Life Insurance policy is simply an agreement between the insurance company and the policyholder. Agreement? What type of agreement? It is an agreement in which the insurance company pays an accumulated amount either at the death of the policyholder or at the end of the policy tenure but for this policyholder keeps on paying premium instalments till either his/her death or tenure of the policy. Before we discuss the types of Life Insurance, let’s understand the broad classification of Insurance.
Insurance can be broadly classified into two types i.e.
- Life Insurance
- General Insurance
Here in this article, we will discuss different types of life insurance, while motor insurance, health insurance, home insurance, fire insurance comes under the category of General Insurance.
Why we need Life Insurance?
Life insurance offers you risk coverage and takes care of monetary needs of your family after your death. Besides providing coverage against all sorts of risks, it gives you an opportunity to grow your investments. It could also be viewed as a long-term investment tool that helps you to save for your child’s future expenses or your post-retirement expenses.
Depending on the diversified needs of every individual, various insurance plans are available in the market. Such customized plans are made in such a way that they suit the likes of a majority of customers.
Types of Life Insurance
The major types of life Insurance policies are shown in the figure and explained below.
1). Term Insurance
As the name indicates, the term insurance policy is for a fixed time period. You can choose the time period as per your convenience and requirements. Term Insurance policy is the most affordable form of Life Insurance as the premiums are cheaper as compared to the other life insurance plans.
A fixed sum of money i.e. the sum assured is paid to the beneficiaries if the policyholder expires over the policy term. If the policyholder survives, no amount is paid at the end of the tenure.
2). Endowment Plans
Under this plan, the risk is covered for a specific period and at the end of the period sum assured along with the accumulated bonus, is paid back to the policyholder. Endowment policy pays back the face value of the amount on the insured person’s death or after a stipulated number of years. Some policies also make payment in case of critical illness.
Endowment plans differ from term plans in one critical aspect i.e. maturity benefit. Unlike term plans which pay out the sum assured, along with profits, only in case of an eventuality over the policy term, endowment plans pay out the sum assured under both scenarios – death and survival. However, endowment plans charge higher fees/expenses as premiums for paying out sum assured, along with profits, in either scenario – death or maturity.
3). Unit Linked Insurance Plan (ULIP)
ULIP is a variant of the traditional endowment plan. The amount is paid in both the scenarios i.e. either to the policyholder on maturity or to the beneficiary if the policyholder dies.
ULIP differ from traditional endowment plans in certain areas. As the name suggests, the performance of ULIP is linked to markets. Individuals can choose the allocation for investments in stock i.e. shares or debt markets. The value of the investment portfolio is captured by the NAV (net asset value). We can say that there are many similarities between ULIP and mutual funds. ULIPs differ in one area, they are a combination of investment and insurance, while mutual funds are for pure investment purpose.
4). Whole Life Policy
As the name indicates, the Whole Life Policy covers the policyholder as long as he/she lives. The policyholder stays protected for his/her entire life, thus this plan is named as whole life policy.
The policyholder pays regular premiums until his/her death, after which the corpus is paid out to the family. The policy expires only in case of an eventuality as there is no pre-defined policy tenure.
5). Money Back Policy
A Money Back Policy is a variant of the endowment plan. It gives periodic payments over the policy term. To that end, a portion of the sum assured is paid out at regular intervals. If the policyholder survives the term, he/she gets the balance sum assured. In case of death over the policy term, the beneficiary gets the full sum assured.
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