Similar to health insurance, life insurance policies are of two types:
- Individual Life Insurance
- Group Term Cover
Unlike health insurance there is no family life insurance cover, although, there can be joint life covers. Group term cover is a simple term plan which is provided to a large homogenous group of people. Only difference is that group cover is cost effective as the buyer can enjoy a cost benefit of up to 30% on the payable premiums.
Apart from the term life cover all other types of life insurance policies are available to individual or joint lives only and not under a group insurance plan. Term plan does not offer any investment benefit (see table); i.e. nothing is paid to the insured if he/she survives the term of the policy.
Read More: What is Group Term Life Insurance Policy?
Given below is a classification of life policies which is universally applicable:
Types of Investment Policies
Life policies with maturity or survival benefit have two distinct classifications as given below:
- Without Profit Plans &
- With-Profit Plans
Difference between these schemes are:
- With-profit plans offer to share the Insurer’s business profits
- Premiums are slightly higher for with profit plans
Types of Premium Payment Terms
Life insurance policies can also be classified according to their premium payment schedule. For example:
- Single premium policy: Premium is payable only once in the beginning.
- Level Premium Policy: A fixed amount payable annually/semi-annually/monthly/quarterly
- Intermediate Premium Policy: Policy allows adjustment to the sum assured by paying an additional premium on the ongoing policy. This feature is generally available with whole life policies.
Use of Different Life Insurance Policies
Sushant is the primary breadwinner in his family of four, his spouse, Shanti is also employed and makes good contribution to the family fortune. Sushant had bought a term cover at the age of 30, when the couple had their first child, Aman. He chose to go for single premium option as the premium for term insurance are very low. He felt relieved to have insured Shanti and Aman’s future then.
At 35 he bought a 20-year money back policy, to avail cash benefits at various stages in Aman’s life. The policy will pay 30% of S.A. at five years’ interval till the maturity of the policy, starting ten years from the commencement of the policy.
“1st cash flow when Aman is 15 yrs. of age, second at 20 years of age and last remaining 40% of the S.A. will be paid at maturity when Aman is 25 years of age.”
To provide for the marriage goal of their daughter Arti, Shushant and Shanti had started investment in a ULIP plan with exposure to equity market at her birth along with the money back plan keeping Aman’s life stages in mind. They plan to keep reducing the equity exposure over time so that by the time of maturity they have an entire portfolio of debt securities.
Now at the age of 40, Shushant and Shanti are planning to ensure an estate for their children. For this, they have bought two separate whole life policies. They will be paying the premium on these policies for next 20 years (till the age of 60). Upon their death, their respective policies will pay the Sum Assured and any Bonus accrued to the policy to Aman and Arti in equal proportions.
All these policies, including the term plan (when the premium was paid on it), allow Shushant and Shanti to claim deduction under section 80C from their taxable incomes in a financial year and save the tax, while they are assured of their children’s future.