It is common knowledge that Life insurance is something that every individual should have in their portfolios. Having a life cover for a sum assured can go a long way in securing your family’s financial future in case you are no longer around. While some are basic and provide just this benefit (called the death benefits), others offer various maturity benefits paid out to the policyholder if they survive the policy term.
In addition, all life insurance policies offer tax benefits under Section 80C (premiums exempt up to ₹1.5 lacs) and 10D (maturity/death benefits exempt) of the Income Tax Act of 1961 as well. Furthermore, some additional riders (critical illness riders) may provide applicable tax benefits per Section 80 D of the said act.
However, with a plethora of policy types for you to choose from, it is not always an easy decision. Therefore, here is a guide towards the same for your benefit.
What Are The Types Of Life Insurance Plans That Are Available?
You should always take time while choosing your life insurance plan to select the right one for your specific needs. Here is a brief walkthrough of the various plan/policy types:
- Term Insurance – This is one of the most prevalent forms of life insurance, where life coverage is provided to the insured person for a particular tenure or term. The death benefit or sum assured is paid out to their nominees upon their demise within the policy period. These are comparatively affordable plans, and you can use a life insurance premium calculator to understand the amount you will have to pay for specific insurance coverage. At the same time, some term insurance plans come with the return of premium In these cases, policyholders get back the premiums they have invested throughout the premium payment term at the conclusion of the policy tenure (if they survive the same) minus GST and other applicable charges.
- ULIPs – Unit-linked insurance plans combine investments and insurance. You get life insurance coverage for the policy tenure, while the scheme also invests in several types of market-linked funds for earning returns. They are suitable for long-term investments and meeting future financial goals, coming with five-year lock-in periods. You can choose your funds and switch/realign your portfolio periodically to avoid risks or earn higher returns. Note that the maturity benefits from ULIPs might be taxable as Capital Gains in case the total yearly premiums for your ULIP policies exceeds ₹2.5 lacs.
- Endowment Plans – These are specialized life insurance offerings that ensure suitable coverage for policyholders and savings options. Additionally, Participating endowment plans have the bonus and sum assured paid out to nominees if the policyholder passes away within the policy tenure. If the policyholder lives till the conclusion of the policy term, then they will still have eligibility for the maturity benefits.
- Whole Life Traditional Endowment Plans – This is an insurance plan type where the policyholder gets coverage for their lifetime, usually till the age of 100. If the policyholder meets an unfortunate death within the policy tenure, then the sum assured/death benefit is paid out to their nominees. The bonuses and other survival benefits are paid out if they survive this duration. The premiums for these types of life insurance plans may be a little higher than conventional term insurance policies.
- Child Insurance Policies – These are savings-oriented policies that enable the development of a future corpus for meeting the higher education requirements of children. The death benefit is paid out to the nominee in case of the parent’s demise (who is the policyholder) within the policy tenure. Some plans also come with premium waiver options in such instances while paying out the whole amount at the time of maturity. Some plans come with lump sum payments after the child turns 18 or even as installments after attaining maturity.
- Pension Plans – These insurance plans ensure life coverage and enable policyholders to save money for retirement. They enable one-time retirement payouts or fixed income every month as well. One can also choose payouts annually after retirement. If the insured outlives the pre-decided policy term, then a part of the retirement funds will have to be deployed in an annuity to get a monthly pension.
Which One Is More Suitable For You?
Before choosing your life insurance plan, you should keep these factors in mind (they will help you come to the right decision):
- Type of Policy – Depending on your goals and requirements, one policy may be more suitable for you than the other. For example, if you are looking to go for just basic life cover, then a term plan would be a good choice, whereas, if you are looking for a policy that will also help you fulfill some long-term goals, then you can either invest in a ULIP or an Endowment plan. Read in detail about all these, or consult a financial advisor to zero in on the correct type of life insurance policy to include in your portfolio.
- Tenure Of The Policy – The plan’s duration will depend on your age and future goals. A term insurance plan with a 30-year tenure may be more suitable for young professionals and couples, those who are the sole breadwinners of their households, and so on. Those in their 40s or 50s may look for coverage till 20 years or slightly longer. Choose the tenure based on your age and other requirements.
- Coverage Amount – Do not make the mistake of underestimating the coverage that you will require. The thumb rule is to go for coverage which is a minimum of ten times your annual earnings. You should factor inflation, future responsibilities, rising healthcare requirements, and other life goals into your calculation. You can use a free online life insurance premium calculator to determine the right amount for your needs.
Along with choosing a suitable policy, you can often supplement your policy with effective riders as well. Some popular ones include accidental death or disability, waiver of premium, critical illness coverage, and more. But again, take your time, discuss things with your family members, and then decide.