Types of Life Insurance

Life insurance products have long been regarded as a cornerstone of financial planning, offering a vital safety net for individuals and their families. However, it’s often overlooked that life insurance is not a one-size-fits-all solution and various types of life insurance products are available, each designed to meet the different types of life insurance plans needs and objectives.

Some types of life insurance in India focus primarily on providing financial protection to the family of the main breadwinner, ensuring that they are supported in the event of an untimely death. On the other hand, certain types of life insurance policy serve a dual purpose, offering coverage and acting as investment vehicles or tools for retirement planning. These products can help individuals build wealth over time, ensuring a secure financial future while also providing the necessary protection. Understanding the different types of life insurance in India is essential for making informed decisions that align with one’s financial goals and responsibilities.

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.
• Whole Life Policy
• A whole life policy covers a policyholder against death throughout his 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 his 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: Whole-life policies are increasingly combined with other insurance products to address various needs, such as retirement planning.
• Endowment Policy
• 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 policies typically provide a guaranteed payout at the end of the policy term, which can provide peace of mind and help with long-term financial planning.
• Life insurance coverage: Endowment policies also include life insurance coverage, which can be an added benefit if you’re looking to provide for loved ones in the event of your unexpected passing.
• Savings and investment: Endowment policies often include an element of savings and investment, which means you can earn interest on your premium payments and potentially build up a larger sum of money over time. This can be especially beneficial if you’re looking for a low-risk way to save for long-term goals like a child’s education or 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, he gets 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.
• 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.

ULIP Benefits

• Flexibility to invest: ULIPs provide flexibility in choosing various fund options depending on the customer’s risk appetite.
• Aggressive funds: These are mainly invested in the equity market with the objective of high capital appreciation.
• Conservative funds: Invested in debt markets, cash, bank deposits, and other instruments to preserve capital while providing steady returns.
• Long-term planning: ULIPs can help achieve various long-term financial goals such as planning for retirement, a child’s education, marriage, etc.

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.

Benefits of Child Insurance Plans

• 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.

How to Buy a Life Insurance Policy in India?

Buying a life insurance plan can seem overwhelming with so many options available. But don’t worry, it’s simpler than you think! Here is how to go about it:

Choose Where to Buy

You can buy life insurance online through a website that gathers policies from different companies or directly from the insurance company’s website. These middlemen might charge a small fee for their service.

Decide on the Type of Plan

Think about what you need from your insurance. If you want coverage if something happens to you, a term plan is the way to go. Other options like endowment plans or unit-linked insurance plans exist if you want to get a lump sum later on.

Share Your Information

Once you have picked where to buy from and what plan you want, you must provide basic details about yourself. This includes your name, birth date, whether you smoke, how much coverage you want, and how to reach you.

Pay Your Premium

The premium is the amount you pay regularly to keep your insurance active. If you miss payments, your policy might lapse, meaning you won’t get any benefits. Once you’ve shared your info, the website will show you how much your premium is. Pay it online, and the insurance company will email you to confirm.

How to Choose the Right Type of Life Insurance Policy?

Choosing the right type of life insurance policy can be daunting, as many options are available. Each type of policy has unique features, benefits, and costs, and selecting the right one depends on your circumstances, financial goals, and personal preferences.

Assess Your Life Insurance Goals

Individuals may have different goals. You must plan for your life insurance goals with suitable life insurance coverage. If protecting your family’s financial security is your primary goal, you may be able to find a term insurance plan that offers high coverage at affordable rates.

Calculate the Optimal Insurance Coverage that You Need

According to several financial gurus, you should carry life insurance coverage at least ten to fifteen times your annual income. While determining the right life insurance sum, several factors must be considered. If you have debts, it may be difficult for your family to make ends meet if you pass away. You must determine the sum of the following:

• Your family’s annual expenses multiplied by the number of years during which income replacement may be necessary
• Your overall debt balance and, if applicable, the cost of paying off any mortgages
• The sum must be set aside for future costs, such as your child’s schooling, marriage, etc.
• To arrive at a suitable life insurance cover, you can subtract all liquid assets from the abovementioned expenses, such as cash on hand or in the bank and any other types of investments.

Find the Coverage Offering the Best Bargain after Calculating the Premium You Must Pay

Using online premium calculators, you may figure out how much of a premium you need to pay for the required quantity of life insurance. Find the policy that provides the best protection at a price that fits your budget by comparing several. Consider how long you will pay premiums based on your anticipated income over the next few years.

Select the Correct Policy Term

The policy term’s appropriate length is when your family financially depends on you. The usual rule is to subtract your current age from the age at which you anticipate your income to end or aim to achieve a certain life goal to determine the optimum insurance term.

Choose a Reliable Life Insurance Company

Over several years, reputable life insurance providers frequently have a claim settlement ratio (CSR) of over 95%. The CSR is the ratio of the company’s settled claims to the total number of claims filed during a fiscal year. You can check the most recent CSR of the various insurance carriers in India by going to the website of the Insurance Regulatory and Development Authority (IRDAI). It’s also a good idea to study customer reviews to determine how quick and easy your life insurer’s claim process is.

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’s 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 received on maturity of a life insurance policy is tax-free under Section 10(10D) of the Income Tax Act, provided the premium paid during the policy term does not exceed 10% of the sum assured for policies issued on or after April 1, 2012. For policies issued before April 1, 2012, 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

Life insurance policies often include riders or additional coverage options for enhanced protection. The premiums paid towards these riders are also eligible for tax benefits under Section 80C, subject to the overall limit of ₹1.5 lakh. Common riders include critical illness riders, accidental death benefit riders, and waiver of premium riders.

Tax Benefits for Single Premium Policies

For single-premium life insurance policies, the entire premium amount is eligible for deduction under Section 80C in the year it is paid. However, the assured sum should be at least ten times the premium paid to qualify for Section 10(10D) tax benefits.

Conclusion

Life insurance is an essential financial product that helps individuals protect their loved ones financially in the event of an unforeseen death. India offers a variety of life insurance policies to meet the diverse needs of its citizens.

Term life insurance covers a specified period, while whole life insurance covers the policyholder’s entire life. Endowment policies combine insurance coverage with savings and investment features. Unit-linked insurance plans (ULIPs) provide policyholders with investment opportunities and insurance protection. Individuals need to understand each policy type’s features and benefits before deciding.