Understanding Different Types of Life Insurance Covers

 Life insurance is an important tool for protecting your family's future. However, with so many different types of life insurance policies to choose from, it can be difficult to make an informed decision. Whether you're a young professional just starting out or a parent planning your child's education, recognising the various types will help you make educated selections. This page provides a breakdown of the different life insurance choices, including government-backed plans such as the Atal Pension Yojana (APY). Let's look at how you may provide financial peace of mind for your loved ones.

Types of life insurance covers

Term life insurance

Term life insurance cover is the most straightforward and affordable type of life insurance. It provides coverage for a specified period, usually 10, 20, or 30 years. If the policyholder passes away during the term, the beneficiaries receive the sum assured. However, if the policyholder survives the term, there is no payout. Term plans are ideal for those looking for high coverage at low premiums.

Whole life insurance

A whole life insurance policy is as the name suggests a policy that covers the life of the policyholder to his/her natural life. This policy does not have a specified period after which the insurance ceases like what is seen in term insurance. It also comprises a savings part referred to as the cash value which accumulates over a given time. The policyholder can even borrow against the cash value of the policy which is a better situation than having that money tied up in an insurance policy. Whole life insurance can be ideal for those who wish to have a policy that will enable their family to be secure even when they die.

Endowment plans

Endowment plans are an insurance cum savings plan. These policies are meant to provide the sum assured to the policyholder or the nominee in the event of the policyholder’s demise or at the end of the policy period whichever is first. These plans are suitable for those with a view of having funds for the achievement of certain life dreams such as education for a child, and marriage among others besides having the life cover.

Unit-linked insurance plans (ULIPs)

ULIPs are a combination of insurance and an investment plan. The first portion is used to ensure that the client is covered for life and the rest is used to buy various funds such as equity, debt or a blend of the two. ULIPs are ideal for those people who wish to accumulate wealth in the long run and at the same time, have life cover. They are also versatile in that policyholders are free to transfer between the different funds depending on their tolerance to risk.

Money-back plans

Money-back policies are endowment policies that provide the policyholder with a percentage of the sum assured at a specified period during the policy period. In case the policyholder is alive at the end of the term, he or she is paid the remaining sum assured plus bonuses. This plan is suitable for those who want to receive a certain amount of money at periodic intervals within the period of the policy.

Group life insurance

Group life insurance is usually offered by employers to their employees as part of their employee benefits package. This type of insurance provides coverage to a group of people under a single policy. Group life insurance is cost-effective and offers basic coverage, making it ideal for employees who might not have individual life insurance coverage.

Factors to consider when opting for life insurance covers

Financial goals

The main selection criteria of the life insurance policy are financial objectives. You need to begin by establishing what you desire in terms of financial accomplishment whether it is retirement, college education for your child, or leaving behind a financial legacy. For instance, if you are saving for your retirement, you may opt for an endowment plan or a ULIP that offers maturity benefits to help you create wealth for retirement. In terms of your child’s education, a child plan that provides payout at significant stages of the child’s developmental process is most suitable. Your goals should, therefore, be met by your life insurance so that you can be ready for the coming days. If you are looking for wealth creation in addition to life coverage you may consider investing in ULIPs that invest in either equity or debt funds depending on your risk profile.

Coverage amount

The coverage amount commonly known as the sum assured is the amount that the beneficiaries will receive in the event of your demise. This is the amount that has to be calculated because it has to provide for the present and future needs. It begins by looking at its income and how much the family must earn to sustain its lifestyle in case of the breadwinner’s death. Add your current expenses, which are, for example, your home loans or other borrowings, and your future requirements including, for instance, your children’s education or marriage expenses. It is recommended to have coverage that should be at least 10-15 of your annual income. In this way, your family can be financially secure even in your absence, that is why such a form of business is highly encouraged.

Policy term

The policy term should be chosen based on your financial objectives and the duration of your financial obligations. If your primary goal is to provide income replacement, the policy term should cover the years you plan to be working. For instance, if you are 30 years old and plan to retire by 60, a 30-year term policy would be appropriate. For goals like covering a loan or your child’s education, the policy term should coincide with the loan repayment period or the time when your child will start college. For whole-life plans, the term extends to your lifetime, offering permanent protection.

Premiums

Premiums refer to the usual cost that you are obligated to pay to sustain your life insurance policy. While choosing the policy, one must also consider the fact that the premiums should be well within one’s means for the entire policy period. This might be expensive in terms of your pocket, and this may lead to you having to drop your policy for some time, and this will undo all the benefits. Again, you need to find ways of keeping from overspending while at the same time getting enough coverage. For example, the new generation may choose term plans as they provide huge sums assured at a relatively cheaper rate. You should also look at your income stability and the likely future earnings to determine which of the premium paying options; annual, half-yearly, or monthly suits you best.

Claim settlement ratio

The claim settlement ratio (CSR) is a significant parameter that helps one understand the credibility of the insurance company. This is the ratio of the number of claims paid by the insurer to the total number of claims made in one particular year. A CSR of above 95 % gives an impression that the insurer is reliable and has a good record of paying claims. This ratio is particularly crucial because life insurance exists mainly to give your beneficiaries financial security. This ratio is especially important because the primary purpose of life insurance is to provide financial protection to your beneficiaries. If an insurer has a low CSR, it could mean that claims are often rejected or delayed, which could cause financial hardship for your family at a critical time.

Riders

Riders are extras that you can attach to your basic life insurance policy to improve on the policy. Some of the riders are critical illness cover, which is where the rider pays a lump sum if you are diagnosed with a severe illness, and accidental death benefit, which is where the rider pays an additional amount if death occurs due to an accident. Another beneficial rider is the waiver of premium that pays for the premiums in the event the policyholder is unable due to disability or critical illness. Riders offer personalised protection and can be a cost-effective way to cover specific risks that are not included in the standard policy.

Ending note

Choosing the correct life insurance coverage is an important step towards safeguarding your family's future. There are several alternatives available, ranging from term plans to whole life insurance, as well as government-backed schemes like the APY scheme, to meet the needs and financial aspirations of each individual. Remember to thoroughly consider your financial circumstances, coverage quantity, and policy features before making a selection. This allows you to safeguard your loved ones while still achieving your financial goals, providing you peace of mind and financial stability.