Traditional life insurance policies can be categorized based on the benefit patterns. The payment of benefits from the policy at death or maturity is used to differentiate the policies.
Term insurance is a pure risk cover product. It pays a death benefit only if the policy holder dies during the period for which one is insured. Term insurance generally offers the cheapest form of life insurance. Term life insurance provides for life insurance coverage for a specified term of years for a specified premium. The policy does not accumulate cash value. It is generally considered “pure” insurance, where the premium buys protection in the event of death and nothing else. Term insurance premiums are typically low because it only covers the risk of death and there is no investment component in it. The three key factors to be considered in term insurance are:
- Sum assured (protection or death benefit),
- Premium to be paid (cost to the insured), and
- Length of coverage (term).
Various insurance companies sell term insurance with many different combinations of these three parameters. The term can be for one or more years. The premium can remain level or increase. A policy holder insures his life for a specified term. If he dies before that specified term is over, his estate or named beneficiaries receive a pay-out. If he survives the term, there is no maturity benefit.
Endowment is a level premium plan with a savings feature. At maturity, a lump sum is paid out equal to the sum assured plus any accrued bonus. If death occurs during the term of the policy then the total amount of insurance and any bonus accrued are paid out. There are a number of products in the market that offer flexibility in choosing the term of the policy; you can choose the term from 5 to 30 years. Endowment policies are quite popular for their survival benefits. The benefits are enhanced by guaranteed and reversionary bonus that is declared on policies. Some policies pay compounded revisionary bonuses, where the bonus amount is added to the sum assured every time it is declared, and subsequent bonus is computed on the enhanced sum assured.
Money Back Insurance policies are a type of endowment policies that covers life and also assures the return of a certain per cent of the sum assured as cash payment at regular intervals. It is a savings plan with the added advantage of life cover and regular cash inflow. Since this is generally a participating plan the sum assured is paid along with the accrued bonuses. The rate of return on the policies is quite low.
Whole Life insurance
Whole Life insurance provides life insurance cover for the entire life of the insured person or up to a specified age. Premium paid is fixed through the entire period. There are variations to the whole life policy provided in the market such as shorter premium payment periods and return of premium option. The primary advantages of whole life are guaranteed death benefits; guaranteed cash values, fixed and known annual premiums. The primary disadvantages of whole life are premium inflexibility, and the internal rate of return in the policy may not be competitive with other savings alternatives. Whole Life insurance is mainly devised to create an estate for the heirs of the policy holders.
Unit Linked Insurance Plans (ULIP) ULIP is an insurance product that combines protection and investment by allowing the policy holder to earn market-linked returns by investing a portion of the premium money in various proportions in the equity and debt markets. The returns on ULIPs are linked to the performances of the markets. The premium is bifurcated into the premium used for providing the life cover and the rest is invested in the fund or mixture of funds chosen by the policy holder. Since the fund chosen has an underlying investment – either in equity or debt or a combination of the two – the fund value will reflect the performance of the underlying asset classes. Each fund has its own risk and return profile based on the asset class that the fund has invested in. The policyholder is also offered the option of choosing the fund mix based on his desired asset allocation. Different insurers have different names for these funds to reflect their return and risk characteristics. Investors are also given the option to switch between funds.
ULIPs may offer a single premium option where a lump sum premium is paid once. They may also feature limited premium payment period where the premium is paid only for a portion of the term of the policy. The sum assured will be a multiple of the annual premium. Depending upon the sum assured selected, a portion of the premium will be apportioned towards providing the risk cover and the remaining is invested in the fund of choice. The allocation rate refers to the portion of the premium that is invested. This rate tends to be low in the initial couple of years when the charges are high and subsequently rises. In a unit-linked plan investors also have the option to make additional premium payments in the form of ‘top-ups’ which again gets invested in the funds. The ULIP provides both death and maturity benefits to the holder. At the time of maturity of the plan, the policy holder will receive the value of the fund as on that date. The value of the fund will be the number of units standing to the credit of the policy holder multiplied by the net asset value of the fund as on the day. In the event the policy holder dies during the term of the policy, the beneficiary will receive either the sum assured, the higher of the fund value and the sum assured or the sum assured and the value of the fund, depending on the terms of the policy. The policy may have guaranteed bonus especially in the initial years. The additions to the benefits may also be in the form of loyalty bonus at the end of the term.
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