6 Life Insurance Types: Term, Whole Life, ULIP, Endowment, MoneyBack, Annuity
Ramchandra got married in 2015 and didn’t feel the need to buy any insurance policy before marriage as he didn’t have any dependents. His father is still working and has taken few life insurance policies and Ramchandra was nominee in one of these. But post marriage, he was seriously looking to buy life insurance policy on his name with wife as nominee. Since his wife was not working, he wanted to secure future of his family in his absence. Health policy was his next objective.
He was contacted by various life insurance agents & also searched internet. But finally he got confused with multiple categories/types of life policies available in the market. This problem is faced by many individuals and they end up buying policy which in future may or may not benefit them and not meet their financial objective. And thus an incorrect way of investing/spending hard earned money. Check out cheapest life insurance policies in India at just Rs. 330 annual premium.
So let’s understand different types of life insurance policies and their objective.
- Term Life: The main objective is to provide risk cover for a specific period of time. There is no option for savings or making profit from such policy. In case of death of the insured person, the pre-fixed sum assured amount is paid out to the beneficiary. Otherwise no payments are made. Since basically term life purely provides life cover and because of this reason premium amount is cheaper compared to other types mentioned below in this article. Get details on Pradhan Mantri Jeevan Jyoti Bima Yojana offering life policies at Rs 330 per year.
- Whole Life: It works on the same line as of term life. But it covers the policy holder for his/her entire life whereas term plan covers for a pre-fixed time period.
- Endowment Plans: Along with the risk cover, this policy offers financial savings. So basically twin benefits – lump sum assured in case of death during the policy term and upon survival, premiums paid are received in return in addition to returns like bonuses. Sum assured is paid to the nominee as declared by the insured while buying the policy. Since it offers higher benefits, the premiums and charges are on a higher side.
- Unit Linked Insurance Plans: Also called as ULIP (short form) and is a variant of endowment plan. They too offer twin benefits to the insured – life cover and wealth creation options. While buying ULIP, you can choose whether money paid in the form of premium should be invested in equity markets or in debt market. This decision is very critical as risk is involved especially in equities as they are dependant on multiple factors which are not in anyone’s control. Whereas debt offers steady returns, equities have offered higher returns historically. So ULIPs are best recommended when individual is planning for long term such as marriage of children or their education and for their personal usage such as retirement.
- Money Back: It is similar to endowment policy and offers life insurance and wealth creation opportunity. Investor gets periodic payment at pre-fixed intervals during the course of the policy term. This payment is paid from the portion of the sum assured. If the policy holder survives during the term, the remaining balance of the sum assured is paid. In an event of death, nominee gets the full sum assured.
- Annuities and pension plans: The main purpose of this policy totally differs from the above listed life insurance policy types and is designed to provide steady cash flow during the golden years of the retirement. Insurance company in this case, agrees to pay the policy holder a pre-fixed sum of money in lump sum or periodically (monthly, quarterly, annually or in one go) when the insured retires. So basically this policy is worth mainly for people wanting to secure their retirement and not depending on others for their day to day needs. Investor in this case has to pay lump sum amount to the insurance company. Remember gone are those lucky days when pension was guaranteed to government employees. For individuals working in private organisations and looking for regular income, annuity plans are worth recommended.
Read – when not to buy life insurance policy.
So opt term plan when protection is what you want, go for endowment plans if saving is your objective. And finally choose ULIPs when wealth creation is your goal.
Depending on your financial goal, choosing a life or any other policy is very critical. You should give a deep thought before buying. Delay of few days in selection is much better than buying something which is worthless. Also remember that, policy holder can also change nominee during the policy term irrespective of the life policy or its type subject to certain terms and conditions.