Different types of life insurance policies in india

Depending on their objectives, there are at least three types of life insurance policy classifications.

A life insurance policy could offer pure protection (insurance), another variant could offer protection as well as investment while some others could offer only investment. In India, life insurance has been used more for investment purposes than for protection in one’s overall financial planning.

Let us check to see the different types of life insurance policies in India.

Pure Insurance Products

Term Plans

Unfortunately, in the pure insurance category, there is only one product available which is called term insurance. Term insurance policy covers only the risk of your dying. You pay premium year on year to the insurance company and if you die, the insurance amount, called the Sum Assured, is paid out to the nominees. If you survive, you don’t get anything and lose the yearly premiums you paid.

Since everything that you pay goes towards covering the risk on your life, term insurance is the cheapest.  There is no investments clubbed with a pure term insurance plan.

There is a variant of term insurance called term-insurance-with-return-of-premium wherein the premiums you pay are returned to you at the end of the policy term. The premium for such policies will obviously be more as compared to pure term plans.

Insurance-cum-Investment Products

As the name goes, these are plans that provide insurance and along with it return on investments.

Endowment Plans

Take a term plan and add an offer of some returns on the premiums you pay – that is an endowment policy for you. If you survive the policy term, you get the sum assured plus the returns and if you die during the policy tenure, you still get the sum assured plus some returns. To get these returns along with the life cover, you end up paying more premium.

It is from these yearly premiums that the insurance company covers you for protection, invests to give you some returns and deducts administrative expenses. That makes the overall yield of an endowment plan somewhere between 4-7%. There are two types.

Without-profit endowment plans : These plans do not participate in  the profits the insurance company makes each year. Apart from the sum assured, you could possibly get a loyalty bonus, which is a one time payout made in appreciation of your sticking to the insurance company.

With-profit endowment plans : These plans share the profits the insurance company makes each year with the policyholder.  So they offer more returns than without-profit endowment plans and are more expensive as well – that it, for all parameters considered same, the premiums will be higher than without-profit endowment plans.

If you know at the beginning what the profit is, then you have picked up a assured returns insurance plan and this in insurance parlance is called guaranteed additions. In case the assurance is shaky or non guaranteed, it is called bonuses. Bonuses are to insurance policies what dividends are to shares. Non guaranteed. Watch out for these terminologies.

Money-back plans

Money-back plans are variants of endowment plans with one difference – the payout can be staggered through the policy term.  Some part of the sum assured is returned to the policy holder at periodic intervals through the policy tenure. In case of death, the full sum assured is paid out irrespective of the payouts already made.

Bonus is also calculated on the full sum assured and not the balance money left. Because of these two reasons, premiums on money-back plans are higher than endowment plans.

Whole-life plans

Term plans, endowment plans and money back plans offer insurance cover till a specified age, generally 70 years. Whole-life plans provide cover throughout your life. Usually, the policyholder is given an option to pay premiums till a certain age or a specified period (called maturity age).

On reaching the maturity age, the policyholder has the option to continue the cover till death without paying any premium or  encashing the sum assured and bonuses.

Unit-linked insurance plans (ULIP)

In all the above mentioned insurance-cum-investment products, you have no say on where your money is invested. To keep your money safe, most of these products will invest in debt. Unit-linked insurance plans give you greater control on where your premium can be invested.

Think of them like mutual funds. The annual premium you pay can be invested in various types of  funds that invest in debt and equity in a proportion that suits all types of investors. You can switch from one fund plan to another freely and you can also monitor the performance of your plan easily.

There are various charges to be aware of in a ULIP and is suitable for those who understand the stock market well. Of late, ULIPs qualified as the most abused insurance plan.

Investment Products

Pension Plans

Pension plans are investment options that let you set up an income stream in your post retirement years by giving away your savings to an insurance company who invests it on your behalf for a fee. The returns you get depends on a host of factors like how much you contributed and when is it that you started, the number of years when you want the money to come to you and at what age that starts.

When you buy the pension plan contract, if the payment to you (called annuity) starts immediately it is called an immediate annuity contract. However, if  the payout start after some years of deferment, it is called a deferred annuity.

Last Word

Buying life insurance should be simple but has been made complex by the different types of life insurance polices available and heavy mis-selling by insurance agents. The investor should check to see what suits his overall requirement and then buy one with a clear focus.

In India, life insurance is never bought, it is sold.