Types of life insurance in India – Forbes Advisor INDIA
Buying a life insurance policy is one of the best and most responsible decisions you can make. A life insurance policy ensures that your loved ones are not left without a financial support system in the event of their death. It can also help you accumulate wealth to fulfill your dreams and aspirations and those of your loved ones.
Historically, insurance has never been considered an important financial instrument and therefore penetration levels have remained extremely low. Current levels of life insurance penetration as a percentage of premiums to GDP in India stand at just 3.2%. Insurance awareness tells a similar story. Traditionally, most people were only exposed to savings plans, which were usually purchased by their parents through insurance agents usually from their social/family circle.
Awareness of life insurance has seen a significant increase over the past few years as people have begun to realize the need for financial protection. Insurance is increasingly seen as an essential component of its financial portfolio. Technology and digitization have also penetrated all aspects of life in recent years, leading to increased access. All of this has led to a democratization of the insurance industry, with exposure to information higher than ever.
It’s clear how essential policy comparison websites, user reviews and YouTube videos have become in simplifying insurance for customers. Buying life insurance is one of the most important decisions of your life. With a plethora of product offerings to choose from, the process can become overwhelming.
So here’s a reminder, especially for first-time buyers, of the different types of life insurance policies available on the market.
1. Term insurance
Term insurance, or a term plan, is the most basic form of life insurance policy and is usually what people mean when they hear or say “life insurance.” Term insurance provides financial security to your loved ones at a pre-determined annual/monthly rate called a premium. If an unfortunate incident results in your death, the life insurer pays a certain amount of money, called the “sum insured” (also predetermined) to your beneficiary.
2. Serious illness
Critical illness insurance covers specific illnesses, which are mentioned in your policy document and also communicated to you at the time of purchase. Upon diagnosis of a serious illness, the insurer pays a lump sum for medical expenses. Although the illnesses covered may be different depending on the insurance provider, most companies include cancer and heart disease.
3. Investment plans
Generally, there are two types of investment plans:
A) Unit-Linked Insurance Scheme (ULIPS)
ULIPS have both an investment and a protection component. Depending on the degree to which you are willing to take risks, ULIPs offer several funds in which to invest money. These can be equities, debt or hybrid funds. ULIPs also take into account that your needs change over the course of your life and therefore offer options such as switching funds and partial withdrawals.
B) Staffing plans
Unlike ULIPs, which are market-linked, endowment plans offer guaranteed returns. Endowment plans meet both investment and insurance needs. The premium you pay in an endowment plan is split in two ways. One part goes towards the death benefit and the other is invested. When you die, your beneficiary receives the death benefit.
If you survive the period of insurance, that is, when the policy expires, you receive the accumulated maturity benefit in the account of the money you invested. Endowment plans can be considered savings plans and are highly recommended for salaried people who might be willing to save for future expenses like children’s education.
4. Diets for children
A great reason to invest in guaranteed return plans or ULIP is to build a financial corpus for your children. These plans can be linked to your financial goals and help you accumulate and grow your wealth for several medium and long-term goals, such as raising children. They give you the freedom to predefine stages when you anticipate needing the funds. Children’s plans include an insurance component so that your child’s finances are taken care of in the event of your unfortunate death.
5. Pension plans
A retirement plan is a long-term instrument that allows you to save a large sum of money so that your financial needs during your retirement years are taken care of. Typically, guaranteed plans can also be tied to such a goal and help you accumulate enough funds to get you through your retirement years. At maturity, you can choose to have a stable source of income or a lump sum payment.
6. Group insurance plans
A group life insurance plan covers all members of a group under one policy. These types of plans are usually used by business owners or companies for their employees, but can also be used by other groups like groups of doctors, lawyers, members of credit societies, etc. Most companies offer insurance benefits to their employees through these plans since grouping individuals together makes companies eligible for lower premium rates.
7. Microinsurance schemes
Microinsurance plans are insurance policies designed for the economically weaker sections of society. This product category was created by the Insurance Regulatory and Development Authority of India (IRDAI) with the aim of increasing insurance penetration among these sections. These plans have a sum assured of INR 50,000 or less.
Since these plans are aimed at the economically weakest sections of society, life insurance companies often partner with non-governmental organizations, self-help groups and microfinance institutions that act as intermediaries in the name of economically disadvantaged people.
Choosing life insurance is a delicate balancing act and you need all the help you can get. Buying a policy is a decision that will affect you for years, so it’s important to get it right the first time. And while there are great online resources you can refer to, you need a basic understanding of life insurance plan types before you can undertake any more in-depth research. We hope the above guide serves as a beginner’s tool and helps you organize your thoughts and make an informed decision.