Life insurance policies come in different types, and each of them has its own benefits. While the general consensus would think life insurance refers to an insurance policy that provides financial support to your family, in case of your untimely death, there are actually different kinds of life insurance policies. But before you understand the different types of life insurance, let’s understand what is life insurance in simple words.
Life insurance is a type of savings scheme. Each month, insurance premiums are collected in an account that’s shared back with you when it matures. Because you chose to save your money and put it in this account, the insurance company provides additional money to you at the time of maturity, known as returns.
So, if you get an insurance policy for ten years, you get to pay a small premium (₹1,000), every month. At the end of ten years, you get all the amount you’ve saved back, i.e. (₹1,20,000).
The insurance company will also share returns you’ve accumulated over the course of the policy, which can range from 4% to 6% per annum, based on your policy. For the mentioned example, the returns can be somewhere between ₹20,000 to ₹30,000. You will get as guaranteed returns on top of the premiums you’ve paid at the time of maturity.
Insurance companies also offer bonuses based on certain factors. If you’ve never missed paying a premium or never made a late premium payment, some insurance companies offer a bonus for that. If the insurance company has performed really well, they can offer bonuses at the time of maturity, too.
So, combined with the guaranteed returns and the bonuses, your maturity amount on an investment of ₹1,20,000 over ten years can be ₹1,50,000 to ₹1,60,000 based on the bonuses and return rate of your insurance policy. This is a thorough overview of what is life insurance in simple words. With this explanation complete, let’s review the different kinds of life insurance policies and how their return rates can differ.
Different Types of Life Insurance Policies
1. Endowment Plans
Endowment plans are what’s commonly understood as life insurance. The example mentioned above is actually that of an endowment plan. In which it offers a 5 to 6% return on investment over the course of the insurance plan. Even though this insurance plan may not yield high returns, it ensures the policyholder’s life for the entire duration of the plan. If the policyholder dies untimely at any point during the policy tenure, the nominee receives the entire maturity amount.
The bonus payouts may not be possible in such cases as this doesn’t qualify as maturity. But all guaranteed returns are provided to the family of the policyholder in case of death.
2. Unit-Linked Insurance Plan
Unit-Linked Insurance Plans also known as ULIPs, are different from regular insurance plans. This is mainly because life insurance plans are considered as fixed income savings plans. The returns of your investment can be calculated at the time of purchasing the policy, and the said amount is provided to you regardless of everything at maturity. However, ULIPs are different. They invest your money in the stocks market and provide market-linked returns.
This means the returns of your insurance policy can be variable based on stock market performance. This is actually highly popular nowadays since it also provides life coverage under the policy term. The fact that the insurance plan is market-linked allows it to provide better returns compared to any other insurance plan. Considering insurance plans have a long tenure, the fear of policyholders losing money on their investments is also significantly low.
3. Term Insurance Plan
Term insurance plans are currently the most popular kinds of life insurance policies. These plans have low monthly or annual premiums and offer high coverage. However, unlike other insurance plans, they do not have any guaranteed returns. In fact, the money you pay as the premium is also not returned at the end of the policy tenure. The payouts are offered only in case of the untimely death of a policyholder within the policy tenure. The term insurance plans have also evolved and certain insurance providers do offer the option to policyholders to get their premium back at the end of policy tenure.
4. Money-Back Insurance Plan
Money-back insurance plans are aimed at helping policyholders get regular payouts during the policy tenure, along with guaranteed lump sum returns at maturity. This is one of the most popular insurance plans. As they can help you meet both your short-term and long-term life goals. Like every other insurance policy, this policy insures the life of the policyholder, and in case of their death, it pays out the complete maturity amount to the nominee.
Money-back plans also provide added liquidity that other insurance plans do not offer. And even though this is a fixed-income plan, the regular payouts, which can also be tax-exempt, make it more beneficial for the policyholder to meet their financial requirements.
5. Child Insurance Plan
Child insurance plans, as the name suggests, help parents meet the various expenses that come with children. A child insurance plan offers the option for annual payouts or lump sum payouts when the child turns 18 to help parents meet expenses like education or marriage. Even though insurance policies insure the life of the policyholder, in the case of the child plans, the policy insures the life of the parent of the policyholder. This is because the parent is the one paying the premiums. Child plans are essential for parents to help them meet future expenses associated with the child.
Conclusion
This concludes your learning of some of the most common kinds of life insurance policies. There are other more niche insurance plans that are not discussed in this article, so if you would like to know more about other life insurance policy types, feel free to leave a comment down below and we will share a second part discussing more kinds of life insurance policies.
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