We have heard about the importance of having life insurance and at some point, thought of getting one. However, the problem is there are too many types of life insurance policies in the market. Your friend might have told you about the maturity benefits of the endowment policy, but then, you read somewhere that term plan provides more coverage for a lesser premium. And amidst all the confusion, we often end up getting the wrong product.
In this blog, we will tell you about different kinds of life insurance policies and their benefits so that you can make an informed decision while getting a life insurance policy.
But, before that let’s understand what a life insurance policy is
Life insurance is simply a contract between the policyholder and the insurance company. The policyholder pays a premium to the insurance company for a specific number of years (or for life), and in return the insurer promises to pay a sum assured to the nominee upon the death of the policyholder. For some policies, the insurer pays a maturity benefit to the policyholder, if he/she survives the term. However, these terms differ for different policies.
There are five different types of life insurance policies available, and here are their features and benefits:
A term insurance policy is a pure life cover and its structure is very simple to understand. You pay a premium to an insurance company for a specific number of years and in return, in case you were to meet with an untimely death, the insurer promises to pay the sum assured to your family. It does not come with any maturity benefit (apart from Term Plan with Return of Premium or TROP).
Benefits of Term Insurance Plan:
It provides higher cover for lesser premium as compared to other life insurance products.
TROP comes with a maturity benefit, which is the sum total of all premiums paid. No interest amount is paid on that.
Whole Life Insurance Policy:
As the name suggests, a whole life insurance policy gives you a cover for life. If the premium amount is paid regularly, the insurer promises to pay the sum assured to the nominee of the policyholder after the death of the policyholder. Apart from the sum assured, it also includes a saving component.
Unlike other insurance policies, it does not have a defined term. The sum assured is paid to the dependent upon the death of the policyholder.
Apart from the sum assured upon your death, it also has a saving component. You can re-invest it letting the cash amount grow or can remit a part of the cash value during your lifetime. You can also avail a loan against the saving component.
Endowment plans are again a combination of savings and protection. If the premiums are paid on schedule for a specific number of years, insurers promise to pay the assured sum to the nominee in case of the untimely death of the policyholder. Meanwhile, if the policyholder survives the policy term, he/she receives a lump sum payout as the maturity benefit.
Benefit of Endowment Policies:
Apart from the sum assured there is a saving component. You can use this to make goal-based savings and in case of financial emergencies, you can avail of a loan against it.
Moneyback policies are also a combination of savings and protection. But the key advantage of this policy is that a portion of the sum assured is paid to you at a regular interval during the policy tenure. The remaining amount along with the bonus is paid at maturity. This benefit is not available for any other life insurance policy. However, if the policyholder dies during the policy tenure then the entire sum assured is paid to the nominee, this is despite the survival benefits that the policyholder has already received.
Benefit of moneyback policies:
The biggest advantage of moneyback policies is the liquidity it provides, i.e. you receive a percentage of the sum assured at the regular interval.
Unit Linked Insurance Plans (ULIPs):
Unit linked insurance plan, better known as ULIP, is a combination of insurance and investment. The investments are made in debt and equities by a fund manager assigned by the insurance provider. However, the policyholders can choose whether he/she wants to invest in debt or equity and in what proportion. Though there are no guaranteed returns, a lump sum amount is paid to the policyholder at maturity. However, if he/she dies during the policy tenure, the insurer pays him/her a sum assured.
Benefit of ULIP:
Though there is no guaranteed return, ULIP provides a higher return than traditional policies with a savings component.
5 Top Benefits of Life Insurance
Life insurance provides a number of useful benefits. Among them:
1. Life Insurance Payouts Are Tax-Free
If you have a life insurance policy and die while your coverage is in effect, your beneficiaries will receive a lump sum death benefit. Life insurance payouts aren’t considered income for tax purposes, and your beneficiaries don’t have to report the money when they file their tax returns.3
2. Your Dependents Won’t Have to Worry About Living Expenses
Many experts recommend having life insurance that’s equal to seven to 10 times your annual income. If you have a policy (or policies) of that size, the people who depend on your income shouldn’t have to worry about their living expenses or other major costs. For example, your insurance policy could cover the cost of your children’s college education, and they won’t need to take out student loans.
3. Life Insurance Can Cover Final Expenses
The national median cost of a funeral that included a viewing and a burial was $7,848 as of 2021.4 Because many Americans do not have enough savings to cover even a $400 emergency expense, having to pay for a funeral can be a substantial financial burden.5 If you have a life insurance policy, your beneficiaries can use the money to pay for your burial expenses without having to dip into their own savings or use credit.
Some insurers offer final expense policies. These policies have low coverage amounts and relatively inexpensive monthly premiums.
4. You Can Get Coverage for Chronic and Terminal Illnesses
Many life insurance companies offer endorsements, also known as riders, that you can add to your policy to enhance or adjust your coverage. An accelerated benefits rider allows you to access some or all of your death benefit under certain circumstances. Under some policies, for example, if you are diagnosed with a terminal illness and are expected to live less than 12 months, you can use your death benefit while you’re still living to pay for your care or other expenses.
5. Policies Can Supplement Your Retirement Savings
If you purchase a whole, universal, or variable life insurance policy, it can accumulate cash value in addition to providing death benefits. As the cash value builds up over time, you can use it to cover expenses, such as buying a car or making a down payment on a home. You can also tap into it if you need to during your retirement years.
However, a life insurance policy should not replace traditional retirement accounts like a 401(k) or an IRA. What’s more, cash value life insurance is considerably more expensive than term life insurance, which has no savings component but simply a death benefit.