Types of Life Insurance

Types of Life Insurance Policies in India

Term Insurance

The simplest form of life insurance product is a term insurance policy. Being a pure risk cover policy, term insurance protects the person insured for a specific period. In such a policy, a fixed sum of money called the sum assured is paid to the beneficiaries if the policyholder expires within the policy term.

Term Insurance Benefits

• Income Tax exemptions: The premiums paid towards term Insurance provide income tax exemption.
• 100% risk cover: These insurance policies provide 100% risk cover, and hence they do not have any additional charges other than the basics.
• Lowest premiums: Premiums paid for term life insurance policies are the lowest in the life insurance category.

ULIPs – Unit Linked Insurance Plans

Unit-linked insurance Plans are market-linked life insurance products that provide life cover and wealth creation options. A part of the amount people invest in ULIP provides life cover, while the rest is invested in equity and debt instruments for maximizing returns. This structure allows you to systematically build a corpus through exposure to equity, debt, or hybrid funds depending on your personal risk tolerance and financial goals.

ULIP Benefits

• Flexibility to invest: ​​ULIPs provide flexibility in choosing various fund options depending on the customer’s risk appetite.
• Wealth enhancement: A mandatory five-year lock-in period instills a sense of financial discipline while granting you access to liquidity through partial withdrawals once the initial phase concludes. Furthermore, remaining invested for the long term qualifies you for loyalty additions and wealth boosters that substantially increase the total value of your fund.
• Tax efficiency: Investors typically receive the entire maturity payout without any tax deduction as per the exemptions outlined in Section 10(10D) of the Income Tax Act. This fiscal advantage makes the plan a highly effective vehicle for funding critical life goals such as retirement or higher education.

Endowment Insurance Plans

Endowment policies are among the popular life insurance policies, combining risk cover and financial savings. Policyholders benefit in two ways from a pure endowment insurance policy. First, the beneficiary gets the sum assured in case of death during the tenure. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses.

Endowment Policy Benefits

• Guaranteed payout: Endowment plans function as a disciplined savings vehicle that assures a lump sum payout upon maturity. This guaranteed corpus allows you to plan for significant financial milestones with certainty because the returns are secured against market volatility.
• Life insurance coverage: The inclusion of a mandatory death benefit provides a safety net for your nominees throughout the selected policy duration. This dual structure guarantees that your dependents maintain their financial stability even as you continue to build a disciplined savings corpus for future goals.
• Savings and investment: Policyholders typically earn annual bonuses on top of the base sum assured to increase the total value of the maturity payout. This instrument effectively supports your tax planning goals by permitting premium deductions under Section 80C, while ensuring that the final maturity amount remains tax-exempt under Section 10(10D).

Whole Life Insurance Plans

A whole life policy covers a policyholder against death throughout their life. The validity of this ​​life insurance policy is not defined; hence, the individual enjoys the life cover. Under this life insurance policy, the policyholder pays regular premiums until their death, upon which the corpus is paid to the family.

Whole Life Insurance Benefits

• More extended cover: The policy does not expire until any unfortunate event occurs with the individual.
• Tax benefits: Premiums paid under the whole life policies are tax-exempt.
• Enhanced protection: Extending coverage up to 99 years allows you to leave a guaranteed financial legacy for your legal heirs. The plan also enhances stability by offering guaranteed income payouts and bonuses after the premium term, securing your finances during retirement.

Money Back Policy

Many people prefer this life insurance policy because it pays periodic amounts during its term. In other words, a portion of the sum assured is paid out at regular intervals. If the policyholder survives the term, they get the balance sum assured.

Money Back Policy Benefits

• Corpus gain: In case of death during the policy term, the beneficiary gets the total sum assured.
• Choice of ULIP versions: Various life insurers offer new ULIP versions of money-back policies.
• Tax benefits: The premiums paid and the returns accumulated through a money-back policy or its ULIP variants are tax-exempt.

Annuity and Pension

In these life insurance policies, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against financial risks and provide money in the form of a pension at regular intervals.

Annuity and Pension Benefits

• Tax Considerations: Both annuity and pension benefits have tax implications that you should be aware of. Annuity payments are generally taxable as ordinary income, although some types of annuities may offer tax advantages.
• Pension benefits may also be taxable, depending on how they are structured and funded. It’s important to consult with a financial advisor or tax professional to understand the tax implications of annuity and pension benefits and how they will affect your overall retirement income plan.

Retirement Insurance Plans

The main goal of a retirement plan, a sort of life insurance, is to provide you with stability and financial security after retirement. Investing in ​​retirement plans can build an ongoing, reliable income stream. If you keep making investments until you retire, the plan will assist you in covering your living costs.

Throughout your working life, you are mandated to invest a set portion of your income regularly. The money you save will be transformed into a steady income stream when you retire. Death benefits are another aspect of retirement programs.

Retirement Plan Benefits

• Financial Security: Retirement plan benefits can provide financial security for retirees, ensuring a steady income stream throughout their retirement years. By contributing to these plans throughout their careers, individuals can build a nest egg to help them cover their retirement expenses.
• Tax Advantages: Retirement plan benefits often come with tax advantages that can help individuals save money on their taxes. Additionally, some retirement plans offer tax-free growth, which means that the money in the plan can grow tax-free until it is withdrawn.

Group Insurance Plans

A group life insurance policy is a type of life insurance that covers a group of people inside a single insurance policy. Group insurance covers a minimum of 10 members, unlike individual life insurance policies, which cover one person for a specific period.

Employers, banks, corporations, and other homogeneous groups can buy group Life Insurance policies for their employees and customers. While employers would want to offer financial protection to their employees’ families, banks and lending institutions aim to keep the debt off the borrowers’ families after their death.

Group Insurance Plan Benefits

• Cost-effectiveness: Group insurance plans offer cost-effective benefits for employers and employees. The premium is usually lower than individual insurance plans since many offer coverage. Moreover, employers can negotiate better rates with insurance providers due to the many employees covered under the plan.
• Increased coverage: Group insurance plans provide wider coverage options than individual insurance plans. This includes health, dental, vision, disability, and life insurance coverage. Group insurance plans also cover pre-existing medical conditions, which might not be covered under individual insurance plans.
• Employee satisfaction: Group insurance plans are an excellent way to attract and retain talented employees. Providing comprehensive health and welfare benefits shows that the employer cares about the well-being of its employees. This can improve employee morale, job satisfaction, and productivity. Additionally, group insurance plans provide employees with a sense of financial security, which can reduce stress and improve overall well-being.

Child Insurance Plans

Child insurance plans are designed to provide financial security for a child’s future, covering their educational expenses and other needs. These plans combine life insurance coverage with a savings component to ensure that funds are available when the child reaches adulthood.

Child Insurance Plans Benefits

• Financial Security: Ensures funds are available for critical stages of the child’s life, such as higher education or starting a business.
• Guaranteed Benefits: Some plans offer guaranteed payouts at specific intervals, providing financial support as the child grows.
• Protection: In the unfortunate event of the policyholder’s (usually the parent’s) death, the policy continues, and future premiums may be waived while ensuring the planned benefits are paid out.
• Loan Facility: Some plans offer the option to take loans against the policy, providing financial flexibility in times of need.

Tax Benefits for Life Insurance

Life insurance provides financial security and peace of mind and offers policyholders tax benefits under the Income Tax Act 1961. These tax benefits make life insurance an attractive investment option for individuals seeking to save on taxes while securing their future. Let us delve into the various tax benefits of life insurance in India.

Tax Benefits on Premium Payments

One of the primary tax benefits of life insurance is available on the premiums paid towards the policy. Under Section 80C of the Income Tax Act, policyholders can claim a deduction on the premium amount paid for themselves, their spouse, or their children’s policies up to a maximum limit of ₹1.5 lakh per financial year. This deduction includes other investments eligible under Section 80C, such as Provident Fund (PF), Public Provident Fund (PPF), Equity Linked Savings Schemes (ELSS), etc.

Tax Benefits on Maturity or Death Benefits

The proceeds received from a life insurance policy are also eligible for tax benefits under certain conditions:

Maturity Benefits

The amount you receive when a life insurance policy matures is tax-free under Section 10(10D) of the Income Tax Act. For this benefit to apply on policies issued on or after April 1, 2012, the premium paid during the policy term cannot exceed 10% of the sum assured. For policies issued before this date, the premium paid should not exceed 20% of the sum assured.

Death Benefits

The proceeds received by the nominee or legal heir in case of the policyholder’s death are tax-free under Section 10(10D). This ensures the family members receive the full sum assured without tax liability.

Tax Benefits on Riders and Additional Coverage

You can enhance your life insurance policy with riders or other additional coverage options for better protection. The premiums you pay for these riders also qualify for tax benefits under Section 80C, subject to the overall limit of ₹1.5 lakh. This includes common riders such as critical illness, accidental death benefits, and ​waiver of premium riders.

Tax Benefits for Single Premium Policies

If you have a single-premium life insurance policy, the entire premium amount qualifies for a deduction under Section 80C for the year it is paid. To also receive the Section 10(10D) tax benefits, the policy’s assured sum must be at least ten times the amount of the premium paid.

Conclusion

The fundamental purpose of life insurance is to create a financial safety net, shielding your loved ones from financial hardship after an unexpected death. India’s insurance market provides a wide variety of policies, ensuring a suitable solution can be found for nearly every citizen’s specific circumstances.

The most common options involve a choice between temporary and permanent coverage. Term life insurance covers a specific period of time. A ​​whole life insurance plan is different, it is built to provide protection that lasts for your entire lifetime. Other policies exist to meet multiple financial goals at once. Endowment plans are a good example, combining savings with insurance, while Unit-linked Insurance Plans (ULIPs) are built for investment growth. Choosing the right policy is simply a matter of matching its core function with your own financial objectives.

FAQs on Types of Life Insurance