Life insurance can be described as a contract existing between an individual or the policyholder and an insurance provider. As per their agreement, in return for regular payments, AKA, premiums, the insurance provider promises to pay them a sum assured or death benefit to the designated beneficiary or nominee of the policy. However, such a payment is made only upon the death of the policyholder, or otherwise mentioned in the policy document. Such a policy serves as a financial security for the insured’s family and provides them with much-needed assistance to account for financial liabilities and living expenses in the absence of the insured.
Read along to know more about what term life insurance is and its key features, so that you can make an informed choice when looking for an ideal cover.
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Types of Life Insurance Plans
Typically life insurance plans can be divided into two broad categories –
- Pure protection insurance plans
They offer only risk coverage and have no investment or savings component. These plans are designed to offer financial security to the loved ones of the insured in the event of their death, disability, or terminal illness.
- Safety and savings insurance plans
They offer the insured the dual advantages of savings and insurance coverage. Note that they offer a lower death benefit when compared to popular pure protection plans. However, they offer a savings component that may come in handy in funding retirement or other major financial goals.
Individuals should know that the primary difference between pure protection and safety and savings plans is the level of associated risk. A pure protection policy plan is best suited for those looking for comprehensive protection, whereas, safety and savings plans would suit those interested in saving money.
These are some of the most popular types of term life insurance plans out there that you should know about –
- Term Life Insurance
It is a type of life insurance that offers the insured coverage for a fixed period, or term. The policy’s death benefit is routed to the nominee in the event of the death of the insured during the active policy term. However, if the insured survives the policy term, the insurance expires and no death benefit is paid to them.
A term life insurance policy is less expensive than other life insurance plans, like whole life insurance. Notably, they are suitable for individuals who seek to obtain a life insurance policy for a certain purpose, like covering an existing mortgage or paying for college tuition in the absence of the insured. However, individuals can customize their term policies with riders, which are essentially add-ons that provide extra coverage. For instance, adding an accidental death rider or critical illness insurance rider to a term policy would pay an additional death benefit to the nominee if the insured dies in an accident.
- Endowment Policies
They offer beneficiaries a guaranteed return on their investment and may distribute additional bonuses. On the maturity of the policy, the insured gets a lump sum amount which they can use as per their wish, such as to plan retirement, fund higher education, or make a home loan down payment. However, if the insured passes away during the policy term death, their nominee will receive the death benefit in the form of a sum assured along with accrued bonuses, if any.
- Whole Life Policy
This policy offers lifelong coverage, 99 years to be specific, to the policy buyer and their dependents, making the insurance plan a good choice for families with kids. It can help build a corpus over time which can facilitate retirement planning, pay for future obligations, etc. Some policies may even provide additional perks like long-term care or disability income protection.
- Pension or Annuity Plans
These plans are crafted with care to offer a guaranteed income stream to the insured on their retirement. Individuals can contribute towards this insurance plan in a lump sum payout or through regular payments in a given period. Notably, the returns on avail from annuities tend to depend on the contributions, the age at which the insured started the policy, their desired age of receiving payments, and the type of plan.
- Unit Linked Insurance Plans
ULIPs are perceived as wealth-building plans that combine the best of investment plans and insurance. It allows individuals to park money in a variety of funds, which include bonds, equities, hybrid funds, etc., based on their risk tolerance level. While it helps generate market-linked returns on their capital, it exposes an individual’s portfolio to market-linked risks, making it crucial to implement careful investment planning. These insurance plans come with a lock-in period of 5 years but allow partial withdrawal and fund-switching against a penalty.
- Money Bank Policies
This insurance plan provides the policyholder with part of the assured sum at regular intervals. The policyholder gets the option to choose to receive the payouts of the funds monthly, quarterly, or annually. By the end of the insurance policy term, they receive the remainder of their assured sum, along with a bonus amount, in case they survive the term. However, if the policyholder does not survive the policy term, then the full assured sum is paid to their beneficiary. The policy provider may offer maturity benefits to them as lump sum payments.
- Children’s Life Insurance
This policy is designed to offer financial security to the policy buyer’s child in the event of his/her death. The insurance policy can help save for a child’s future education or related expenses. They offer a combination of investment and savings and may allow the insured to access funds through withdrawals or strategic partial surrenders.
Individuals may choose the best-suited term life insurance plan based on their needs and develop the most suitable financial plan. However, it is recommended to read the terms and conditions of each plan to understand their scope and limitations better and make a decision accordingly. It is also recommended to compare the features of leading insurance plans to understand which plans could benefit you the most.