Sunday, December 16, 2007

Types of Life Insurance Policies

Some basics about the various types of insurance policies:

Life insurance policies can be broadly classified into two types, term life insurance and permanent life insurance. Term life insurance policies are basically meant for younger people who live with their families. These policies offer cover to a person's requirement on a short -term basis. If any unfortunate accident was to happen during the term of the policy then the policy holder can make an insurance claim with a term life insurance policy. You name any leading life insurance company and they will offer such term life insurance policies. The range of a term life policy will vary. With a permanent life insurance policy the entire life of a policy holder is covered. Whole life insurance policies are of this type and require you to pay for a small period of time. This is till the total amount is fully paid-up.
Here is a snapshot of the types of policies and what they offer.

Term Insurance
Term insurance covers for a term of one or more years. It pays a death benefit only if the policy holder dies during the period the insurance is in force. It is the cheapest form of life insurance. Most of the term insurance policies can be renewed for one or more terms even if the health condition of the insured person has changed. Though each time the policy is renewed for a new term, premiums may rise higher. This policy is particularly useful to cover any outstanding debt in the form of a mortgage, home loan, etc. For example if someone has taken a loan of Rs10 lakhs, he/she will have an option of taking an insurance to protect the loan in case of passing away before the debt is repaid.

Whole Life Insurance
Whole life insurance covers for as long as the insured person live if the premiums are paid. The premium payments remain stable and level throughout the life of the policy, and upon the death of the insured person, the beneficiaries receive the death benefit in whatever amount the policy was originally set up. It is different from term life in that it also builds "cash-value" as the years pass. However, that it takes many years for this to happen, so it can’t be looked at as a means to make money quickly. There are options in the market to have a return of premium option in a whole life policy. That means after a certain age of paying premiums, the life insurance company will pay back the premium to the life assured but the coverage will continue. Some whole life policies offer the premiums to be paid for a shorter period such as 15, 20 or 25 years. Premiums for these policies are higher.

Money Back Insurance
Apart from covering life, Money Back Insurance 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. This plan is ideal for planning special moments like a wedding, child's education or purchase of an asset, etc. Money back plan have "participating" and "non participating" versions in the market.

Endowment Assurance
Endowment insurance is a level premium plan with a savings feature. At maturity, a lump sum is paid out equal to the sum assured (plus dividends in a par policy). If death occurs during the term of the policy then the total amount of insurance and any dividends (par policy) are paid out.
There are a number of products in the market that offer flexibility in choosing the term of the policy. The terms can be chosen from 5 to 30 years. There are products in the market that offer non participating (no profits) version, the premiums for which are cheaper.

Universal Life
This is a flexible life insurance policy and is also market sensitive. The investor decides here the several investment options on how the net premium is to be invested. While the money invested has the potential for significant growth, such funds are subject to market risks including the loss of the principal.

Unit Linked Product
Market-linked plans or unit-linked insurance plans (ULIP) are similar to traditional insurance policies with the exception that the premium amount is invested by the insurance company in the stock market.
Market-linked insurance plans (MLP) mimic mutual funds and invest in a basket of securities. It allows choosing between investment options predominantly in equity, debt or a mix of both (called balanced option).
The major advantage market-linked plans offer is that they leave the asset allocation decision in the hands of investors themselves. Investor is in control of how he/she wants to distribute the money among the broad class of instruments and when to do it or pull out. Any of the products mentioned above except term products could be unit-linked.

Riders
Riders are additional add-on benefits that one can opt to include in one’s policy over and above what the policy may provide. However, these additions come at an extra premium charge depending of the rider one opt for. These riders cannot be bought separately and independently. The extra premium, nature and characteristics of the riders are based on the base policy that is offered.

Some riders available in the market are :
1. Accident Death Benefit: Provides an additional amount in case death occurs as a result of an accident.
2. Term Rider: It allows the payment of an additional amount if death of the insured happens.
3. Waiver of Premium: In case of total and permanent disability of life insured due to accident or any other means this rider allows premiums on base policy or riders to be waived.
4. Critical Illness: It provides payment of an additional amount on the diagnosis of some critical illness.

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