Life Insurance: Different Types of Policies Available In Indian Insurance Sector
Life insurance is one of the fastest growing financial sectors in India. (India’s life insurance sector is the biggest in the world with about 3600 Lac policies which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12 to 15% over the next 5 years). As of now, there are 24 insurance companies offering different types of life insurance policies in India.
Why Life Insurance Policy: The primary reason for taking life insurance is to provide financial security for the dependants of a man in case of his death.
Objective and Tax Benefits: There are some life insurance policies which have inbuilt investment or wealth creation plans along with insurance. Also, these policies are offered as specific goal oriented products such as child plans, pension plans, retirement plans, etc. A few products also offer loan facility along with the life insurance plan. Additionally, all life insurance premiums tender tax benefits to the insured, as per the Indian Income Tax Act.
Different Types of Life Insurance Policies
Annuities and Pension Plan:
In these types of life insurance policies, the insurer agrees to pay the insured a required sum of money periodically.
- Purpose: The main purpose of an annuity plan is to protect against financial risks as well as provide money in the form of pension at regular intervals.
Endowment Insurance Policy:
It is a savings-linked insurance policy that provides cover for a specified period of time. The policyholder receives the sum assured plus bonus or profits at the end of the policy in case of his survival. In the case of the death of the policyholder before the maturity period of the policy, the beneficiary of the policy receives sum assured amount only. The premiums of the endowment policies in India are costlier than term plan and whole life insurance plan.
- Purpose: This policy is most suitable for those individuals who do not have either a savings or investing habit on a routine basis.
- Tax Benefits: The premiums paid on endowment policies are adequate for tax exemption under section 80C of Indian Income Tax Act.
Money-Back Policy:
Under this policy, certain percentage or portion of the sum assured is returned back to the insured, in the case of survival of the policyholder. In the event of death during the period of the policy, the nominee of the policy gets death benefits equal to the sum assured and accumulated cash benefits. The premiums of money-back policy are very high as compared to that of term plan.
- Duration: The money-back policies are offered for a fixed period of time, as a rule, up to 25 years and the policyholder pays a fixed premium periodically (annually, quarterly, monthly) during the policy period.
- Tax Benefits: The premiums paid on money-back policies are entitled to tax exemption under section 80C of Income Tax Act in India.
Term Plan:
Term insurance offers financial safety for the family of the insured person in case of his/her sudden death. It is the least expensive life insurance policy that offers high sum assured at a much lower premium price. This policy provides insurance cover for a particular timeframe. In India, almost all insurance companies offer term plan with different names.
- Duration: The term plan will be usually available for 5, 10, 15, 20 or 30 years.
- Life Cover: The policyholder does not get life cover at the end of the term policy.
- Tax Benefit: In India premium paid on term insurance plan is eligible for tax exemption under section 80C of Income Tax Act in India.
ULIP (Unit Linked Insurance Plan):
It is an exceptional sort of investment plan combined with life insurance and serves as an investment-linked insurance policy. The policy consists of investment mix where some part of the premium can go into either 100 percent equity funds or 100 percent debt funds or a combination of both. Here, the policyholder gets an option of selecting funds or he/she can pick the tactic of investing. The policyholder can likewise have the choice of changing from one fund to other funds. The returns from ULIP plans are based on the performance of the funds.
- Drawback: The main drawback of Unit Link Plans is that it contains high charges (commissions) for managing funds.
- Tax Benefits: ULIPs offer tax benefits at the time of investment as well as on maturity. Tax Benefit on investment – money invested in ULIP can be claimed as a deduction under section 80C (life insurance) or 80CCC (pension). A maximum of Rs 1.5 Lac is allowed under section 80C/ 80CCC.
Whole Life Insurance Policy:
As the name suggests, the policy covers risk for the whole life of the policyholder. This policy continues as long as the policyholder is alive. The policy offers only death benefits to the nominee or beneficiary in case of the demise of the insured. This policy does not offer any survival benefits.
- Purpose: The whole life insurance policy is mainly taken to create wealth for the beneficiaries of the policyholders, as this policy offers payment of bonus plus the sum assured in the event of the death of the policyholder. The premiums for whole life insurance are again costlier than term plans.
- Duration: The policyholder pays a premium for (1) whole life or (2) till some age or (3) for some period of 35 to 40 years based on the terms and conditions of the policy.
- Tax Benefits: The premium paid under insurance policies is qualified for tax exemption under section 80C of Income Tax Act in India.
Definitions:
Sum Assured: Sum assured is the guaranteed amount the policyholder will receive. This is also known as the cover or the coverage amount and is the total amount for which an individual is insured.
Insurer: A person or company that guarantees an insurance risk.
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