TYPES OF LIFE INSURANCE POLICIES

Prof.Mishu Tripathi Assistant Professor-Finance

Term Life Insurance Policy

Term life insurance policy covers risk only during the selected term period. If the policyholder survives the term, the risk cover comes to an end. Term life policies are primarily designed to meet the needs of those people who are initially unable to pay the larger premium required for a whole life or an endowment assurance policy.

Term Life Insurance Policy

No surrender, loan or paid-up values are granted under term life policies because reserves are not accumulated. If the premium is not paid within the grace period, the policy lapses without acquiring any paid-up value. A lapsed policy can be revived during the lifetime of the life assured but before the expiry of the period of two years from the due date of the first unpaid premium on the usual terms.

Term Life Insurance Policy

Accident and / or Disability benefits are not granted on policies under the Term plan. Premiums in a term policy pay for the insurance and no part of the premium in a term life insurance policy is used for investment purposes. The length of a term life insurance policy varies from 5 to 30 years. Term life policies are suitable for those who need to provide financial security to their family but are unable to pay the larger premium required for a Whole Life or Endowment policy.

Whole Life Insurance Policy

A whole life policy runs as long as the policyholder is alive. As risk is covered for the entire life of the policyholder, therefore, such policies are known as whole life policies. A simple whole life policy requires the insurer to pay regular premiums throughout the life. In a whole life policy, the insured amount and the bonus is payable only to the nominee of the beneficiary upon the death of the policyholder. There is no survival benefit as the policyholder is not entitled to any money during his / her own lifetime.

Disadvantage of Whole Life Insurance Policy

Whole life policies have a major drawback in the sense that the policyholder is not entitled to any money during his or her own lifetime.

Who Should Buy Whole Life Policy?

A whole life policy is beneficial for those who are eligible for a sizable pension during their retired life. It can cover the risk of death taking place soon after retirement and, therefore the pension coming to an early end. It is also ideal for those who wish to create an estate either for their heirs or for donating to charity after their death.

Money Back Policy

Money back policy provides for periodic payments of partial survival benefits during the term of the policy, as long as the policyholder is alive. An important feature of money back policies is that in the event of death at any time within the policy term, the death claim comprises full sum assured without deducting any of the survival benefit amounts, which may have already been paid as money-back components. The bonus is also calculated on the full sum assured.

Money Back Policy

This type of policy is perfect for individuals who are in their late 30s or early 40s and are looking at significant payouts after 10-15 years to fund their children's higher education, marriage and other expenses. Money back policies create a long-term savings opportunity with a reasonable rate of return, especially since the payout is considered exempt from tax One negative aspect of money back policies is that they have higher premium as compared to other insurance policies.

Things to Consider Before Buying Money Back Policy

1. 2. Before buying a money back plan, it is advisable to read the terms and conditions thoroughly. You should carefully check out the actual amount allocated towards the premium, how much of it is going to be accumulated and how much is the insurance company's charges. Make sure that the periodic payouts are sound enough to meet your anticipated needs. You can also analyze the past performance in terms of declared bonuses.

3. 4.

Pension Plan
A pension plan or an annuity is an investment that is made either in a single lump sum payment or through installments paid over a certain number of years, in return for a specific sum that is received every year, every half-year or every month, either for life or for a fixed number of years.

Pension Plan
Annuities differ from all the other forms of life insurance because annuity does not provide any life insurance cover but, instead, offers a guaranteed income either for life or a certain period. By buying an annuity or a pension plan the annuitant receives guaranteed income throughout his life. He also receives lump sum benefits for the annuitant's estate in addition to the payments during the annuitant's lifetime.

Types of Annuities / Pension Plans

Life Annuity: Guarantees you a specified amount of income for your life. After death, the amount invested is refunded to your nominee. Guaranteed Period Annuity: Provides specified income for your lifetime and guarantees that your nominee will receive payments for a certain minimum number of years, even if you die earlier.

Types of Annuities / Pension Plans

Annuity Certain: Under this plan, the stipulated annuity is paid for a fixed number of years. The annuity payments stop at the end of that period, irrespective of how much longer you may live. Deferred Annuities: The premiums paid into such plans may be deducted from ones taxable income at the time of payment. In addition, the interest earned on the annuities is not taxed immediately. But the proceeds of the annuity will be taxable when they are paid to you.

Endowment Policy
An endowment policy covers risk for a specified period. At the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. An endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy.

Endowment Policy
Endowment policy is an instrument of accumulating capital for a specific purpose and protecting this savings program against the saver's premature death. Premium on endowment policies is payable for the full term of the endowment policy unless, the insurer dies earlier.

Endowment Policy
But one of the major attractions of endowment policies is that they provide a return on premium payments, when the policy comes to an end. The endowment received at the maturity of the policy can be used for buying an annuity policy to generate a monthly pension for the whole life. Apart from providing financial risk cover in case the insurer's-who is usually a family's breadwinnerpremature death, the insurance amount is also repaid once this risk is over. The endowment amount paid at the maturity of the policy can be used for meeting major expenditures such as children's education and marriage, etc.

Unit Link Insurance Plan (ULIPs)

A ULIP is a life insurance policy which provides an arrangement of risk cover and investment. The dynamics of the capital market have a direct impact on the performance of the ULIPs. ULIPs fundamentally work like a mutual fund with a life cover into it. They invest the premium in market-linked instruments like stocks, debentures, Corporate Bonds and Government Securities.

Features Good for On Maturity On Death

ULIPs More than 10 Years Investments Fund Value

Term Insurance Less than 10 years investments. No Survival Benefit on Term

Fund Value/Death Benefit or both Sum assured will be paid will be paid

Long Term Costs

Good for long term investing as Mutual Funds charge close to there are high upfront charges. In 2.25% of Annual Fund Management the Long term total charges are charge till you remain invested. lower than Mutual Funds

Switching Costs Switching Tax Costs

Mostly ULIPs have 3 Switches Free No Tax Implication

Switches are charged at 3-4%. Profits on switching are charged at 10%

Discipline

Compulsion of Investment every No Compulsion. Planning to be year. Helps you to plan your childs implemented by you. future or retirement.

SEBI v/s IRDA??

Regulation issue New Guidelines (w.e.f 1st September 2010) Lock in period increased from 3 to 5 years All ULIPs, except Pension and Annuity to have mortality and health cover. No partial withdrawals for ULIP Pension/Annuity products. ULIP pension products must be converted into an annuity. ULIP Pension/Annuity Products to offer guarantee of 4.5%/Year. Insurers to distribute overall charges evenly during lock-in period

SEBI v/s IRDA??

Loan upto 40% of NAV can be sanctioned ULIP charge structure evened out over tenure of product For policies < 10 yrs, 3% per annum can be levied as charges For policies > 10 yrs, 2.25% per annum can be levied as charges Front loading of charges can be done only for first 4 years