An individual today has an array of options to choose from when it comes to financial planning. Mostly people focus on the wealth creation aspect and compromise with the protection element. In the wake of raising inflation, change in lifestyle patterns and move to nuclear families, life insurance should be the first step in financial planning. Insuring your life for the financial security of your dependents must be paramount before proceeding to address any other aspects.
Life Insurance is a contract which is based on mutual trust. It promises to give a lump sum amount to the nominees of the policyholder in case the policyholder dies. The loss of family's bread-winner is irreplaceable but Life Insurance guarantees that much-needed funds will be provided to the dependents for a financially independent life. It keeps the financial plans of the family and their standard of living on track.
When buying life insurance, you can be overwhelmed by an avalanche of information. The basic premise of Life insurance policy is Protection but there are certain products available in the market which allows the policyholder to use it as a wealth creation & long term savings tool. There are various types of life insurance available in the market today. These life insurance policies can be classified in terms of the customer segment they cater to such as child insurance plans, retirement plans and savings and investment plans. On the other hand they can be categorised by the benefits/ coverage that they provide such as term life insurance, whole life policy, Endowment Policy.
Term Life Insurance
Term life insurance is a type of life insurance that provides a death benefit to the beneficiary only if the insured dies during a specified period. If the insured survives until the end of the period, or term, the coverage ceases without value and a payout or death claim cannot be made. Term life insurance is income replacement that remains active for a specified number of years. Term life insurance is the most affordable type of life insurance. It can further be classified into:
- Level Term Life Insurance: where the death benefit remains the same throughout the policy term and the renewal premium is constant.
- Decreasing Term Life Insurance: where the death benefit under the plan decreases with time and the renewal premium is constant. For example: Mortgage redemption policies, credit life insurance.
- Increasing Term Life Insurance: where the coverage and premium increase.
Whole Life Insurance
Whole life insurance is a type of life insurance that provides you coverage throughout your lifetime provided the policy is in force. Whole life insurance policies also contain a cash value component that increases over time. You can withdraw your cash value or take out a loan against it as per your convenience. In addition, in case of your unfortunate demise before you pay back the loan, the death benefit paid to your beneficiaries will be reduced.
An endowment policy is defined as a type of life insurance that is payable to the insured if he/she is still living on the policy's maturity date, or to a beneficiary otherwise. An endowment policy provides you with a dual combination of protection and savings. In an endowment policy, if the insured dies during the term of the policy, the nominee receives the sum assured plus the bonus or participating profit or guaranteed additions, if any. The bonus or profit is paid for the number of years that the insured survives in the policy term.
Money Back Policy
Money back policy gives you money during the policy tenure. A money back policy gives you a percentage of the sum assured at regular intervals during your policy term. If you live beyond the term of the policy then you will receive the remaining portion of the corpus and the accrued bonus also at the end of the policy term.
But in case of an unfortunate event before the full term of the policy is over; the beneficiaries are entitled to receive the entire sum assured regardless of the number of instalments paid out. Money back policies are the most expensive insurance options offered by insurance companies as they offer returns to the insured during the policy tenure.
Money Back policy gives way for a person to plan the course of his life with a sum that is expected in regular intervals. Plans such as children’s education, children’s marriage can be executed in a better way with the help of this policy.
Savings & Investment Plans
Savings & Investment Plans provide you the assurance of lump sum funds for you and your family's future expenses. While providing an excellent savings tool for your short term and long term financial goals, these plans also assure your family a certain sum by way of an insurance cover. This is a broad categorisation which covers both the traditional and unit linked plans.
A savings and investment plan that provides you with income during retirement is called Retirement Plan. Retirement plans are offered by life insurance companies in India and help you to build a retirement corpus. On maturity, this corpus is invested for generating a regular income stream which is referred to as pension or annuity. Retirement plans are further classified into.
- 'With cover' and 'without cover' plans: 'With cover' pension plans offer an assured life cover in case of an eventuality and in 'Without cover' pension plan, the corpus built till is given out to the nominees in case of an eventuality. There is no life cover in without cover plans.
- Immediate Annuity Plans: In case of immediate annuity plans, the pension commences within one year of having paid the premium.
- Deferred Annuity Plans: In case of deferred annuity, the pension does not commence immediately; it is ‘deferred‘up to a time, which is decided upon by the policyholder.
Unit Linked Insurance Plans – Ulips
Unit linked insurance plans are a type of life insurance plan that provide you with a dual advantage of protection and flexibility in investment. A unit-linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets. The premium paid is used to purchase units in investment assets chosen by the policyholder.
Types of Unit Linked Insurance Plans (according to investment):
- Aggressive ULIP‘s which invest 80-100% in equity.
- Balanced ULIP‘s which invest 40-60% in equity.
- Conservative ULIP‘s which invest up to 20% in equity.
Types of Unit Linked Insurance Plans (according to death benefit)
- Type I ULIP: It gives the higher of the sum assured or fund value as death benefit
- Type II ULIP: This plan pays the policy holder both benefits i.e. sum assured plus fund value as death benefit.
Child Insurance Policy
A child insurance policy is a saving cum investment plan that is designed to meet your child‘s future financial needs. A child insurance policy allows your kids to live their dreams. Child insurance policy gives you the advantage to start investing in the children‘s plan right from the time the child is born and provisions to withdraw the savings once the child reaches adulthood. Some child insurance policies do allow intermediate withdrawals at certain intervals.
Life insurance is not just to fulfil the daily expenses of the family in the absence of breadwinner. It should be capable enough to bail out the family during large financial exigencies. So, one should always choose that plan which can support his/her family in different stages of life.