Everybody needs life insurance; however, with the wide variety of insurance policies available, you may find choosing the right one difficult. It's really not as confusing as it seems, once you understand the basic types of life insurance policies. In order to understand life insurance, I have provided a brief description of some commonly available types of life insurance. Most of the products offered by Indian life insurers are developed and structured around these "basic" policies and are usually an extension or a combination of these policies.
Term insurance policy
A term insurance policy is a pure risk cover for a specified period of time. What this means is that the sum assured is payable only if the policyholder dies within the policy term. For instance, if a person buys Rs 2 lakh policy for 15-years, his family is entitled to the money if he dies within that 15-year period.
Term insurance is available for periods ranging from 1 year to 30 years or more. You may be able to renew the policy for a new term without regard to your health, but at a higher rate.
It is a 100 per cent risk cover. It simply means that a person pays a certain premium to protect his family against his sudden death. If the person survives for more than the period specified, he forfeits the amount payable to the family. That is why this policy comes at the lowest cost.
Permanent Life Insurance
This type of life insurance lasts for the entire life of the insured - as long as premium obligations are met. The policy owner may pay premiums as long as the insured lives, or only for a set amount of time. Permanent life policies usually build cash values in addition to providing a death benefit.
Whole Life Policy
This is permanent life insurance that usually requires premiums to be paid for the entire time the insured is living. Whole Life Policy is an insurance cover against death, irrespective of when it happens. Under this plan, the policyholder pays regular premiums until his death and after his death; the money is handed over to the family.
Single-Premium Whole Life (SPWL)
A limited pay life policy that can be paid for with only one premium is called a single premium policy.
Juvenile Insurance
Juvenile insurance is life insurance written on the life of a child. It is a means of building an insurance program for a child with low premiums and usually at standard rates.
Universal Life Insurance
This is a permanent life insurance policy that may have flexible premiums, cash values and adjustable death benefits. A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums.
Variable life insurance
Variable Life insurance is also a form of Whole Life insurance. As with Whole Life and Universal Life insurance, part of the premium payment goes toward the term life portion of the policy, part to administrative expenses and part to the investment or cash value portion of the policy. There is a major difference between the investment portion of Variable Life and that of other forms of life insurance. With Variable Life, the insured person (you) is able to choose how to invest the funds in the investment portion of the policy. The insured may select from an array of investments such as stocks, bonds and mutual funds as long as they are within the insurance companies portfolio.
Endowment Policy
Combining risk cover with financial savings, endowment policies is the most popular policies in the world of life insurance. In an Endowment Policy, the sum assured is payable even if the insured survives the policy term. If the insured dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other pure risk cover.
A pure endowment policy is also a form of financial saving, whereby if the person covered remains alive beyond the tenure of the policy, he gets back the sum assured with some other investment benefits.
Money Back Policy
These policies are structured to provide sums required as anticipated expenses (marriage, education, etc) over a stipulated period of time.
Annuities and Pension
In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against risk as well as provide money in the form of pension at regular intervals.
