Types of Life Insurance Plans

In this blog post, we compare the various types of life-insurance policies, along with our reasons for why we typically only recommend Term-Insurance policies for our clients. 

Term Insurance

  • About: Pure Life-Cover | Provide sum assured to your beneficiary in case of your death (during the term of the insurance plan)
  • In case of death prior to maturity: Pay-out of sum assured
  • Benefits: much lower premiums than insurance + investment options 
  • Types of term insurance plans: (a) Term Insurance (b) Whole life insurance (offers coverage till 100 years of age)

Endowment Plans

  • About: Life-insurance plans that pay a lump-sum on maturity or on death | unlike term insurance plans, these provide the investor a lump-sum at the end of the plan period (which leads to a higher premium)
  • Typical Terms: 10/15/20 years
  • In case of death prior to maturity: Pay-out of sum assured + bonus
  • Types of Endowment Plans: Unit-Linked (market-linked payouts) | With Profit (Payout of sum assured + bonus) | No-Profit (sum assured paid-out) | Guaranteed (guaranteed amount + bonus)
  • Riders Available: Accidental Death | Critical Illness | Disability | Hospital Cash Benefit | Premium Waiver
  • Taxation: Maturity amount (tax-free) | Premium Payments (80c benefits)
  • Early Termination: Surrender value depends on the length of premiums paid & varies based on the insurer … Typically get between 30-75% of premium paid (depending on time contract has been in force) … Tax-deductions will be reversed if surrender within 3 years of policy starting .. Also have the option of converting to a paid-up plan (no additional premiums) if surrender value is very low

Money Back Policies

  • About: Regular Income (% of sum assured) + Maturity Value (bonus + balance sum assured)
  • Death Benefit/Maturity Benefit: Pay-out of sum assured + bonus
  • Survival Benefit: A periodic payout (typically starts a few years from the start of the policy, and is paid every few years) that is paid as long as the insured is alive
  • Typical Policy Terms: 10,15 and 20 years are the most common. However, can extend to as high as 40 or even 50 years
  • Tax Benefits: Premium Paid (sec 80 c benefits … subject to premium < 10% of sum assured) 

Unit-Linked Insurance Plans (ULIPs)

  • About: Insurance + Investment Product
  • In case of death: pay out of the sum assured + value of units
  • Investment returns: dependent of the returns of the underlying funds … The investor has an option to choose (& switch) between funds of different asset classes …