Life Insurance: Types of Policies available in India

There are broadly two kinds of insurance policies available in India. Insurance cum investment plans and pure life covers (called term life insurance).

Insurance cum investment plans (which serve dual purpose of life cover and savings) are further subdivided into traditional insurance plans and ULIPs. The major difference between the two is that while in case of traditional insurance plans, investment risk is borne by insurer, for ULIPs it is borne by the insured.

The two also differs on account of other factors such as maximum equity exposure, flexibility, transparency, and liquidity.

Now, traditional insurance plans offered by life insurance companies in India are basically of three kinds:

1.Whole Life Plans

2.Endowment plans

3.Money back plans

Whole Life Policy provides life insurance cover for the entire life. It’s a kind of permanent insurance and provides for payment of sum assured along with bonuses to the nominees on the death of the policy holder. However, normally whole life plans provide cover only till the maximum age of 80 to 85.

Similar to whole life plans, endowment life insurance policies—used to be most popular before the introduction of ULIPs— also provide a mix of insurance and savings. However, unlike whole life plans, endowment plans provide life insurance cover for a specific period.

Money back plans are also quite similar to endowment plans; the only major difference between the two is that while endowment plans pays the entire sum only after maturity (on survival), money back plans allows regular payouts of pre-determined sums at pre-determined periods.

The bonus declared on traditional plans depends on investment performance and is not guaranteed. It is of two kinds: reversionary and non-reversionary.  If the bonus is accumulated and paid at the time of maturity or death, it is called reversionary bonus.  And if allowed to be encashed, it is called non-reversionary bonus.

Another distinction between various life insurance policies is based upon premium payments. There are single premium plans and regular premium plans.

In contrast to regular premium policies, single premium plans (where premium has to be paid only once) are considered more of an investment product because they usually offer less insurance coverage and have relatively short tenure as compared to regular premium plans.

Furthermore, under IT Act the tax benefits available on insurance gets curtailed for an insurance plan having sum assured less than 5 times the premium paid. In other words, if the premium paid is more than 20% of the sum assured under the life policy, then the tax benefit under section 80C gets restricted to 20% of the sum assured. For example, to avail the maximum tax benefit on a life insurance policy with a sum assured of Rs 1 lakh, the premium paid can’t exceed Rs 20,000.

In such cases the tax exemption available under section 10(10D) of Income Tax Act, 1961, on maturity proceeds received on survival also gets forfeited.

Finally, term plans are purest form of life insurance which provides you with a maximum protection at a minimum cost. In other words, term plans provide you with a high coverage for low premium. However, the flipside is that you don’t get anything back at the expiry of the term (i.e., there is no maturity value).

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