Types of life insurance

Now that we have examined the importance of life insurance, let’s look at the different types of life insurance policies available.

Life insurance policies can be mainly differentiated on the basis of payment of the sum assured. While in some policies, the sum assured is paid to the beneficiary only in the event of death of the insured, in others the sum assured may be paid either in the event of death or upon maturity of the policy, whichever is earlier. The former are popularly known as Term Insurance policies while the latter are called ‘Endowment’ policies.

• A Term Insurance policy is life insurance in the classic sense of the term. Here’s how it works – An individual pays a specific amount as premium, at periodic intervals, for the term of the policy, against which his/her life is insured for a pre-determined amount. In the event of his/her death, during the term of the policy, the amount assured is given to his/her dependents. No premiums are payable after the death of the individual. In case the individual outlives the policy term, no money is paid back. This is the way a typical insurance contract works – The amount is paid only when the loss occurs and not under any other circumstances. The premiums in Term Insurance policies are much lower than other policies.
• endowment policies are quite popular in India. Like in Term policies, in Endowment policies too you need to pay periodic premiums for the term of the policy. In the event of death during the term of the policy, the amount assured is given to the dependents. But in case the individual survives till the maturity of the policy is reached, the entire sum assured is paid back. Thus, Endowment policies include an element of security in addition to the savings element. Hence, these are often used as tools to plan for future financial needs. Naturally, the premiums for Endowment policies are higher than those for Term policies.

Further, there are sub-categories in Endowment policies – Whole-life policy and Money-back policy.

• A Whole-life policy is similar to an Endowment policy, the difference being that the maturity period in a Whole-life policy is longer. Typically, this policy matures around the age of 80 or after a period of 40 years, whichever is later.
• In case of a Money-back policy, payments are made at regular intervals to the policyholder during the term of the policy. In the event of death during the term of the policy, the entire assured amount is paid to the nominees, irrespective of any earlier payments made.

Let’s see what one would get if one were to take an insurance policy of Rs. 10,00,000 under different policy types for a term of 20 years.

Now let’s see how much insurance the same amount of premium will get you under each of these policies. Let’s suppose you are 30 years old and have opted for a 25-year policy, the amount of insurance you will get under each of these policies is as under: