6 Life Insurance Types in India – All You Need to Know
A life insurance policy is a contract between you and the
insurance provider. In this contract, you agree to pay a predetermined premium,
upfront or on a recurrent basis. And the insurer agrees to provide a financial
cover for your life. That means, in case of an unfortunate event before the
policy termination date, the company will pay your nominee a lump-sum amount.
Therefore, if your family depends on you for their upkeep, life
insurance is essential to safeguard them against financial setbacks, should
they lose the support of your income.
However, the different life insurance types available in India
might confuse you about which one to choose. Here’s a rundown on the features
and benefits of each to help you make an informed choice.
What are the different types of life insurance in India?
There are six major life insurance types that cater to
diverse needs. These include:
1. Term life
3. Unit Linked Insurance Plan (ULIP)
Let’s look into the details the different type of life insurance policy plans.
What is a term life insurance policy?
Term life insurance is a pure protection plan. It lasts for a
pre-specified period. In case of any eventuality during this period, your
nominee receives the payout. However, if you survive the policy term, you won’t
receive any payment.
Thus, you might think of it as a waste of your hard-earned money.
But you never know what turn it will take tomorrow. And the recent COVID-19
pandemic has taught us how fragile human life is, how powerless we are against
the ravages of nature and uncertainties of life.
Hence, it is always prudent to stay prepared. Your loved ones look
to you for their wellbeing. It is up to you to protect them from money-related
hardships arising from unforeseen events. And a term life insurance policy helps
you achieve just that.
Moreover, having no investment component, your entire premium goes
towards securing your life cover. Thus, you can buy a life insurance term
plan for very affordable prices. Even life coverage as high as Rs. 1
crore come for premiums less than Rs. 500 per month. Thus, you can get the sum
assured your family might need to sustain them in your absence.
Also, you can buy additional covers called riders, for a minimal
hike in your premium, along with most term insurance plans. Accident benefit
riders provide extra payouts in case of any fatality or disability due to
accidents. Critical illness riders provide funds to meet expensive healthcare
costs arising out of life-threatening health conditions covered under the plan.
Therefore, a term life insurance policy
is a crucial tool that you must include in your financial plan.
What is endowment plan?
An endowment plan combines insurance with investment. In case of
any unwanted event during the policy tenure, your nominee receives the sum
assured. However, in the happy event that you survive the term, you will
receive the maturity benefits. These proceeds are usually a sum-total of the
premiums you paid throughout the policy tenure along with some bonuses provided
by the insurer.
Bonuses are subject to the profits the insurance company makes in
a financial year. The insurers pool the premiums paid by policyholders and
invest the amount in various avenues. If there is a profit, they share a
percentage of the revenue with the policyholders. However, some endowment plans
belong under the non-participating category. In these plans, insurers do not
provide bonuses. They do, in most cases, offer some additions to your invested
amount, helping your wealth grow.
Nevertheless, irrespective of bonuses, these plans guarantee a sum
assured when you buy the policy. Hence, in traditional endowment plans, your
capital stays secure. And over time, with systematic investments, you can build
sufficient corpus to finance your long-term life goals like buying property,
paying for children’s higher education, going on a foreign trip, and more.
Moreover, you can take loans against your endowment insurance
policy. Hence, these types of life insurance policies help you
if you face a cash crunch.
What is meant by unit linked insurance plan?
ULIPs let you venture into the capital market, while at the same
time, providing the security of life insurance.
The insurer invests a part of your premium in different stocks and
bonds. You can choose the asset classes based on your ability and inclination
to take risks with your money. If you are young or have lesser liabilities, you
can choose to be aggressive in your investment style and place your money in
equities. Though these fund types are more susceptible to market volatilities,
these also provide the highest odds of substantial returns on investment.
If you are aged or prefer a conservative investment approach, you
can invest in debt funds like government bonds. These offer lower returns but
are generally more stable even when the market crashes. Or you can choose to enjoy
the best of both worlds with hybrid bond types that mix the benefits of both.
ULIPs also offer you the option to switch your money among
different asset types. When the market is booming, you can place your funds in
equities and reap a tidy profit. If you anticipate a downswing, you can shift
over to debt funds and ride out the unstable phase. Thus, ULIPs minimize the
risks of capital market investments.
However, these come with 5-year lock-in periods. During this time,
you cannot withdraw any money from your funds. If you choose to surrender the
policy, you will not get your money back before the lock-in period is over.
Also, there will be penalties for premature surrender, hampering your returns.
ULIPs are actually for long-term investments. Over time, the
effect of market swings levels out, helping you gain a lot. Also, ULIPs come
with some charges, but these pay off when spread over a long tenure. Moreover,
the insurers often offer financial incentives for staying invested, boosting
your income from the funds.
What is a child insurance plan?
The purpose of a child insurance plan is to build capital for the
milestones in your child’s life. Occasions like college admissions, higher
education overseas, marriage, and such key events of life require funds. And a
child plan provides the necessary resources.
Essentially, these are varieties of endowment plans. You buy a
policy with your child as the nominee when they are young. Once they reach 18
years of age, the policy provides payouts. It can be a one-time payment or
However, if something unfortunate occurs during the policy period,
the insurer pays the sum assured to your family. It helps your child to
continue their education and pursue their career goals even if your income can
no longer pay the necessary fees.
Most of these policies waive off future premiums after the
unwanted event. The insurer pays the premiums, and at the end of the policy
period, your beneficiary receives the maturity value. It can fund your child’s
plans, helping them succeed even in the face of adversities.
What is a money-back type of life insurance plan?
A money-back policy is another variant of endowment plans that
provides periodic payouts over the policy term. These payouts are deducted from
your sum assured. Your capital increases through bonuses and other financial
rewards the insurer offers from time to time. And at maturity, you get the
balance sum assured along with accrued dividends if any.
However, if an unanticipated event occurs during the policy term,
your nominee gets the sum assured.
Therefore, the advantage of money-back plans arises from the
liquidity it provides. You can use the income to fund short-term financial
goals like repayment of loans, going on a dream vacation, or more.
What is a retirement plan?
These insurance plans are again, a variety of endowment plans or
ULIPs, where the goal is to create a corpus for your old-age expenses.
Considering the relentless march of inflation, by the time you
retire, the cost of everyday items will skyrocket. To mention nothing of
quality healthcare costs, which are already too high. But old age comes with
health complications. You will need funds to secure adequate medical
Retirement plans help you create an alternate source of income
once your regular paycheck stops. Over the policy tenure, you amass a
considerable fund. You can use it to buy an annuity – a steady income for life.
You can also use the payout to invest in other revenue sources, creating
Thus, these policies provide financial independence in your golden
years, meeting your living costs, and giving you the freedom to pursue your
life-long aspirations. And in your absence, your spouse or other financial
dependents receives the policy benefits, helping them meet their living
What is the best life insurance policy for your needs?
Each of the different types of life insurance serves different
purposes. The one that will be ideal for you depends on your individual needs.
However, to ensure your insurance cover is a viable one, you need to consider
the following parameters:
Affordability: Different insurers provide different terms and
conditions. Research online to find the policy that offers the coverage you
want at the premiums that fit your budget.
Insurer’s credibility: Look for a claim settlement ratio (CSR)
over 95%. A high CSR indicates a robust track-record of settling past claims
from policyholders. Hence, you can rely on the insurer with such a high CSR for
disbursing the sum assured in your family’ hours of need.
Insurer’s financial standing: The Insurance Regulatory and
Development Authority of India (IRDAI) recommend investing with insurers with a
solvency ratio over 1.5. It is a marker of the insurer’s financial foothold. A
strong financial background ensures the insurance provider’s capacity to settle
Now that you are familiar with the different types of life insurance policy available in the market, you can choose the one that best matches your needs. It will secure your family against financial distress due to exigencies, and help you build wealth for your long-term financial goals.