nominee only if the insured dies.
.i.e. No payment of the sum assured would be there if the insured survives the plan tenure.
The amount of premium in the term insurance plans is the lowest among all the insurance products.
There is no provision of surrender value in the term insurance plans.
Term insurance plans are taken by the earning members of the family.
Purpose of term life insurance plans
The term insurance plan has the purpose to provide financial stability to the family of the insured in the case of the unfortunate death of the insured.
Categories of the term life insurance plans
The term insurance plans are categorised based on the frequency of payment of premiums.
Single premium term life insurance plans
Under these, the insured is required to pay a lump-sum premium and in return receives life insurance coverage for the specified period of time (.i.e. up to the tenure of the policy).
Regular premium term life insurance plans
Under regular premium plans the insured is required to make the periodic payment of premiums for the entire tenure of the policy.
The frequency for payment of premium can be monthly, quarterly, semi-annually, or annually.
Pure endowment plans
The pure endowment plans are survival benefit plans.
In the term insurance, the policyholder does not get anything during the period of survival but the nominee or beneficiary is eligible for the amount of sum assured in the event of the untimely demise of the policyholder.
While in the endowment plans the sum assured is given to the policyholder if he survives the entire tenure of the plan.
In the endowment plans nothing is paid to the nominee or beneficiary in the event of the death of the policyholder during the period of the plan (.i.e. policy period)
Let us understand Term insurance plans and endowment plans with an example.
Example 1
Mr. “A” opts for a term insurance plan for 20 years. The amount of premium is Rs. 20,000 annually and the sum assured in the plan is Rs.1,00,00,000.
Case 1- Mr. “A” has continuously paid the premiums but died during the above said period of 20 years.
In this case, the insurance company would become liable for the payment of rupees one crore sum assured to the beneficiary or nominee of Mr. “A”.
Case 2- Mr. “A” has continuously paid the premiums and by god’s grace survived the above said period of 20 years.
In this case, nothing would be payable to him or his nominee.
Therefore, we would say that the term plans provide the sum assured to the nominee in the event of the death of the policyholder during the tenure of the plan.
So we can say that the term insurance plans are the “Death Cover Plans”.
Example 2
Mr. “A” opts for an endowment plan for 20 years. The amount of premium payment is Rs.20,000 annually and the sum assured in the plan is Rs.1,00,00,000.
Case 1- Mr. “A” has continuously paid the premiums but died during the above said period of 20 years.
In this case, nothing would be payable to him or his nominee.
Case 2- Mr. “A” has continuously paid the premiums and by god’s grace survived the above said period of 20 years.
In this case, the insurance company would become liable for the payment of rupees one crore some assured to Mr. “A”.
.i.e. The endowment plans are just opposite to the term insurance plans.
Therefore we can say that the endowment plans are the “Survival Benefit” Plans.
Endowment assurance plans
These days insurance companies have come up with plans which combine the benefits of both term insurance plans and endowment plans.
These are known as endowment assurance plans but in common parlance, they are known as endowment plans.
These plans provide death cover as we have discussed in the term insurance plan and also survival benefits as we have discussed in the endowment plans.
In these types of plans, the premium paid by the policy-holder has two components:
One component is towards the life cover (as in a term plan) and the other for an investment to generate the returns (as in endowment plans)
But the policyholder has to pay only a single premium.
The allocation towards life cover and investment is internally done by the insurance companies.
The premiums in these plans are high in comparison to term plans.
Example
Mr. “A” opts for an endowment assurance plan for 20 years. The amount of premium paid is Rs. 20,000 annually and the sum assured in the plan is Rs.1,00,00,000.
This plan contains two benefits
One as a term plan, the sum assured would be paid to the nominee in the event of the death of Mr. “A” during the tenure of 20 years.
Other, as an endowment plan, the sum assured would be paid to the policyholder in the event of his survival during the entire policy term of 20 years.
Whole life insurance plans
Whole life insurance plans provide insurance coverage to the insured for the entire life.
These plans are a combination of term plans and endowment plans but the only difference is the time period of coverage.
The time period in these plants is not specified while the term insurance plans and endowment plans are for a specified period.
The sum assured would be paid to the beneficiary/nominee on the death of the insured person.
The premiums are high in comparison to term plans.
Money Back Insurance Plans
Money-back insurance plans are a combination of term plans and endowment plans.
In these plans, the sum assured is paid back at regular intervals to the insured during the tenure of the policy (.i.e. as survival benefits).
These plans have a special feature in which, if the insured dies during the policy tenure, the entire sum assured is paid to the nominee even if the survival benefits have already been paid.
Let us understand the money-back insurance plans with an example.
Mr. “X” has taken a money-back insurance plan having a sum assured of Rs.1,00,00,000 for 25 years.
Suppose the policy specifies the payment of 25% of the sum assured every 10 years and 50% of the sum assured on the maturity of the policy.
Now, if Mr. “X” dies in the 22nd year. i.e. after taking 2 survival benefits ( each at the 10th year and 20th year) of Rs. 25 lakhs each. i.e. a total of Rs. 50,00,000.
In the event of the death of Mr. “X” in the 22nd year, his nominee would be entitled to receive the entire sum assured without any deduction for the already made payment of Rs 50,00,000 (.i.e. survival benefit)
Is there any difference between endowment plans and money-back plans?
The only difference between the endowment plans and money-back plans lies in the payment of the sum assured.
In the endowment plans, the sum assured is paid either at the end of the policy term (as a survival benefit) or the sum assured is paid to the nominee during the policy term on account of the death of the insured.
In money-back insurance plans, there are periodic payments of the sum assured during the policy term (as a survival benefit) or
The sum assured is paid to the nominee on account of the death of the insured during the policy term without making any deduction for the already paid amount of survival benefit.
Joint life insurance policies
These policies provide live coverage to two individuals simultaneously.
Generally, it is taken by husband and wife, business partners.
In these policies, the sum assured is paid to the other joint policyholder in the case of the death of the first joint policyholder.
Joint life insurance policies could be in the form of joint term plans and joint endowment plans.
Joint life policies offered by different companies might have different terms and conditions that are required to be carefully read before buying these policies.
Child insurance plans
Securing the future of the child is the ultimate dream of parents.
The purpose of child insurance plans is to ensure sufficient funds for the future requirements of the child such as marriage, education, etc.
Under these plans, the payment of the premium is done by the parents.
These plants try to ensure that the child’s future would not suffer due to the untimely death of a parent.
Various types of child insurance plans are available in the market which needs to be checked thoroughly before buying these policies.
Tax benefits under life insurance plans
Benefit for premium payment
The amount of premium paid by the policyholder is tax deductible (.i.e. reduces the tax liability of the policyholder) under section 80 C of the income tax act 1961.
The Sum Assured
The amount of sum assured received by the policyholder or his nominee as the case may be is exempt from income tax under section 10(10 D) of the income tax act 1961
.i.e. No income tax would be payable on the amount of sum assured received by the policyholder or his nominee.
What are riders in insurance?
Riders are add-on (additional) benefits to the original policy. i.e. riders provide additional coverage and safety against risk.
The riders can be of various types such as
- Critical Illness Rider
- Increased Death Benefit Rider
- Waiver of Premium Rider
- Accidental Death Benefit Rider
- Disability Income Rider etc
Some additional amount has to be paid by the policyholder along with the premium to get the rider benefit attached to the policy.
The maximum cover that can be added as a rider cannot exceed the base policy amount. i.e. if the base policy is having sum assured for Rs. 10,00,000, the maximum amount for the rider cannot exceed Rs 10,00,000.
ULIP’S
ULIP stands for Unit Linked Insurance Plans.
ULIP is a combination of investment and insurance.
From the point of view of insurance, ULIPs are similar to traditional insurance plans like whole life insurance plans, money-back insurance plans, and endowment plans.
From the point of view of investments, ULIPs are similar to mutual funds.
So basically there are three components in ULIP:
- Insurance
- Investment
- Tax benefit
When the premium is paid in ULIP, it is divided into three parts:
Expenses: Every policy issued by the issuer has some administrative costs, commission components, etc. These are called Policy Allocation Charges.
Insurance: The amount of premium paid by the insured is allocated towards risk coverage for the life of the insured. As we have said that ULIP also includes a component to provide life cover to the insured.
Therefore, some portion of the premium paid by the insured is allocated toward providing life coverage.
Investment: After the allocation of the amount in the above two segments, the remaining amount is used for investment by the issuer.
As we have said earlier that the ULIPs are the same as the mutual fund, therefore the investor is given an option of whether he wants his money to be invested in equity, debt, or hybrid funds.
This write-up tried to provide you with the various types of life insurance plans available in the market.
The terms and conditions of the plans vary from company to company.
Before purchasing any insurance product it is advised to thoroughly read the brochure.