Buying life insurance is one of the best decisions you can make. Life insurance ensures that your loved ones are not left without a means of financial support when you die. It can also help you accumulate wealth to fulfill your dreams and aspirations as well as those of your loved ones.
Historically, insurance has never been seen as an important financial instrument and penetration levels have remained very low. The current rates of life insurance premium as a share of GDP in India is only 3.2%. Insurance coverage presents a similar issue. Traditionally, most people only looked at savings plans, which were usually purchased by their parents through an insurance agent often from their groups/families.
Awareness of life insurance has seen a significant increase in the past few years, as people have begun to realize the importance of financial security. Insurance seems to be the most important part of the economy. Technology and digitalization have also permeated all aspects of life in recent years, leading to an increase in the number of people. All this has resulted in the democratization of the insurance sector, where transparency of information is higher than ever.
This can be clearly seen in how comparison websites, user reviews, and YouTube videos have played a role in making insurance easier for customers. Buying life insurance is one of the most important decisions of your life. With so many options to choose from, the process can be overwhelming.
So, here’s a refresher, especially for first-time buyers, on the different types of life insurance available in the market.
1. Term Insurance
Term insurance, or a term policy is the most important form of life insurance and is usually what people mean when they hear or say, “life insurance”. Term insurance provides financial protection to your loved ones at a pre-determined annual/monthly premium. If an unfortunate event causes you to lose your life, the insurance provider pays a certain amount, called the ‘sum assured’ (also pre-determined) to your beneficiary.
2. Critical Illness
Critical illness insurance covers specific illnesses, which are mentioned in your policy documents and are communicated to you at the time of purchase. When diagnosed with a serious illness, the insurer pays for the medical expenses. Although the diseases covered may differ depending on the insurance provider, most companies include cancer, and heart disease.
3. Financial Planning
Generally, there are two types of financial plans:
A) Unit-Linked Insurance Plan (ULIPS)
ULIPS have both income and security. Depending on your risk tolerance, ULIPs offer a range of funds to invest in. This can be equity, debt or hybrid investment. ULIPs also take into account that your needs change as you move through your life and therefore offer options such as switching investments and partial withdrawals.
B) Delivery plans
Unlike ULIPs, which are linked to the market, annuity plans offer guaranteed returns. Endowment plans cater to business and insurance needs. The fees you pay in an endowment plan are divided into two ways. One portion goes to the death benefit and the other is invested. Upon your death, your beneficiary receives the death benefit.
If you survive the term of the policy, i.e. when the policy matures, you will get the maturity benefit for the amount invested. Annuity plans can be thought of as savings plans and are highly recommended for salaried individuals who may be willing to save for future expenses such as children’s education.
4. Children’s Plans
The main reason to invest in guaranteed return plans or ULIPs is to invest for your children. These goals can be linked to your financial goals and help you accumulate and grow wealth for a variety of medium or long-term purposes such as children’s education. They give you the freedom to pre-define installments when you expect to need the money. Child plans have an insurance component so that your child’s money is taken care of in the event of your misfortune.
5. Retirement Plans
A retirement plan is a long-term tool that allows you to accumulate enough money to take care of your financial needs during your retirement years. In many cases, defined benefit plans can also be linked to such a goal and help you earn enough money to support you in your retirement years. As you get older, you can choose to have a steady source of income or a lump sum payment.
6. Group Insurance Plans
A group life insurance policy covers all members of the group under one policy. These types of plans are usually offered by business owners or companies to their employees but can also be used by other groups such as groups of doctors, lawyers, members of credit unions etc. Many companies offer insurance benefits to their employees through these plans starting with group membership. together they make companies eligible for lower prices.
7. Microinsurance Plans
Micro insurance plans are insurance designed for the economically weaker sections. This group of products was created by the Insurance Regulatory and Development Authority of India (IRDAI) with the aim of increasing the penetration of insurance among these sectors. These plans have a sum assured of INR 50,000 or less.
Because these policies help people who are economically weaker, life insurance companies often tie up with non-governmental organizations, self-help groups and financial institutions that act as intermediaries on behalf of the poor.
Choosing life insurance is a simple process and you need all the help you can get. Buying a policy is a decision that will affect you for years to come, so it’s important to get it right the first time. And while there are many great online resources to refer to, you should understand the types of life insurance plans before doing a lot of research. We hope that the above book will be a starting point and will help you organize your thoughts and make an informed decision.