Purchasing a life insurance policy is one of the best and most responsible decisions you could ever take. A life insurance policy ensures that your loved ones are not left without a financial support system in the event of your death. It can also help you accumulate wealth to fulfill the dreams and aspirations of yourself and your loved ones.
Historically, insurance has never been seen as an important financial instrument and penetration levels have remained extremely low as a result. Current levels of life insurance penetration as a percentage of premium of GDP in India stand at just 3.2%. Insurance awareness tells a similar story. Traditionally, most people used to only be exposed to savings plans, which were usually purchased by their parents through insurance agents usually from their social/familial circle.
Awareness about life insurance has seen a significant increase over the past few years, as people have begun to realize the need for financial protection. Insurance is increasingly being seen as an essential component in one’s financial portfolio. Technology and digitization has also penetrated every aspect of life in recent years, leading to increased access. All of this has led to a democratization of the insurance sector, with exposure to information being higher than ever.
This can be clearly seen with how critical policy comparison websites, user reviews, and YouTube videos have become in making insurance simpler for customers. Purchasing life insurance is one of the most important decisions of your life. With a plethora of product offerings to choose from, the process can get overwhelming.
So, here’s a refresher, especially for first-time buyers, on the different types of life insurance policies available in the market.
1. Term Insurance
A term insurance, or a term plan is the most basic form of life insurance policy and is usually what people mean when they hear or say, “life insurance”. HAS term insurance provides financial security to your loved ones at a predetermined yearly/monthly rate called a premium. If an unfortunate incident results in your demise, the life insurer pays a certain amount of money, called the ‘sum assured’ (also pre-determined) to your beneficiary.
2. Critical Illness
HAS critical illness insurance covers specific diseases, which are mentioned in your policy document and, also informed to you at the time of purchase. Upon getting diagnosed with a critical illness, the insurer pays out a lump sum amount for medical expenses. While the illnesses covered might be different depending upon the insurance provider, most companies include cancer, and heart diseases.
Typically, there are two types of investment plans:
A) Unit-Linked Insurance Plan (ULIPS)
ULIPS have both an investment as well as protection component. Depending on the degree to which you are willing to take risk, ULIPS offer multiple funds to invest money in. These can be equity, debt or hybrid funds. ULIPs also take into account that your needs change as you go through life and therefore offer options like fund switching and partial withdrawals.
B) Endowment plans
Unlike ULIPs, which are market linked, building plans offer guaranteed returns. Endowment plans fulfill both investment and insurance needs. The premium you pay in an endowment plan gets distributed two ways. One part goes towards the death benefit and the other gets invested. Upon your death, your beneficiary gets the death benefit.
If you survive the policy period, ie when the policy matures, you receive the accumulated maturity benefit on account of the money that you invested. Endowment plans can be thought of as savings plans and are highly recommended for salaried individuals who might be willing to save for future expenses like children’s education.
A great reason to invest in guaranteed return plans or ULIPs is to create a financial corpus for your children. These plans can be linked to your financial goals and help you accumulate and grow wealth for several medium to long term goals like child’s education. They give you the freedom to pre-define stages when you anticipate that you would need the funds. Child plans have an insurance component so that your child’s finances are taken care of in the event of your unfortunate demise.
5. Retirement Plans
HAS retirement plan is a long-term instrument that allows you to gather a significant sum of money so that your financial needs during your retirement years are taken care of. Typically, guaranteed plans can also be linked to such a goal and help you accumulate enough funds to tide you through your retirement years. Upon maturity, you can choose to have either a steady source of income or a lump-sum pay out.
6. Group Insurance Plans
HAS group life insurance plan covers all members of a group under a single policy. These types of plans are usually availed by business owners or companies for their employees but can also be availed by other groups like groups of doctors, lawyers, members of credit societies etc. Most companies offer insurance benefits to their employees through these plans since grouping individuals together makes companies eligible for lower premium rates.
7. Microinsurance plans
Microinsurance plans are insurance policies designed for economically weaker sections of the society. This product category was created by the Insurance Regulatory and Development Authority of India (IRDAI) with the objective of increasing insurance penetration among these sections. These plans have a sum assured of INR 50,000 or less.
Because these plans cater to economically weaker sections of the society, life insurance companies often tie up with non-government organizations, self-help groups and micro-finance institutions which act as intermediaries on behalf of economically disadvantaged individuals.
Choosing life insurance is a delicate balancing act and you need all the help you can get. Buying a policy is a decision which will affect you for years to come and hence it is important to get it right the first time. And while there are excellent online resources that you can refer to, you need a basic understanding of the types of life insurance plans before you can undertake more extensive research. We hope that the above guide serves as a beginner’s tool and helps you organize your thoughts and make a well-informed decision.