If insuring your family is your aim, it is better to opt for a pure online term policy which charges a lower premium. Other plans which have an investment component may be expensive
A life insurance policy should be taken primarily to protect your family and provide for them in case of your death.
Traditionally, this has been the purpose and meaning of purchasing a life insurance policy. However, over the years, insurance companies have come with several products under the life insurance category, some of which combine the investment angle as well. But are these different types of life insurance policies suitable for you? Let us first understand the various types of life insurance policies:
Pure Term Insurance Policy: This is a pure risk cover policy, which has no investment component. The policy holder pays a regular premium for a specified term. During the term of the policy, if the policy holder dies, the beneficiary gets the Sum Assured amount. However, if the policy holder survives the term of the policy, the premium is not returned, i.e. there is no survival benefit. The premium paid in this type of policy is the lowest in the life insurance category for the same amount of life cover.
Whole Life Policy: As the name suggest, a Whole Life Policy covers the life of the insured throughout his life term. This means there is no specific policy term. When the policy holder dies, the amount of Sum Assured is paid to the beneficiary. Premiums are paid on a regular basis till death. In some plans, if you reach the age of 100, the Sum Assured is paid to you.
Endowment Policy: In an Endowment Policy, the policy holder pays a regular premium for a specific term. At the end of the term, a lumpsum amount is paid to the policy holder if he survives. This includes any accumulated bonus under the plan. If on the other hand, the policy holder dies during the term of the policy, the beneficiary receives the Sum Assured amount. In addition to the basic endowment, some endowment policies give benefits such as double endowment, critical illness endowment or marriage/education endowment.
Money Back Policy: A Money Back policy pays back a regular amount in periodic intervals to the policy holder during the term of the policy. This is a percentage of the Sum Assured amount. At the end of the term, if the policy holder is alive, the remaining amount of Sum Assured is paid out. However, in case of death during the policy term, the full Sum Assured amount is paid to the beneficiary.
ULIP: A Unit Linked Insurance Plan is an investment cum insurance plan, wherein the premium paid is invested in different securities. The residual premium (net of charges) can be invested in all equity, all debt or hybrid funds. The returns of the policy vary depending on the option chosen. Since this is insurance cum investment plan, the premium charged is comparatively higher for the same life cover under a pure term insurance plan. Moreover, generally, this type of policy entails high fees and charges during the initial years in the form of premium allocation charges, mortality charges, fund management charges, etc. On maturity, the units accumulated can be redeemed at the prevailing NAVs. In case of death during the policy term, the beneficiary receives the Sum Assured amount.
Annuity Plan or Pension Policy: In this form of insurance, the policy holder purchases an annuity plan by paying a lumpsum or paying regular premiums till retirement. On retirement, the policy holder receives a fixed annuity amount. There are different types of pension plans. The annuity payable differs depending on the type chosen.
You can buy insurance plans offline or online. Pure Term Plans bought online are comparatively cheaper. Similarly, one can choose regular yearly premium option or upfront single premium option.
Which Life Insurance Policy should you buy?
If insuring your loved ones is your goal, it is always recommended to opt for an online pure term insurance as the premium is comparatively lower. A Whole Life policy also works on the same lines, but the premium may be higher. The other options which include a survival benefit have an investment component. These plans usually charge higher premiums, have higher fees and charges and hence normally include lower Sum Assured, comparatively. Moreover, the returns delivered by these policies may be low due to high charges. If investing for your goals is your purpose, then you should first take an online term plan to meet your family’s financial needs in your absence. Post this you can start a long term Systematic Investment Plan in a diversified equity mutual fund (depending on your risk profile). This is likely to generate higher returns for you.
Smitha Hari is the Blog Editor at www.gettingyourich.com and can be reached at firstname.lastname@example.org.