What are the different types of life insurance policies, which one should you pick?

There are essentially two types of life insurance plans, ones that offer pure protection, and others that focus on wealth creation and are a mix of insurance and investing.

So while the former only offer benefit on the death of the insured, the latter offer proceeds even if the insured survives the term or through the course of the term. Within each category, there are several variants, and depending on the payout, these serve different purposes throughout one’s life.

• Term insurance

It is the simplest, most basic protection plan that covers the risk of death. In case of untimely death of the breadwinner, the family or nominee gets the sum assured as a lump sum. These plans are usually till 85 years of age.


Death benefit
The payout in this type of plan is only on the death of the insured, and if the insured person survives the term of the plan, he does not get any maturity benefit. However, due to the demand for life plans offering returns, one variant does return the premiums on maturity.

Premium
Term plans have the lowest premium for the largest cover size and you pay a fixed premium for the entire term. However, some variants that alter the sum assured through the term have varying premiums.

Types of term plans
a) Regular Plan
This plan is the purest form of protection, and offers sum assured on death of the insured.
Annual premium for a Rs 1 crore term plan by a 30-year-old for 40 years: Rs 11,210

b) Return of premium
As with the regular plan, it pays death benefit if the insured dies during the term of plan, but if the insured survives the term, this plan returns the premiums paid. Their term varies from 10-40 years.
Annual premium for a Rs 1 crore term plan by a 30-year old for 40 years: Rs 17,969

c) Staggered payout
If the insured dies, the plan offers a part of death benefit to nominee, while the remaining amount is staggered over 10-20 years.
Premium for lump sum of Rs 10 lakh and monthly payout of Rs 50,000 for 15 years for a 30-year-old: Rs 15,725

d) Single premium
For those unable to or unwilling to pay the premium throughout the term of the plan, it offers the option of paying the entire premium at one go. Expectedly, the premium is higher than the other variants but there is no hassle of renewal and payment each year. The terms of such plans are usually till 85 years.
Annual premium for Rs 1 crore cover by a 30-year-old for 20 years: Rs 1.8 lakh

e) Increasing/decreasing
As the name suggests, the sum assured can be altered, either increasing or decreasing by a fixed amount each year, during the term of the plan. The premium, however, may or may not vary, and is higher than the regular plan. While the increasing plan is usually taken to beat inflation and the premium remains fixed, the decreasing plan is typically taken to cover the risk of big loans and the premium comes down with the size of cover.
Premium for Rs 1 crore increasing term plan for a 30-year-old: Rs 22,801

Who should buy?
If you are a breadwinner with dependants or liabilities like loans, you need to secure your family’s financial future with this plan. If you are not earning, or are retired and have no dependants, you can ignore it.

• Whole life insurance

Also known as permanent plan, this is different from the basic term plan in that it offers a cover for the entire life or 100 years. Depending on the term for which premium is paid, these are of two types.

Death/maturity benefit
On the insured’s death, the nominee gets the sum assured as a lump sum. If the insured survives till 100 years, he gets the maturity proceeds. The proceeds can be given out as lump sum or can be staggered over a certain period.

Premium
The premium stays the same throughout the term. In another variant of whole life plan, you can pay the premium for a shorter period of, say 15 years, in which case the amount will be higher.
Annual premium for a whole life plan bought by a 30-year-old: Rs 15,167

Who should buy?
It’s best avoided unless you are planning to leave a legacy for your children, which is not a good idea anyway.

• Traditional insurance

These life insurance plans are a mix of insurance and investing, but are mainly used for wealth creation, offering a small cover by way of protection. Depending on the time of payout, these are divided into two categories.

a) Endowment plan
Death/maturity benefit
These plans offer the sum insured to nominee or beneficiary on the death of insured, along with the bonus. The bonus is paid only for the number of years that the insured survived while the policy was active. If he survives the term, the insured receives maturity proceeds along with guaranteed bonus or profit at the end of the term.

Premium
The premium is much higher than that for term plans, and has to be paid for a fixed number of years.
Annual premium for Rs 10 lakh plan by a 30-year-old for a 20-year plan with premium paying term of 10 years: Rs 1.04 lakh

b) Moneyback plan
Death/maturity benefit
The main difference here is that the payout is staggered and paid at specified, regular intervals. A bonus is also paid on maturity if the insured survives. It is used to achieve goals like a child’s education or marriage.

Premium
As with endowment plans, the premium is high compared with term plans and is split into insurance and investment.
Annual premium for a Rs 10 lakh plan by a 30-year-old for 20 years: Rs 1.18 lakh

Who should buy?
Only if you have no investing discipline, should you go for it as a goal achieving tool. Since it offers low covers and low returns, it’s best avoided. Don’t consider it a tax-saving instrument either.

• Ulips

These plans are again a combination of insurance and investment, where the premium is invested in the market for growth. The insured can decide the assets in which he wants to invest.

Premium
There is a lock-in period of five years for premium payment after which the insured can decide to stop paying the premium or continue.

Death/maturity benefit
If the insured person dies, the nominee gets the sum assured. If he survives the term, he gets the maturity proceeds.
Annual premium for a Rs 10 lakh plan by a 30-year-old for 20 years: Rs 1 lakh

Who should buy?
If you have long-term goals and can invest for more than 8-10 years should you opt for it as an investment tool since the returns will be good only after this period. It is best to continue investing even after the lock-in period for best returns.

All premium rates are indicative and may vary