Which Type of Life Insurance Policy Should You Invest In?

Life is full of uncertainties, and while we cannot predict the future, we can certainly plan for it. This is where life insurance plays a crucial role. In India, the life insurance market offers a wide range of options to help individuals safeguard their financial future and protect their loved ones. In this blog, we will explore the various types of life insurance policies available in India and understand their unique features.

1. Term Life Insurance

Term life insurance is one of the simplest and most affordable types of life insurance. It provides coverage for a specific term, typically ranging from 5 to 30 years. If the policyholder passes away during the term, the nominated beneficiaries receive a death benefit. 

This type of insurance offers pure protection without any savings or investment component. It’s an ideal choice for those seeking to provide financial security to their dependents in the event of their untimely demise.

Here is a list of some of the best term life insurance policies in India and their starting premium and sums assured:

Policy Starting Premium (per month) Sum Assured
₹250
250X Premium
₹1,046
₹2 crores
₹942
₹2 crores
₹542
₹1 crore

Term Life Insurance Calculation: 

If the person whose life is insured with a term insurance policy passes away during the policy term, then the nominee will get the full death benefit (sum assured) as stated in the policy.

In case of most term insurance policies, if the life assured does not pass away within the term, then the premium paid is lost forever without any refunds. However, due to the low risk assumed by the insurer in term insurance, the premium is significantly low. 

Moreover, under Section 80D of the Income Tax Act, 1961, all term insurance plans are liable for tax deduction for the premium payment component.

2. Whole Life Insurance

As the name suggests, whole life insurance provides coverage for the entire lifetime of the policyholder. Apart from the death benefit, this policy also accumulates a cash value over time. Policyholders can borrow against this cash value or even surrender the policy for a portion of its cash value. Whole life insurance offers long-term financial security and can act as an inheritance for beneficiaries.

Policy Starting Premium (per month) Sum Assured (Up to)
₹822
No limit
₹567
₹1 crore
₹466
₹50 lakhs

Whole Life Insurance Calculation:

Whole life insurance policies offer a cash value component that accumulates over time. If you decide to surrender a whole life insurance policy, it means you are canceling the policy before the insured person’s death. In this case, you get back a proportion of your premiums paid, minus the insurance costs and surrender charges. 

For instance, if you decide to surrender a whole insurance policy with a yearly premium of Rs. 8,000 at the 10-year mark, you could get back a sizable amount of premium paid.

In this case, it would be calculated as follows:

Surrender Value = Cash Value- Surrender Charges (e.g., 10% of cash value)

                           = Rs. 8,000*10- Rs. 8000

Therefore, the surrender value of your whole life insurance would be Rs. 72,000. 

If you decide to not surrender the policy, it will continue to increase in value and the interest and dividends on it grow till it is paid out as the death benefit upon the passing away of the life assured.

3. Endowment Plans

Endowment plans combine insurance coverage with savings/investment components. These policies offer both a death benefit and a maturity benefit. If the policyholder survives the policy term, they receive the maturity amount, which can serve as a valuable source of funds for future goals like buying a house, funding education, or retirement planning. Endowment plans are suitable for those who want a savings element along with life coverage.

Policy Starting Premium (per month) Sum Assured (Up to)
₹1,205
₹1 crore
₹1,000
11X Annualised Premium
Subject to underwriting
Calculated on premium
₹1,000
Min. ₹65,463- No Limit

Endowment Life Insurance Calculation:

In case of endowment life insurance policies, a portion of your premium goes to the insurance component and the remaining amount goes to the interest component. 

At maturity, you will receive the maturity benefit , which includes the sum assured and total cash value of your investment. In case the insured passes away during the policy term, the nominee shall receive the sum assured as the death benefit and accumulated cash value.

4. Money-Back Policies

Money-back policies are a variation of endowment plans. They provide periodic payouts during the policy term, which can act as a supplemental income source. A percentage of the sum assured is paid out at regular intervals, and the balance is paid as a lump sum along with bonuses at the end of the term or upon the policyholder’s death. These policies offer a blend of insurance coverage and liquidity for various financial needs.

Policy Starting Premium (per month) Insurance Term (in years)
₹3,000
10-30 years
₹2,916
10-20 years
₹833
12-24 years

Money-Back Life Insurance Calculation

In case of a money-back policy, a proportion of your premium goes toward providing insurance coverage, while the rest goes to savings and investment. Periodically, the insurer will receive money-back payouts out of the savings component. These payments could be monthly, quarterly, or even annually. 

If the policyholder passes away during the policy term, the beneficiaries will receive the sum assured (death benefit). At the end of the policy term, if the policy matures and the policyholder is intact, they receive the maturity benefit. The maturity benefit includes the accumulated savings component and any final money-back payout.

5. Unit-Linked Insurance Plans (ULIPs)

ULIPs are investment-linked insurance policies that offer a mix of insurance protection and investment opportunities. Policyholders can choose from various fund options based on their risk appetite. A portion of the premium goes towards insurance coverage, while the remaining is invested in equity, debt, or a combination of both. ULIPs provide flexibility and potential for higher returns but are subject to market risks.

Policy Starting Premium (p.a.) Return Rate (5 Years)
₹30,000
7.7%
₹48,000
4-8%
₹25,000
4%
₹40,000
5.9%

ULIP Calculation:

  1. Premium Payment: The policyholder pays premiums regularly, which are used to cover insurance costs and invest in the chosen funds. The premium is divided into two parts: one for insurance and one for investment.
  2. Units Allocation: The investment portion of the premium is used to buy units in the selected funds. Each fund has a specific Net Asset Value (NAV), which represents the value of each unit of the fund. The number of units allocated depends on the NAV at the time of investment.
  3. NAV and Fund Performance: The value of your ULIP depends on the performance of the funds you’ve invested in. The NAV of each fund can change daily based on the performance of the underlying assets. If the fund’s assets perform well, the NAV increases; if they perform poorly, the NAV decreases.
  4. Unit Value Calculation: The value of your ULIP is calculated by multiplying the number of units you hold in each fund by their respective NAVs. The total value of all your units across different funds determines the overall value of your ULIP.
  5. Charges Deduction: ULIPs have various charges like premium allocation charges, policy administration charges, fund management charges, etc. These charges are deducted from the premium or the investment component, which affects the number of units allocated to your investment.
  6. Switching and Fund Choices: ULIPs offer the option to switch between different funds based on market conditions or your investment strategy. Some ULIPs may allow a certain number of free switches each year, while additional switches might have associated charges.
  7. Death Benefit: In case of the policyholder’s demise during the policy term, ULIPs provide a death benefit to the nominee. This usually includes the higher of the sum assured or the fund value, which is the value of units in the investment funds.
  8. Maturity Benefit: If the policyholder survives the policy term, they receive the fund value, which is the value of the units in the investment funds at that time.

6. Pension Plans

Also known as retirement plans or annuity plans, pension plans are designed to provide a steady income stream during the policyholder’s retirement years. Policyholders contribute premiums during their working years, and upon retirement, they receive regular payouts (annuities). These plans ensure financial independence and stability during retirement when there is no regular income source.

Plan Age Eligibility Investment Amount
18-60 years
Minimum: ₹500 per month; Maximum: 12% of your salary
60 years and above
Minimum: ₹1.5 lakhs; Maximum: ₹15 lakhs
18-60 years
Minimum: ₹100 per month; Maximum: ₹1 lakh per month

Pension Plan Calculations:

With pension plans, the premiums you’ve paid, along with any investment returns or interest earned, accumulate to form the retirement corpus. The insurance company deducts administrative and other charges from this corpus. In the vesting age, the accumulated corpus is used to provide you with regular pension payouts, known as annuities. The amount of the annuity depends on various factors, including the corpus, the annuity option chosen, the prevailing interest rates, and your life expectancy.

If you pass away during the accumulation phase, a death benefit may be paid to your nominees or beneficiaries. This could be a lump sum or the accumulated corpus, minus any charges.

Conclusion

Choosing the right life insurance policy depends on your individual needs, financial goals, and risk tolerance. Each type of policy offers a unique set of benefits to cater to different life stages and circumstances. Whether you’re looking for pure protection, long-term savings, or a combination of both, the diverse range of life insurance options with many benefits available in India ensures that you can find a policy that aligns with your objectives and provides peace of mind for you and your loved ones. Remember to carefully assess your requirements and consult with financial experts before making a decision.

Amit Arora Finnable

AMIT ARORA

I am a seasoned retail banker with over 21 years of global experience across business, risk and digital. In my last assignment as Global Head Digital Capabilities, I drove the largest change initiative in the bank to deliver the end-to-end digital program with over US$1 billion in planned investment. Prior to that, as COO for Group Retail Products & Digital, I implemented a risk management framework for retail banking across the group.
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