What Is Life Insurance?

Life is dotted with important financial milestones as you grow older - taking care of your parents, buying a house, funding your child’s education, setting up your business, saving for retirement, etc. Regardless of how much money you earn, there are two things you must take care of - keeping up with the rising costs to meet your goals and protecting your family’s financial future. And, a great tool that fulfils both these needs is life insurance. A good life insurance plan is an effective financial instrument that can help you achieve your financial goals, protect your family, and give you tax benefits too - all while ensuring your peace of mind! There is a multitude of plans available in the market today to cater to your requirements - whether it’s a simple term plan to secure the financial future of your family, or an endowment plan that helps you grow your wealth along with giving you an insurance cover, or a retirement plan to take care of your post-retirement phase, etc. Let’s have a detailed look at what life insurance is and the different kinds of plans sold by insurance companies.

What Is Life Insurance?

Life insurance is a contract between you, the insured, and the insurance company. You are required to pay regular premiums and in exchange, the insurance company promises to pay the sum assured to your family if you pass away unexpectedly during the policy period. Besides safeguarding your family's financial future, life insurance also serves as a means of achieving long-term goals such as buying a house, a child's education, a wedding, retirement planning, etc.

There are a variety of life insurance plans available in the market. In general, the types can be a mixture of-

• Linked and Non-Participating
• Non-Linked and Participating
• Non-Linked and Non-Participating

Let's now examine some of the types of insurance plans available in the insurance industry.

Types Of Life Insurance Plans

Whole Life Insurance Policy

A whole life insurance policy provides financial protection up to the age of 99/100 years - basically, lifelong coverage. As the general life expectancy is much lower than that, a whole life plan is a sure-shot way of leaving a financial legacy, a parting gift for your loved ones.

Term Insurance Policy

A term insurance policy is one of the simplest and most affordable types of life insurance. It provides a fixed sum of money to your family if you pass away while the policy is active to secure the financial future of your loved ones. The claim amount can help your family fulfil their financial goals, meet everyday expenses, settle existing loans and liabilities, pay for your child's education, etc.

Endowment Policy

An endowment plan is a blend of insurance and savings. It helps you accumulate a savings fund in addition to providing a life cover.

• If you pass away while the plan is in force, your nominee will be paid the death benefit, i.e., a fixed sum of money, which can be used to meet their day-to-day expenses, pay existing debts, etc.
• If you survive till the end of the term, a maturity benefit is paid to you, which can be used to fulfil your financial goals such as buying a house, starting a business, etc.

Child Insurance Policy

If you want to provide financial security to your child and ensure that their dreams are met even in your absence, then a child insurance policy is your ideal investment option. It combines both insurance and investment to create a sufficient fund for important life goals, i.e, their higher education, wedding, etc. It ensures that the child remains protected even when you are no longer around.

ULIPs (Unit Linked Insurance Policies)

Just like Mutual funds, ULIPs give you the chance to invest in market-linked instruments. And, they also offer you a life insurance cover as a part of the product. The premium you pay for a ULIP is partly used to provide life insurance coverage, and the rest is invested in various stock market funds of your choice, which can provide high returns.

Money-Back Policy

As the term implies, a money-back plan is a type of life insurance plan that gives money back to you in the form of regular guaranteed payouts. This plan is a blend of investment and insurance. The investment part helps cover several expenses at different stages of life, like EMI payments, child's tuition fees, etc. The insurance part will offer financial security to your family, should something untoward happen to you.

Retirement Policy A retirement policy is specifically designed to help you meet your financial needs and goals during the retirement phase. Typically, insurance companies sell two types of retirement plans: Pension Accumulation Plans and Annuity Plans.

Pension Accumulation Plan

It can be either linked or non-linked.

Non-linked Pension Accumulation Plan This plan is similar to the Endowment Plan. In a Non-Linked Pension Accumulation Plan, you need to pay the stipulated premiums for a specific period to keep the policy in force. You will receive a fixed amount of money once the policy matures that can be used to meet your post-retirement needs.

Linked Pension Accumulation Plan This plan is similar to the Unit Linked Insurance Plan. In a Linked Pension Accumulation Plan, you invest your money in market-linked instruments and build your wealth in a systematic manner. When the policy matures, you'll receive a lump sum that can be used to fulfil your retirement needs and goals.

Annuity Plan

In an annuity plan, you pay premium/s for a certain number of years, which get accumulated into a fund. This money accrued in the fund will be converted into an annuity, that is, a steady source of income. Once you retire, you will start receiving this annuity periodically. You can use this payout to meet your regular expenses - groceries, utilities, EMIs, etc.

Wrapping up!

A life insurance policy is one of the best investments you can make for your and your family’s financial security. It will provide your family with a sum of money if something untoward happens to you during the tenure of the policy. Besides this, it also allows you to save for your child’s education and marriage, accumulate wealth for your retirement, and so on. We hope that you gained some insight into how life insurance works and the different types of life insurance available in today's market through this article. Before you invest in any type of life insurance, make sure to consider your needs, budget, etc.