What is a life insurance policy?
A life insurance policy provides financial protection to your family in the unfortunate event of your death. At a basic level, it involves paying small sums each month (called premiums) to cover the risk of your untimely demise during the tenure of the policy. In such an event, your family (or the beneficiaries you have named in the policy) will receive a lump sum amount. In case you live till the maturity of the policy, depending on the type of life insurance policy you have opted for, you will receive returns the policy may have earned over the years. Today, there are many variations to this basic theme, and insurance policies cater to a wide variety of needs.
Various Types of Life Insurance Policies
Term Insurance Plans
Term insurance is the cheapest form of Life Insurance available. Since a term insurance contract only pays in the event of an eventuality, the life cover comes at low premium rates. Term insurance is a useful tool to purchase against risk of early death and/or protection of an asset (housing loan).
Endowment plans are savings and protection plan(s) that provide a dual benefit of protection as well as savings. Endowment plans pay a death benefit in the event of an eventuality; should the customer survive the benefit period, a maturity benefit is paid to the life insured.
Whole of Life Plans
A Whole of Life plan provides Life Insurance cover to an individual up to a specified age (85 or 100). A whole of life plan is suitable for an individual who is looking for an extended Life Insurance cover and/or wants to pay premium over as long a tenure as possible, to reduce the amount of up front premium payment.
Single Premium Plans
Single Premium plans are investment plans offered by a Life Insurance company. The insurance company generally pays a guaranteed interest rate on the single premium investment. Returns from single premium plans are tax free in the hands of the customer.
Pension plans allow an individual to save in a tax-deferred manner. An individual can either contribute through regular premiums or make a single premium investment. Savings accumulate over the deferment period. Once the contract reaches the vesting age, the individual has the option of choosing an annuity plan from a Life Insurance company. An annuity is paid till the life time of the insured or a pre-determined period depending upon the annuity option chosen by the life insured.
In money back policies, the policy holder gets periodic “survivance payments” during the term of the policy and a lump-sum amount on surviving its term. In the event of death during the term of the policy, the beneficiary gets the full sum assured, without any deductions for the amounts paid till date, and no further premiums are required to be paid.
Unit Linked Insurance Policy (ULIP)
A ULIP is a life insurance policy which provides a combination of risk cover and investment. The investment risk in ULIP is generally borne by the investor.