Ch. 11: Different Types of Life Insurance Plans

“Why do I need life insurance?” - if this question ever crosses your mind, think about all the people who depend on you. All the people you love and hold close. Life insurance is a way to provide for and protect them. It helps you build a large sum, safeguard your family’s financial future, and save for big events, like - your child’s education, their marriage, or your peaceful retirement.

Every person has specific needs, hence, the life insurance plan they choose should cater to them. In this article, we will talk about its different types and why they matter.

Term Insurance Plan

Your family needs your love and care. What they also need is financial security, if they are dependent on you. As a provider, it is your responsibility to plan for the unfortunate situations, keeping in mind that you might not be around to fulfil every single one of their dreams.

Term Insurance pays your family a sum of money in case of your untimely demise within the policy tenure. In technical terms, this sum of money is known as “Sum Assured”. It will basically be a replacement for your income to secure your family’s financial needs, without them having to compromise on their dreams and lifestyles.

For instance,

Prayag has two children and a spouse who depend on him financially. He has also taken a home loan of INR 1 Crore. He dreams of giving his family the best lifestyle. Now, if he meets with an unfortunate demise before repaying the loan, the financial burden would fall on his family members. However, if he has a term insurance policy and if he passes away within the policy term, the insurance company will pay the claim amount to his family. With the help of this money, they can repay the entire loan and lead a financially secure life, even in Prayag’s absence.

Benefits:

• Financial safety net: Term insurance provides financial security to your family at a very low cost.
• Lowest premiums: Premiums paid for term life insurance policies are the lowest in the life insurance category.
• Tax exemptions: The premiums paid towards Term Insurance provides income tax exemption. The Death Benefit received by the nominee is also exempted from tax.

You can read more about Term Insurance Plans here.

Whole Life Insurance Plan

A Whole Life Insurance policy, as the name suggests, is a type of life insurance that covers you for your whole life.

• If you pass away within the policy tenure, the sum assured will be paid to your nominee.
• If you survive the entire policy tenure, the sum assured will be paid to you as a maturity benefit.

The basic goal of a Whole Life Insurance policy is to ensure life-long financial protection to family members. There are no restrictions on the sum assured you can buy under this policy.

Benefits:

• Longer cover: The policy does not expire till the time any unfortunate event occurs to you, the policyholder.
• Leaving a legacy: Given this is a guaranteed payout, it is also bought as an expression, a parting gift or legacy that people want to leave behind for their family, to ensure their loved ones live a comfortable life.
• Tax benefits: Premiums paid under whole life policies as well as the Death and Maturity Benefits received are exempted from tax.

You can read more about Whole Life Insurance Plans here.

Unit Linked Insurance Plan (ULIP)

It is a life insurance plan that gives you a blend of both market-linked investment and insurance. Therefore, when you purchase a ULIP,

• The insurance provider invests part of your premium in different funds, such as equity funds, debt funds, and other securities - depending on your preference.
• The remaining amount is utilised in providing an insurance cover.

Please note: There may not be any guaranteed returns under ULIP. Because here, the risk involved is substantial - as the returns depend on the performance of the stock market.

Benefits:

• High returns: A ULIP has the potential to generate great returns because it’s linked to the stock market.
• Flexibility: To choose your fund based on your risk appetite, to switch between funds, and to make partial withdrawals.
• Tax benefits: The money you invest (premiums), the money you withdraw (partial withdrawal), and the money that you get in return (maturity benefit/death benefit) - all of them are exempted from taxation.

You can read more about Unit Linked Insurance Plans here.

Endowment Plan

An Endowment Plan is a low-risk savings tool that also gives you the benefit of insurance. In other words, it provides insurance coverage while simultaneously assisting you to build a savings fund.

So it gives you -
Maturity Benefit:
This is paid to you at the end of the policy term as a lump sum. Depending on the product, it may either be - An amount you’ve chosen while purchasing the policy. A percentage or premiums you have paid under the policy. Total premiums you have paid under the policy.

Death Benefit:
This is paid to your nominee if you pass away during the policy term. It may either be an amount you’ve chosen while purchasing the policy, or a multiple of annual premium - depending on the product. For example, In 2022, Rahat buys a Participating Endowment Plan for a policy duration of 20 years. He chooses the sum assured to be Rs. 30 lakhs. The annual premium according to the sum assured comes around Rs. 1,00,000.

If Rahat survives the policy term, he will receive a maturity benefit of Rs. 30 Lakhs along with any accrued bonuses - in 2041.

Let's assume Rahat has appointed his spouse, Pragya, as nominee. This means the death benefit shall be given to her, in case he passes away.

If Rahat meets with an unfortunate death during the 11th policy year, his wife Pragya is entitled to receive Rs 30 lakhs, along with any accrued bonuses, as a lump sum in 2032. The endowment policy will terminate after the death benefit has been paid to her.

Benefits:

• Guaranteed lump sum after a specific time interval: In the form of Maturity Benefit, if you survive the policy tenure to fulfil your goals like buying a house, funding your child’s education, etc.
• Guaranteed returns: Stock market fluctuations have a direct impact on financial tools like mutual funds. In contrast, endowment plans offer guaranteed returns, hence, becoming low-risk investments.
• Tax benefits: The premiums you pay and the maturity/death benefits received will be exempted from taxation. You can read more about Endowment Plans here.

Money Back Plan

As the name implies, this type of life insurance gives your ‘money back’ in the form of periodic payments, during the policy term as well as an insurance cover.

So, it gives you -

• Survival Benefit: Periodic payments given to you over the benefit payout period. They may be a percentage of the sum assured you have chosen or a percentage of the annual premium you pay.
• Maturity Benefit: Given to you once the policy term ends. It varies across products and can be the sum assured + any accrued bonuses, the survival benefits as periodic payouts, a lump sum of the payouts, or just the accrued bonuses.
• Death Benefit: Given to your nominee if you pass away during the policy term. It is exclusive of the survival benefit. For example, Neetu is a lab analyst, earning Rs. 50,000 a month. Since she has other expenses to take care of, she wishes to choose a premium which can comfortably fit in her budget. Suppose, she can pay Rs 40,000 annually. The policy term is 30 years and the premium payment term is 20 years. The sum assured is Rs. 4 lakhs. The survival benefit she will receive will be a percentage of her premium amount. Let’s assume it is 10% of the annual premium, which is payable from the 21st policy year to the 30th policy year. So,

So, the survival benefit = 10% of 40,000 = Rs 4000 - will be paid to Neetu, annually, from the 21st to 30th policy year.

Benefits:

• Survival Benefit to fulfil your goals: The periodic payouts you receive are a great way to maintain a regular income. This can help you with a multitude of things like having a comfortable post-retirement life, taking care of your child’s higher education or wedding expenses, etc.
• Guaranteed returns: Money-back plans are not linked to the stock market, and hence, the associated returns do not waver. You get fixed returns.
• Tax benefits: The premiums you pay and the maturity/death benefits received are all tax-exempt.

You can read more about Money Back Plans here.

Child Insurance Plan

A child plan is a lovely way of giving your child a stable and secure future. These plans help you accumulate enough funds to secure your child’s future. This money can be used to achieve key milestones, such as the best quality education, higher studies abroad, marriage, etc.

Benefits:

• Premium Waiver: If you pass away during the policy term, the insurance company waives all the remaining premiums, while the benefits remain intact. Hence, all the dreams you have seen and the goals you have set will be fulfilled - without creating any financial burden on your child.
• Maturity Benefits: When the policy matures, you receive an amount - either as a lump sum or periodic payouts.
• Death Benefits: In case you pass away during the policy term, the child is eligible to receive the death benefit. It is the sum assured along with any accrued bonuses. In case the child is a minor, the death benefit cover will be handed over to the appointee (as selected by you during policy purchase). They are responsible for safekeeping the funds until your child turns 18.
• Tax advantages: All the money you pay and receive are exempted from taxation.

You can read more about Child Insurance Plans here.

Retirement Plan

Retirement plans ensure a comfortable retired life. They are designed to look after your retirement needs by helping you meet living expenses despite inflation and rising costs.

There are 3 types of retirement plans available in the market -

• General Annuity Plan: It essentially is a mix of savings and income. You invest money during the policy term and receive regular income when you retire.
• Single Premium Annuity Plan: You make a lump sum investment, i.e., pay a single premium, and receive a steady income once you retire. This type of plan is usually purchased very close to retirement.
• Pension Accumulation Plan: You accumulate your wealth under this plan. So, you pay premiums during the policy term and receive a lump sum when you retire.

Please note, for General and Single-Premium Annuity Plans
You can delay the payouts you’ll receive when you retire. So, you can opt to receive them after a specific time span. This is known as the ‘deferment period’. For instance, if your policy has a premium payment term of 15 years and you choose a deferment period of 20 years - you shall receive the payouts from the 21st year.

Benefits:

• Financial independence: Meeting life expenses on your own and living post-retirement life gracefully.
• Tax benefits: When you invest in a retirement plan, it enables you to reduce your taxable income. The premiums you pay and the benefits you receive are all tax-exempt. You can read more about Retirement Plans here.

Group Insurance Plan

As the name suggests, a group life insurance plan covers a group of people inside a single plan. It is normally less expensive than individual life insurance. It serves as a great option for employees of a company, members of a club or any professional organisation.

This plan can be withdrawn anytime - the policy will remain active till the group's contract is maintained by the group's administrator (the person managing the plan).

Benefits:
For employees -

• Low-cost cover: A default life cover for the employees, often as an incentive.
• No prerequisites: Up to a specific cover limit, pre-medical screening is not required in case of group plans.

For employers -

• Low premiums: Generally, the premiums under this policy are paid by the employers. They can significantly lower their expenses by choosing group insurance plans to cover the same number of employees - instead of purchasing individual covers.
• High morale in the workspace: When the employees are insured and stress-free, they can put in their best efforts, leading to the company's growth.
• Tax benefits: The premiums paid and the returns received are tax-deductible under income tax laws in India.

Achieving your goals at every stage of life comes with some financial preparation. And the best part about life insurance is - it has got you covered, at every step. We hope this article helps you make a good decision and invest in a better future. Understanding what life insurance is – and why it matters – is the key to protecting your loved ones.