Types of Life Insurance Policies :
As per the above discussion it becomes apparent that Life Insurance is required for both protection and investment purposes. Based on the primary objective and benefits, life insurance products are of the following types:
- Traditional plans like term insurance, endowment, money back, etc.
- Unit linked insurance plans.
A. Term Insurance :
Term Insurance is the simplest form of life insurance. The payment of Insurance amount is made only if death occurs during the term of the policy, which may, generally, range from one to 30 years. Most term policies do not provide for any other benefit.
Thus the features of Term Insurance Plan are as follows:
- It is a pure life cover i.e. in the event of death of the insured the sum assured is paid to the family (beneficiaries/nominees).
- In case the insured survives the policy term, there is no refund of premium.
- There is no investment component in a term plan.
Example
Mr. X took a term insurance plan from ABC Life Insurance Co. Ltd. for a period of 20 years and sum assured of Rs.10lacs. In the event of his death, Rs.10lacs would be paid to Mrs. X. If Mr. X survives the term, there will be no refund of premium.
B. Whole Life Insurance :
Under this policy, premiums are paid throughout the life of the Insured and the sum insured becomes payable only in the event of the death of the insured. The policy remains in force throughout the life of the assured and he continues to pay the premium till his death. This is the cheapest policy as the premium is to be paid till the death of the Insured hence the same i.e. the premium is low in this policy as compared to other policies. This type of Policy is also known as ‘ordinary life policy’.
C. Endowment Plans :
An endowment policy is a saving linked Insurance policy with a specific maturity date. This type of policy serves the dual purpose of saving as well as securing the family in the event of death. Hence these days this is the most popular type of Life Insurance Policy.
The features of an endowment policy are as follows:
a) The term for which policy is taken is called Endowment Period.
b) The sum assured is paid at the end of the endowment period or in the event of death of the insured, whichever is earlier.
c) The premium under this policy is paid upto the maturity of the policy ie the point of time when the amount under the policy becomes payable.
d) Options are also available where premiums can be paid for specific periods (terms like 5yrs/10 yrs/15 yrs etc) and maturity periods can be 10/15/20/25/30/35 years (depending on the age of policy holder).
Under this type of Policy the premium would be little higher than the whole life policy.
D. Child Policies :
These types of policies are taken on the life of the parent/child for the benefit of the child. Under the terms of this policy the parent can plan to get funds when the child attains various stages in life. Some Insurers offer waiver of premium in case of unfortunate death of the parent/proposer during the term of the policy.
These policies can be used towards education expenses, marriage expenses and any other expenses that can be planned for the life at different life stages.
E. Annuity/ Pension Plans :
When an employee retires he no longer gets his salary while his need for a regular income continues. Though there are Retirement benefits such as Provident Fund and gratuity which are paid in lump sum but they may be spent too quickly or may not be invested prudently. As a result of this the retired employee finds himself without regular income in his post - retirement days.
Pension is ideal solution to this problem as it entails benefit in the form of regular income. Financial independence during old age is a must for everybody.
This issue of having regular income during old age is taken care off by Annuity Policies. Annuities are series of payments received at fixed intervals over a fixed number of years or over the lifetime of the individual.
Accordingly the features of Annuity Policy are as follows:
a) It is a policy under which the insured amount is payable to the assured by monthly or annual installments after he attains a certain age.
b) The assured may pay the premium regularly over a certain period or he may pay the premium regularly over a certain period or he may a lump sum of money at the beginning of the Policy.
These policies are useful to persons who wish to provide a regular income for themselves and their dependents.
F. Money Back Policies :
Unlike ordinary endowment insurance plans where survival benefits are payable only at the end of endowment period, Money Back Policy provides for periodic payments of partial survival benefits during the term of the policy, of course, so long as the policy holder is alive.
Examples
a) In case of a 20 year Money Back Policy, 20% of the sum assured becomes payable after 5,10, 15 years and the balance of 40% plus the accrued bonus becomes payable at the end of 20th Year.
b) For a Money Back Policy of 25 years, 15% of the sum assured becomes payable after 5, 10, 15, 20 years and the balance 40% plus the accrued bonus becomes payable at the end of 25th year.
An important feature of this type of policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which have already been paid. Similarly the bonus is also calculated on the full sum assured.
Thus money back policy is an endowment policy with liquidity benefits.
G. Group Insurance :
Group insurance is an insurance that covers a defined group of people such as the members of a Society or a Professional Association or the employees of a particular Organization.
In Life Insurance under Group Insurance Scheme the life insurance cover is allowed to all members of the group. However, under this scheme the insured amount is paid only on the death of a member of the group and there is no maturity value at the end of the scheme.
The premium rates are more competitive in Group Insurance as compared to other insurances. These policies are suitable for large part of population who cannot afford individual life cover. Further members of an eligible group who otherwise cannot be insured can benefit through group insurance. Once the conditions of group insurance are satisfied, members can get life insurance at significantly lower rates compared to individual policies.
The group may consist of employees, doctors, lawyers, credit societies etc. A group insurance scheme can be either
a. Contributory scheme – In this case the premium on the group life insurance policy is paid by both the employer and the employee.
b. Non-Contributory scheme – In this case premium is paid by the employer or the main agency fully.
H. Unit Linked Insurance Plan :
Unit linked insurance plans (ULIPs) aim to serve both the protection and investment objectives of investing. ULIP’s are subject to capital market risks.
