Depending on their objectives, there are at least three types of life insurance policy classifications. A life insurance policy could offer pure protection (insurance), another variant could offer protection as well as investment while some others could offer only investment. In India, life insurance has been used more for investment purposes than for protection in one's overall financial planning. Let us check to see the different types of life insurance policies available.
Term Plans
Unfortunately, in the pure insurance category, there is only one product available which is called term insurance. Term insurance policy covers only the risk of your dying. You pay premium year on year to the insurance company and if you die, the insurance amount, called the Sum Assured, is paid out to the nominees. If you survive, you don't get anything and lose the yearly premiums you paid. Since everything that you pay goes towards covering the risk on your life, term insurance is the cheapest. There is no investments clubbed with a pure term insurance plan.
There is a variant of term insurance called term-insurance-with-return-of-premium wherein the premiums you pay are returned to you at the end of the policy term. The premium for such policies will obviously be more as compared to pure term plans.
Insurance-cum-Investment Products
As the name goes, these are plans that provide insurance and along with it return on investments.
Endowment Plans
Take a term plan and add an offer of some returns on the premiums you pay – that is an endowment policy for you. If you survive the policy term, you get the sum assured plus the returns and if you die during the policy tenure, you still get the sum assured plus some returns. To get these returns along with the life cover, you end up paying more premiums. It is from these yearly premiums that the insurance company covers you for protection, invests to give you some returns and deducts administrative expenses. That makes the overall yield of an endowment plan somewhere between 4-7%. There are two types.
Without-profit endowment plans: These plans do not participate in the profits the insurance company makes each year. Apart from the sum assured, you could possibly get a loyalty bonus, which is a one time payout made in appreciation of your sticking to the insurance company.
With-profit endowment plans: These plans share the profits the insurance company makes each year with the policyholder. So they offer more returns than without-profit endowment plans and are more expensive as well – that it, for all parameters considered same, the premiums will be higher than without-profit endowment plans.
If you know at the beginning what the profit is, then you have picked up a assured returns insurance plan and this in insurance parlance is called guaranteed additions. In case the assurance is shaky or non guaranteed, it is called bonuses. Bonuses are to insurance policies what dividends are to shares. Non guaranteed. Watch out for these terminologies.
Whole-life plans
Term plans, endowment plans and money back plans offer insurance cover till a specified age, generally 70 years. Whole-life plans provide cover throughout your life. Usually, the policyholder is given an option to pay premiums till a certain age or a specified period (called maturity age). On reaching the maturity age, the policyholder has the option to continue the cover till death without paying any premium or encashing the sum assured and bonuses.
