The BuyT Desk
Before deciding upon which life insurance policy is best suited for you, it is important to understand your need for life insurance and the different types of life insurance policies. There are two broad categories of life insurance policies – term insurance and permanent (whole life) insurance. As the name suggests, term insurance is valid for a specified period, while permanent insurance is valid until the end of life.
Term life insurance: This type of life insurance is the most affordable. Its sole purpose is to provide financial security to the family members of the insured person. Term life insurance is done for a specific time (term). If the insured person dies during this term then the beneficiary receives the death benefit. However, there is no survival benefit at the end of the term.
Pros:
-
Affordable premium.
-
The sum assured is much higher than the premium paid.
-
The usual term is 30-35 years, and thus, when you buy this policy at the beginning of your career its coverage will cover years when age-related ailments begin.
-
There is no penalty to be paid in case you surrender the policy. If you do not pay the premium, the policy will lapse.
Cons:
-
There is no cash value associated with term life insurance.
-
After depositing a premium for so many years, you do not receive any payout at end of the term.
-
The coverage is available only for the specific term and not the whole life.
As a remedy to the shortcomings of term life insurance, you can opt for a convertible term life insurance plan. In this plan, you can switch the term life insurance to an endowment or whole life insurance as per your need. Even after the conversion, the premium of the policy remains the same.
Whole life insurance: This kind of life insurance offers life protection cover until the end of life i.e. 100 years of age. It provides a death benefit and bonus to the nominee in the case of the demise of the policyholder. If the policyholder outlives the term of the policy then he receives maturity benefit. The policyholder decides the sum assured amount for whole life insurance. A higher premium is paid for this life insurance policy.
Pros:
-
The premium is paid for the initial years of the policy (10-15 years) but life protection coverage is available for the entire life.
-
The premium determined at the beginning of the policy remains the same throughout.
-
Maturity and survival benefits are provided.
-
Instead of taking maturity benefit as a single lump-sum payment, you can opt for receiving it as an income periodically.
-
If you do not default in the premium payment and the policy has been completed for 3 years, then you can avail loan against the policy.
Cons:
-
High premium.
-
A surrender charge is levied in case you surrender the policy before maturity.
Endowment life insurance: It is not only an insurance plan but also a savings plan. It helps the policyholder to save money regularly that is received as a lump sum at the end of the policy’s term. Unlike the term life insurance, the payout is given if the policyholder survives the tenure of the policy. The premium is definitely higher than term life insurance.
Pros:
-
It provides the opportunity to save for long-term financial goals like child’s marriage or retirement.
-
It is safer than ULIP because an amount of the premium is saved for the future and not invested in equity.
Cons:
-
High premium.
Money-back life insurance policy: It is the most beneficial policy to fulfill your financial commitments that crop up at different life intervals, for example, child’s education, child’s marriage, medical emergency. In this policy, you receive some money regularly from the sum assured. When the policy lapses then the remaining portion of the sum assured is paid. In the case of the demise of the policyholder during the policy tenure, the beneficiary is paid the full sum assured despite earlier interim payments.
Pros:
-
A regular stream of money in addition to life protection cover.
Cons:
-
Most expensive life insurance policy.
ULIP (Unit-linked Insurance Policy): This policy provides insurance along with investment. A percentage of the sum assured is invested in either equity or debt instruments. At the end of the policy tenure, a financial corpus gets accumulated. This can help you fulfill long-term financial goals.
Pros:
-
Accumulation of financial corpus.
-
Flexibility to decide whether to invest in equity or debt funds.
-
Exposure to market-linked investment for a newbie investor.
Cons:
-
Associated risk as the investment is market-linked.
Now you have a broad idea about the different life insurance plans available in the market. Next, analyze your requirement and then choose the best fit. Take the example of a lock and key. Here, your requirement is lock and you have to decide which policy is the key.
Before we go ahead, do remember that a certified financial consultant/planner is the correct person to help you seek the key for your lock. Always consult him before buying your life insurance policy.
Scenario 1: You want an insurance plan, which is affordable and provides good financial security to your family in your absence.
Term life insurance has a low premium yet provides a high amount of sum assured.
Scenario 2: Along with life insurance cover, you wish to create a financial corpus for mid to long-term financial goals.
Endowment or whole life insurance plans are good options to create a corpus for the future along with life insurance cover. In both these plans, your saved money will be risk-free.
Scenario 3: You want a life insurance cover for your entire life.
A whole life insurance plan provides coverage until 100 years of age.
Scenario 4: You want to have a taste of market-linked investments.
ULIP gives you a chance to understand the workings of the equity market. Also, in case later to wish to keep your investment safe, you can easily switch to a hybrid or debt fund.
Scenario 5: You feel that your requirement for life insurance cover or financial goals will become different in the future.
Simply, opt for a convertible life insurance policy and switch to a different life insurance plan as per your need in the future.
We hope you will utilize this information and take a well-researched and well-thought decision while choosing your life insurance policy. Again, always consult a certified financial consultant before making any financial decisions.
