Types of Life Insurance Policies in India- Which to buy?

There are multiple types of life insurance available in the market. Investors often confuse them and at SmartMoneyGoal.in it is our motto to educate investors. We want them to be well informed before they decide. We discuss here so that you can be well informed of the advantages and dis-advantages of each of the types of life insurance before you purchase them.

Suggested read: tips for buying life insurance

Types of life insurance

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Ideally insurance can be split into term insurance(you do not get money back) and cash value insurance(get money back with some return). Here are the various types of life insurance…

1) Whole Life Insurance

In a whole life policy, you pay the premiums until your death (mostly) so that you leave an inheritance to your loved one. This policy remains in force for the whole term of the insured’s life. That is why it is called a Whole Life Insurance.

Pros:

• The surrender value can be known initially.(which will be at huge discount of the total premiums for initial years)
• The death benefits and premiums are fixed at policy issue
• You can get your money back as it is cash value insurance
• An efficient way of inheritance planning

Cons:

• Your money will be locked for years . For example, you pay Rs. 10,000 every year for 5 years. At end of 5 years(Rs 50,000 paid), if you surrender policy due to some emergency you will hardly get Rs.11,000.
• Pathetic rate of return
• Inadequate life coverage / sum assured

2) Money Back Policy. (also called as Guarantee Universal life in US/UK)

Money back policies provide a death benefit and also build cash value over the years. Most Indians have this types of life insurance policy (you may not know it) . The insurer collects premiums and provides a return every year by lending and investing.

Pros:

• Surrender value of money back is better than whole life.
• You do not pay until life. Usually only for fixed period.
• You get your cash + returns at the end of the policy term
• Premiums are Tax deductible
• Sum Assured, Premiums, policy term can be modified when required

Cons:

• The corpus is invested in equity,bond,securities by the insurer. So you carry additional risk (For eg.,LIC invests in market. However, over the long term they have maintained a successful track record of positive return)
• Again, rate of return is lower compared to PPF
• Insufficient sum assured/ life coverage

3) Pure Term Insurance

Term Insurance policy is the starting point of insurance. The basic idea is to eliminate the risk of sudden death. Every individual has some responsibility financially like providing for loved ones, debts, mortgages etc., With term insurance you can ensure that these will be taken care in your absence.

Pros:

• Significantly lower premiums for the same Sum Assured than whole life, money back, ULIP etc., Usually its 10% or 20% of whole life premium.
• Purest form of insurance
• Significant value to policy holders with high Sum Assured. Highest protection per rupee/dollar spent as premium than any whole-life,ULIP or money-back
• Flexible. Can be modified/discontinued as needed.
• Easy to buy and maintain.
• Low claim rejection rates
• Best for person with more responsibilities

Cons:

• Premium increases with age.
• No cash value. You don’t get any money on surrender or policy term end

4) Unit Linked Insurance Plans (ULIP)

ULIPs are a combination of mutual funds and insurance. They primarily invest in equity market and the Sum Assured is usually 5 or 10 times the Annual Premium Amount. ULIPs were a rage in 2006-2010 and it diminished as people failed to get returns in most cases. They are more mutual funds than insurance products

Pros:

• Shorter term. They are usually for 15 years and less.
• Combine investment and insurance
• Chances for higher return (with additional risk of course)

Cons:

• They pay high commissions to agents which eats away your initial year investments
• One of lowest Sum Assured for per rupee premium spent
• Returns vary as per the market .If equity markets perform well returns are good and vice-versa(negative) . ULIP provided great return from 2005-2008.You are lucky if you withdrew before 2008.

There are also other derived policy types like Child Plan, Retirement Plan,Pension Plan, Child Plan etc., They are just combinations of features of policies discussed above in different proportions. So we have not discussed them.

We believe you can segregate the type of life insurance next time you are approached by an agent. Choose a policy based on your need and plan for your future.

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