Life Insurance: Types of life Insurance policies

Need for life insurance

Risks and uncertainties are part of life's great adventure -- accident, illness, theft, natural disaster - they're all built into the working of the Universe, waiting to happen.

Insurance, therefore has proved to be man's answer to the uncertain vagaries of life. If you cannot beat man-made and natural calamities, well, at least be prepared for them and their aftermath.

Insurance basically can be defined as a contract between two parties - the insurer (the insurance company) and the insured (the person or entity seeking the cover) - wherein the insurer agrees to pay the insured for financial losses arising out of any unforeseen events in return for a regular payment called "premium".

These unforeseen events are defined as "risk" and that is why insurance is called a risk cover.

Hence, insurance is essentially a means to financial compensation for losses that life throws at people - corporate and otherwise.

Most of the products offered by Indian life insurers are developed and structured around the "basic" policies and they are usually an extension or a combination of policies. So, this article focuses on what are these policies and how do they differ from each other.

The Term insurance policy

The term insurance policy defines a pure risk cover for a specific time period. This means that the sum assured is payable only if the policyholder dies within the policy term. For instance, if a person buys Rs 2 lakh policy for 15-years, his family is entitled to the money if he dies within that 15-year period.

· Then questions like what if he survives the 15-year period, arises. Well, then in that case he is not entitled to any payment; and the entire premium paid during the 15-year period goes to the insurance company.

So, there is no element of savings or investment in such a policy. It is a 100 per cent risk cover. It simply means that a person pays a certain premium to protect his family against his sudden death. He forfeits the amount if he outlives the period of the policy. This explains why the Term Insurance Policy comes at the lowest cost.

Whole Life Policy

· As the name suggests, a Whole Life Policy is an insurance cover against death, irrespective of when it happens.

· Under this plan, the policyholder pays regular premiums until his death, following which the money is handed over to his family.

This policy, however, fails to address the additional needs of the insured during his post-retirement years. It doesn't take into account a person's increasing needs either. While the insured buys the policy at a young age, his requirements increase over time. By the time he dies, the value of the sum assured is too low to meet his family's needs. So, in wake of these drawbacks, now insurance firms offer either a modified Whole Life Policy or combine it with some other type of policy.

Endowment Policy

Combining risk cover with financial savings, endowment policies are the most popular ones in the world of life insurance.

· In an Endowment Policy, the insured is always at the recieving end because the sum assured is payable to him/her even if he/she survives the policy term.

· And, in case if the insured dies during the tenure of the policy, the insurance firm has to pay the sum assured just as any other pure risk cover.

· A pure endowment policy is also a form of financial saving, whereby if the person covered remains alive beyond the tenure of the policy, he gets back the sum assured with some other investment benefits.

In addition to the basic policy, insurers offer various benefits such as double endowment and marriage/education endowment plans. The cost of such a policy is slightly higher but worth its value.

Money Back Policy

· The Money Back policies are structured to provide sums required as anticipated expenses (marriage, education, etc) over a stipulated period of time. With inflation becoming a big issue, companies have realized that sometimes the money value of the policy is eroded. That is why with-profit policies are also being introduced to offset some of the losses incurred on account of inflation.

· A portion of the sum assured is payable at regular intervals. On survival the remainder of the sum assured is payable.

· In case of death, the full sum assured is payable to the insured.

· The premium is payable for a particular period of time.

Annuities And Pension

In an annuity, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against risk as well as provide money in the form of pension at regular intervals.

Over the years, insurers have added various features to basic insurance policies in order to address specific needs of a cross section of people.

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