Types of Life Insurance Policies-How to choose the best one?

There have been numerous misselling of insurance policies in our country for the last couple of decades. By playing with the sentiments of common people and also taking advantage of the low financial education scenario, thousands of insurance agents along with the country’s one of the largest insurance company grew manifold. Today, I have decided to write a blog post on Types of Life Insurance Policies-How to choose the best one? 

The common people of our country even don’t know that those who(insurance agents) help them to buy life insurance products are getting rich day by day with the help of their own money. This is just because of the unawareness about the types of life insurance policies and their suitability for each of us. Some people even consider buying life insurance policies as an investment.

Life insurance is an important component of long-term financial planning. Just like financial planning, insurance planning is also specific to individuals and their situations. Life insurance makes sure that when the sole bread earner is no more, the remaining family members do not have to come on roads. Therefore, it can be said that life insurance policies compensate for the financial loss the family to a great extent and does not worsen the unfortunate tragedy.

Before knowing how to choose the best life insurance policy, first, you must know what are the types of life insurance policies actually exist in India.

# Types of Life Insurance Policies

Types of life insurance policies	Nature of Coverage
Term plans	Pure risk coverage
Whole Life Insurance plans	Risk coverage for lifetime along with cash value
Endowment plans	Insurance plus savings
ULIPs	Insurance plus investments
Retirement / Pension/ Annuity plans	Regular pension post retirement
Money back plans	Insurance plus periodic return of premiums

# 1. Term Life Insurance

Term Life Insurance – as the name itself suggests that this is an insurance which covers the risk of one’s life for a specified term or period on payment of lump sum or regular premium. If during the risk coverage period the insured person dies, the predetermined sum assured is paid to the nominee of the insured. Further,  during the policy term, if no unprecedented incident occurs (no death), no maturity value will be paid to the policyholder.

Since term life insurance provides purely life risk coverage at a very nominal premium as compared to traditional life insurance, it is gaining momentum day by day. Term insurance emphasizes solely on risk coverage and therefore its inherent nature is insurance and not an investment.

Therefore, Term life insurance is solely meant for risk coverage and not for investment. Term insurance is the least expensive way of buying a substantial death coverage amount per premium rupee basis over a specific period of time. This payment of premium buys protection in the event of the death of the insured and nothing else. This type of policy does not accumulate any cash value. 

⇒Can you elaborate in brief about the characteristics of term life insurance policy?

It is noteworthy to state that Term Life Insurance is a very low-cost product, covers a huge life risk at a very low premium and provides insurance even up to 100 years of age. One can buy it online very conveniently at home. The online Term policy is very cheaper and no undue influence by the offline agents due to non-engagement of middleman in online policy.

A term life insurance mainly has three factors. Such as :

1. Face value i.e. Death benefit or Sum assured;
2. Premium amount i.e. cost to the insured;
3. Term i.e. period of coverage.

You may want to read this: 

• Best Term Insurance Plans for 2018
• Best Liquid Funds-5 Best Liquid Funds for 2019

Many insurance companies sell various terms insurance plans with various combinations of the above three components.

** Main characteristics of term insurance:

• The policy term can be for one or more years;
• The premium amount can remain same of increase during the policy term;
• The policy is being taken for a specified period of time;
• If the policyholder survives during the policy term, no maturity benefit is given to him;
• Very much low-cost product as compared to traditional life insurance products;

# 2. Whole Life Insurance policy

Whole life insurance policy is a kind of life insurance policy that caters both- insurance and investment. Term life insurance policy is “pure insurance” whereas, whole life policy is “ insurance plus investment”. Therefore, whole life policy is having an add-on of investment over insurance in term life policy.

Whole life insurance policy provides life insurance coverage for the entire life of the insured persons or up to a specified age. Premium to be paid throughout the policy term is fixed. A part of the premium paid by the insured is for covering life risk and the balance amount of premium is for investing and accumulates a cash value.

⇒Can you elaborate in brief about the characteristics of a whole life insurance policy?

Since whole life policy is a combination of insurance and investment, the insurance portion pays out a predefined lump sum amount upon the death of the insured person and the investment component accumulates a cash value that the policyholder can withdraw or can obtain a loan against it. The cash component of the premium is primarily invested in stocks, bonds and money market instruments.

**Main characteristics of whole life policy(WLP):

• WLP is basically a term plan with the unlimited term;
• The maturity age for the WLP is usually 100. Though differs for male and female and across insurance companies;
• WLP offers guaranteed death benefits, guaranteed cash values and fixed annual premiums;
• In this policy the sum assured has to be paid mandatorily on death since no one is immortal;
• Unlike term insurance, the premium amount for WLP remains fixed irrespective of age bar;
• It provides life coverage for whole life for an individual rather than for a specified period;
• Premiums for this policy can be paid for a specified period or throughout whole life;
• Premiums for this WLP has two components viz; insurance and investment;
• The investment component helps in accumulating cash values which in other terms is called wealth creation;
• The policyholder can obtain loans against the accumulated wealth or cash values;
• WLP insurance is usually expensive as compared to pure term plans since death is certain to occur. Thus a hefty portion of the premiums goes towards the mortality charges;
• WLP may or may not have bonus component according to its different types of life insurance policies;

# 3. Endowment Insurance policy

Those insurance policies which have a combination of a protection(insurance) plan and a saving plan are termed as endowment insurance policies. Endowment policy in India is a very popular one. In our country, the majority of us mix up insurance with investment.

Since term policy solely focuses on risk insurance coverage and delivers or returns nothing if the policyholder survives during the policy term, therefore, to mitigate this problem the insurance companies came up with a new insurance policy named as Endowment plan which provides both for life risk coverage and investment plans. Though this policy is very much expensive, still the majority of Indians prefer to go with this insurance plans. At maturity, a lump sum amount equals to the sum assured along with the accrued bonus is paid out to the policyholder or to his nominee if the policyholder dies before the maturity.

⇒ Why Endowment plan in India is so popular and what are its main characteristics?

This policy is very much popular in India because it provides for life risk coverage during the policy term and also returns some portion of the premiums after the policy term or if the insured person dies before the maturity. People tend to buy this policy mainly because it returns some amount of the premium after the specified term and that thing helps them to meet up certain future expenses such as higher education cost, foreign travel cost, buying a car and many other needs.

Though this policy is very much expensive as compared to term life policy but the return of premium has gained this a huge popularity. Some of the Endowment plans offer money back policy i.e. return of premiums after a certain time on a regular basis along with risk coverages. This money back offer plays a vital role in meeting the different needs of the investors at different stages of life. 

**Main characteristics of Endowment policy(EP):

• This policy caters for both insurance and investment needs to some extent;
• This is very much expensive as compared to term insurance;
• Most famous life insurance policy in India;
• Policy term ranges from 5 to 30 years;
• Endowment plan is a dual advantage plan. If the policyholder does not die during the policy term, the predefined sum assured is paid out to the insured along with return of premiums upon maturity;
• This plan is best suitable for conservative and low risk appetite investors;
• Endowment policy is beneficial for those who want to receive a lump sum at the end of the policy term;
• This policy is low risk to invest as the maturity benefits are guaranteed;
• This policy ensures financial security for the loved ones;
• It also provides tax benefits to the investors;
• Return from this policy is safe since the investment is made in safe debt products;
• Under this policy, the sum assured is guaranteed but not the bonuses. So, this policy is also called Guaranteed returns with non guaranteed bonuses;
• Endowment policy is of two types depending upon its types of life insurance policies viz; with profit and without profit;
• This policy also offers money back or return of premiums at a certain interval which is popularly known as money back policies ;

# 4. Unit Linked Insurance Plan(ULIP)

ULIP  is an insurance policy that offers both protection and investment plan and helps an investor to earn a market linked returns by investing in a certain portion of the premiums in the capital market in a combination of equity and debts. This is a dual advantage plan. The premium under ULIP is bifurcated between the premium used for buying life coverage and the rest is invested in the investment assets chosen by the investor.

The returns of ULIP are dependent on the performance of the underlying assets classes. Since the investment is made in the desired fund mix as per the wish of the investor, the risk and return profile of each fund is different from each other. Different insurance companies offer different ULIPs depending upon its risk and return profile.

**Main characteristics of Unit Linked Insurance Plans(ULIP):

• ULIP is a dual advantage plan in terms of insurance and investment;
• Part of the premium goes towards life coverage and the rest part goes for investment in different asset allocation as per the choice of the investor;
• Different funds carry different risk and return profile due to various investment mix;
• ULIPs offer payment of single premium for the entire policy term;
• This plan provides both the death benefit as well as maturity benefit to the policy holder;
• At the maturity, the policy holder gets the value of the fund as on date. The value of the fund is calculated based on the number of units accumulated multiplied by the NAV as on the date;
• Different ULIPs have different payout terms based on the terms of the policy. Like, (a).the nominee may receive at the death of the insured a higher of the sum assured or fund value or (b). sum assured and the value of the fund. However, this option will have to be clearly mentioned while taking the policy;
• ULIPs also offer guaranteed bonus after maturity;
• This plan offers tax benefits for the investors;
• ULIPs offers different plans depending upon the risk appetite of the investors such as aggressive, conservative. They are primarily different from each other due to its different investment options in different asset mix;

# 5. Retirement or Pension Plans(Annuity plans)

People who are nearing retirement love retirement plans or annuity plans most. Annuity plan ensures them certain post retirement flow of income. Under a retiremnet or pension plans , contributions are to be made upto retirement or for a certain period of time. All pension plans are to be defined assured benefit plans in form of assured return on the premiums paid or guaranteed death or maturity or surrender benefit.

Annuities are of different types like immediate annuities and deferred annuities. Depending up on the varities of annuty plans, the upfront charges are deducted from the investment or premiums of the investors. One third of the accumulated corpus under deffered annuity plans can be withdrawn or commuted as lump sum.Like NPS , under retirement or pension plans the remaining(2/3rd) corpus is used to buy annuity plan that will generate regular guaranteed pension after retirement. 

There are primarily two phases of annuity one is accumulation phase and the other one is distribution phase.  

Accumulation phase:  Under this phase the investor or annuitant deposits his money into his annuity account.

Distribution phase:  In this phase the insurance company starts making monthly regular payments till the whole life of the annuitant.

⇒ Currently what types of life insurance policies in form of Retirement or Pension annuity plans are available in the market?

Based upon different features the following annuity plans are available in the market.

• Annuity for life plan;
• Joint life last survivor annuity plan;
• Increasing annuity plan;
• Life annuity with return of purchase price plan;
• Annuity guaranteed for certain periods.

You may check the following types of life insurance policies and choose the one that is best suitable for you:

• Best Term Insurance Plans that suits your needs
• How to choose best life insurance policy. Compare and decide
• Decide the best endowment plans best suited for you
• Best ULIPs with low charges. Choose as per your risk profile
• Best Retirement or pension plans best suited for you

This plan also very popular among the service holders who don’t have guaranteed pension from their employers.

Final word on types of Life Insurance Policies

Though there are fundamentally five types of life insurance policies as I discussed above, I personally prefer term plans. Since this is purely insurance products and nothing else. It is very noteworthy that those plans which offer guaranteed income or payouts the ROI will be very much lower as compared to other secured fixed interest bearing instruments. Also, they are very much expensive. My suggestion is that insurance should be perceived as coverage for life risks only. Term plan is a very low cost product.

Disclaimer:  I am neither directly nor indirectly associated with any type of products or insurance companies. My this post on types of life insurance policies are solely meant for educational and awareness purposes. My opinions are completely of my own and should not be warranted as buying recommendations.