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Life Insurance: Choose a policy that suits your needs

This explains how some popular insurance schemes work to help you choose one
Anyone above 18 years of age, who is eligible to enter into a contract, can go for an insurance policy. Subject to certain conditions, a policy can be taken on the life of a spouse or child too.

Here are some popular policies:

1) Whole life policy

These are the simplest of policies. You pay a fixed premium every year based on your age and other factors. The insured earns interest on the policy's cash value as the years roll by and his beneficiaries get a fixed benefit after he dies. The premium is the same even in later years as it was when the policy was taken.

Whole life insurance policies are valuable as they provide long-term cover and accumulate cash values that can be used for emergencies or to meet specific objectives. The surrender value gives you an extra source of retirement money if you need it.

2) Endowment policy

An endowment life insurance policy is designed primarily to provide a benefit in the lifetime. Thus, it is more of an investment than a whole life policy.

Endowment life insurance pays the face value of the policy either at the time of death of the policyholder or at the time of maturity of the policy.

The policy is a method of accumulating capital for a specific purpose and protecting this savings programme against the investor's premature death. Many investors use endowment life insurance to fund anticipated financial needs, such as college education or retirement.

The premium of an endowment life policy is much higher than that of a whole life policy.

3) Money-back policy

It is an endowment policy. A part of the sum assured is paid to the policyholder as survival benefits at fixed intervals before the maturity date. Risk cover on the life continues for the full sum assured even after payment of survival benefits. Bonus is also calculated on the full sum assured. If the policyholder survives till the end of the policy term, the survival benefits are deducted from the maturity value.

4) Annuity scheme

In these schemes, the policyholder's regular contributions over a period of time (or a one-time contribution) accumulate to form a corpus. This corpus is used to generate a regular income that is paid to the policyholder until death, starting from the desired retirement age. Some annuity schemes have the option to pay survivors a lump sum amount upon death of the policyholder, in addition to the regular income he receives while he is alive.

6) With-profit and without-profit plans

Some insurers distribute profits among policyholders every year in the form of bonus or profit share. An insurance policy can be 'with' or 'without' this profit share. In the former, any bonus declared is allotted to the policy and is paid at the time of maturity or death of policyholder (with the contracted amount). In a 'without-profit' plan, the contracted amount is paid without any profit share.

The premium charged for a 'with-profit' policy is therefore higher than that of a 'without-profit' policy. While all those who insure under the 'with-profit' plan get a share of the profits, the profit amounts are not the same for all. This is because the profit share allotted depends on the premium paid by the policyholder. Policies of a longer duration yield higher profits to the company as compared with policies of shorter durations.

Here are some added benefits some offer:

a) Bonus:

Insurers distribute profits among policyholders every year in the form of a bonus. Bonuses are credited to the account of the policyholder and paid at the time of maturity. Bonus is declared as a certain amount per thousand of sum assured.

b) Guaranteed additions:

In some policies, insurers guarantee the bonus/profit declared as a certain amount per thousand of sum assured. This assured bonus will be credited to the policyholder irrespective of the insurer's performance and is known as guaranteed additions. Guaranteed additions will be payable at the end of the term of the policy or death of the policyholders.

c) Loyalty additions:

In some policies, over and above guaranteed additions, the insurer will declare and credit to the policyholder, an additional amount per thousand of sum assured every five years, depending on its performance. This additional amount is known as loyalty addition.

d) Accident benefits:

On payment of additional premium, a policyholder is entitled to this benefit. In case of death in an accident, the nominee will receive double the sum assured.

e) Disability benefits:

If the policyholder becomes totally and permanently disabled due to an accident, he need not pay future premiums and his policy will remain in force for the full sum assured.

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