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What are the different types of life insurance?

We all want the best of our loved ones and family members. And what can be better than financially securing the lives of your dependents and family members?

Hence, insuring your life so that your dependents are financially secure is one of the first things that you need to do. You need to take care of this step before you invest for your financial goals.

Before we explain the different life insurance policies, let us be aware of what is life insurance and its importance.

What is Life Insurance?

In simple words, life insurance is a contract between the policyholder and the insurance company. The policyholder pays a certain premium for a specific number of years and insurance provider promises to pay the sum assured to the nominee after the death of the policyholder. However, for some life insurance policies, the insurance company pays the maturity benefit to the policyholder if the insured person survives the policy term.  

Benefits of taking life insurance

Life insurance provides risk coverage to the policyholder’s family in form of monetary compensation.

With adequate life insurance coverage, the family members of the insured person can maintain their standard of living.

Life insurance cover also takes care of the financial goals of the family members, especially children’s education.

Insurance policy holder can also claim tax deduction under the section 80C of the Income Tax Act.

Types of Life Insurance

Now that you know about the different benefits of life insurance, the next step is to figure out the best type of life insurance policy.

1.  Term Insurance  

Term insurance is the cheapest and plain vanilla life insurance product. The term insurance is valid for a certain time period, say 20 years, or till the policyholder reaches a certain age. You can pay premium on a monthly, quarterly, or annual basis. However, most term insurance does not come with any cash benefits on survival i.e. the sum assured is paid to the nominee after the time of death.

However, term insurance policies offer a higher insurance cover at nominal cost. Also, the younger individuals can take this policy at a very cheap rate.

2. Endowment Plan  

Endowment Plan is very similar to term insurance and is a combination of savings and protection. Just like the term plan, the nominee will receive the sum assured after the death of the policyholder. Also, if the policyholder survives the policy date, the policyholder will receive a lump sum payout as the maturity benefit. 

However, endowment plans are expensive as it comes with a higher premium.  

3. Unit linked insurance plan (ULIP)  

ULIPs is a mix of insurance and investment. A part of your money is invested in the market and rest goes to provide insurance cover.

There are different plans under ULIPs where fund manager makes investments in equities and debt market. Policyholders can select whether they want to invest in equities, debt or a mix of both.

The life cover in ULIPs is ten times of your annual premium. E.g. if you want a life cover of Rs.1 crore, you may have to pay an annual premium of Rs.10 lakh. Hence, it may not provide sufficient life cover for people with no other life insurance cover.

Moreover, ULIPs come with a lock-in period of five years.

4. Money Back Policy 

As the name suggests, money back gives you money at regular intervals during the tenure. The money paid to the policyholder is a percentage of the sum assured of the policy.

If you survive the term, you will receive the remaining portion of the cover with the accrued bonus at the end of the policy term.

However, in case of an unfortunate event, the nominee will receive the full amount irrespective of the number of instalments that the company has already paid out. Hence, money back policies are the most expensive life insurance options.

The money back policy can help you plan for your goals such as children’s education and children’s marriage.

5. Whole Life Policy 

The validity of the other life insurance policies is valid for a specified period. Whole Life Policy is different as the policy extends up to the entire life of the policyholder.

If the policyholder pays the premium amount regularly, the insurance company will pay the sum assured to the nominee after the death of the policyholder.

It also comes with survival benefit as well. Policy holder can partially withdraw the cover with the option to borrow money against the policy.

Conclusion:

Life Insurance is an important element of any financial plan. Term insurance, endowment plan, ULIPs, Money Back Policy and Whole Life Policy are some common life insurance plans. You can consult your financial advisor to help you figure out the best life insurance policy for you.

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