Investing in a comprehensive life insurance policy is considered to be an effective and far-sighted financial move in the current times. The approach guarantees the policybuyers’ loved ones a safety blanket in the face of their unexpected demise or accident, while also extending provision to accumulate wealth to help meet future goals and obligations. Traditionally, insurance policies were not counted among crucial financial tools, leading to low penetration rates in the market. Similarly, the only type of insurance most encountered were the basic savings plans, which were promoted by friends, parents, or known insurance agents. However, in the last year years, more individuals have recognized the importance of life insurance and its role in ensuring financial security. With growing awareness, individuals are also becoming aware of the life insurance types and their scope. As a result, it is rapidly becoming an essential component in the financial portfolio to help individuals safeguard their financial future.
That said, let’s explore the different life insurance types and their features to understand which ones are most suitable in different situations.
Life Insurance Types and Their Scope
These are some of the most commonly known life insurance types –
Term Insurance
Typically, known as a term plan, this insurance is one of the most common types of life insurance policy. A comprehensive term insurance policy provides the policyholder with financial security to protect their loved ones for a given period. In exchange for robust coverage or sum assured, individuals have to pay a prefixed amount premium at regular intervals. This premium is based on their financial standing, coverage requirements, age, and obligations. In the event of an unforeseen situation that leads to the death of the policyholder, the insurance company pays the beneficiary of the policy the sum assured. The substantial amount helps them tide over their existing financial obligations and meet their future liabilities without straining their savings or finances.
Critical Illness Cover
Critical illness insurance typically covers only certain diseases mentioned in the policy document. When the policyholder gets diagnosed during the policy term with a critical illness, the insurance company pays them the coverage to seek medical treatment. Typically, insurance companies include cardiac disorders, cancer, respiratory disorders, etc., under critical illness coverage. However, the list of the same may vary among insurers. Notably, to ensure the claim gets approved, individuals must be honest about their preexisting health conditions when buying the plan. Pre-existing diseases might increase the policy premium but will ensure that the policy buyer’s claim gets approved during a medical emergency. In addition, one should check the company’s life insurance claim settlement ratio to gain an idea about the insurer’s track of settling cases.
Investment Plans
Typically, there are two types of investment plans:
Unit-Linked Insurance Plan (ULIP)
This insurance type extends investment and protection components to policyholders. Based on the risk-taking capacity of the policyholder, they can decide to park their money into multiple investment instruments, such as debt, equity, and hybrid funds. Since ULIPs are market-linked investment instruments, individuals should weigh their risk-taking level before investing across different units.
In addition, ULIPs extend the flexibility to withdraw funds and switch funds. This allows individuals to better account for their evolving needs and milestones of life and helps allocate resources to options that generate better returns.
Endowment plans
Unlike unit-linked insurance plans, endowment plans provide accountholders with guaranteed returns. These plans are designed to help fulfill individual’s both insurance and investment needs. Typically, the endowment plan premiums get routed in two ways. One part gets invested and the other part is directed towards the death benefit of the scheme. In the unforeseen event of the policyholder’s death, the beneficiary of the policy receives the death death. On the other hand, if the policyholder survives the policy period, they are entitled to receive the maturity benefit. This aspect of the endowment plan makes it somewhat similar to savings plans and is often recommended to salaried professionals who wish to save up for their future and secure the future of their dependents.
Child Insurance Plans
One of the best reasons to park money in ULIPs or guaranteed returns plans is to build a corpus for one’s children. Typically child plans are linked to a financial goal for a child’s future milestones and help accumulate wealth to achieve them with ease. Usually, most child plans allow individuals to pre-define stages when they could need money, say for a child’s college admission, higher education, etc. These plans also have an insurance component, which ensures that the child’s future financial obligations are taken care of even in the absence of the parent’s unforeseen demise.
Retirement Plans
This is typically a long-term option that enables individuals to mobilize a substantial amount of money to build a safety net for their retirement. Usually, retirement plans offer guaranteed returns and their main focus is capital protection so that the retired individual can lead an independent and stress-free life. Retirement plans often offer the flexibility to individuals to choose either a lumpsum payout or a steady income source.
Group Insurance Plans
A group life insurance is designed to cover members of a group under a single plan. Typically, these plans are availed by entrepreneurs or companies by their employees. These plans can also be availed by other groups such as groups of lawyers, doctors, and credit society members. Today, most companies tend to extend insurance perks to employees through these plans as grouping individuals often makes firms eligible to receive lower premium rates.
Microinsurance plans
These insurance plans are designed for those who belong to the economically weaker sections and typically offer a sum assured of Rs. 50000 or less. Microinsurance plan category was designed by the Insurance Regulatory and Development Authority of India to increase the penetration rate of insurance among these sections.
Insurance providers often collaborate with non-government organizations, microfinance institutions, and self-help groups that act as intermediaries on behalf of economically disadvantaged individuals.
Individuals can choose any of these plans to safeguard their financial future and also to build a safety net for their dependents. However, before they go for a plan it is recommended to learn about their features in detail to decide if it’s a match for their needs.
