What is a Life Insurance Policy and what are its types?

The legal arrangement between two parties in which one provides insurance and the other gets insured with death and health benefits in exchange offer a premium amount known as a life insurance policy. An insurance company is responsible for offering a life insurance policy based on the unique Expectations and budget of potential clients. There are different types of life insurance policies such as Term Life Insurance, Child life insurance, Endowment plans, Whole life insurance and Unit link insurance plans (ULIPs). 

Life Insurance Policy

A life insurance policy is a legal contract between potential policyholders and the Insurance Company. Based on a Life Insurance policy the insurance company is responsible for a sum of money to the beneficiaries of the policyholder in case of his/her critical illness or sudden demises in exchange for a fixed premium amount. The validity of life insurance policies is based on selected tenure by the policyholder. The benefits of life insurance become available for beneficiaries in case of specific dates, the policy’s maturity date or the sudden death of the policyholder. Some types of life insurance policies also offer living benefits along with investment opportunities.

Benefits of Life Insurance Policy

• The most important feature of a life insurance policy is financial protection to support family members in the absence of a family earner. 
• It provides tax benefits by offering a Rs. 1.5 Lakh deduction on taxable income under section 80c of the Income Tax Act. 
• Life insurance policy provides financial security and ensures a consistent lifestyle for family members in case of the policyholder’s demise. 
• It provides critical illness benefits with death benefits to cover hospital expenses and other medical expenses of the policyholder. 
• Life insurance policy provides sufficient funds to cover financial obligations such as outstanding debt, loans as well as funeral costs. 
• Life insurance policy provides accidental disability benefits by offering additional payouts along with a premium waiver if the policyholder gets critically injured during the policy term. 
• It ensures consistent income after the sudden demise of the policyholder by offering regular income payout options to the family members or beneficiaries designated in the policy.  
• Life insurance policy provides maturity benefits in the form of sum assured along with accrued bonuses if the policyholder survives the decided policy term.  

Types of Life Insurance Policy

Term Life Insurance

A type of life insurance policy that provides coverage for a specific duration typically between 10 to 30 years in exchange for a fixed rate of premium known as term life insurance. It provides death benefits to the beneficiaries if ensures the person dies within the policy term.  It is a simple and affordable type of life insurance policy that offers financial security for family members for a specific period.  The investment in a term Life Insurance is eligible for tax benefits with multiple payout options.  It also offers other benefits such as accidental death benefits, permanent disability waiver, terminal illness, etc.

Child policy

A life insurance that provides combined benefits of investment and life insurance among policyholders to secure the child’s financial future is known as a child policy. A child policy offered by insurance companies typically provides coverage for a child’s life and helps in creating battle cash value to address future expenses such as a marriage education or entrepreneurship. The child policy also takes care of the child’s financial obligations if the parent or policyholder dies within the policy duration. A child policy is also eligible for tax deductions under the Income Tax Act of India, complete financial protection of a child’s life, and an opportunity to increase wealth with an investment component.

Endowment plans

An endowment policy offers the benefits of a savings scheme and insurance coverage altogether. This life insurance policy is designed to support people in saving regularly and enjoy a lump sum amount when the policy matures or in case of the sudden demise of the policyholder.  The endowment policy generally matures within 10: 15 or 20 years or to a specific age limit.  It offers that benefits to the beneficiaries if the policyholder dies or it provides a lump sum amount at maturity if a policyholder survives the policy term.

Whole life insurance

The permanent type of life insurance policy offered by insurance companies that continues for the entire life of the insured in exchange for premium payments regularly is known as a whole life insurance policy.  Whole life insurance provides death benefits to the beneficiaries to help them survive financial obligations in the absence of the earner. It also provides accidental death benefits, critical illness benefits, terminal illness benefits and permanent disability benefits.

Unit link insurance plans (ULIPs) 

This type of life insurance policy provides a combination of benefits related to investment and life insurance. The premium paid by the policyholder in ULIP is divided into two parts one of which is utilised to provide Life Insurance coverage and the other part is invested in market products. Policyholders can select the type of market product to invest in such as a combination of funds and equity, debts, funds, equity, etc. 

How to buy an appropriate Life Insurance Policy

• Analyse personal financial goals to identify a suitable life insurance policy
• Assess life insurance goals possible with different types of life insurance policies
• Evaluate personal financial conditions and define a budget to invest in life insurance
• Use an insurance calculator to compare different options and choose accordingly
• Consider features like waivers, riders, tax deduction eligibility, and the reputation of the insurance provider
• Determine life insurance benefits such as death benefits, critical illness coverage, etc.

Conclusion: 

To conclude, Life insurance policies offer several benefits for insured as well as designated beneficiaries in the time of critical illness or death of a policyholder. A life insurance policy allows individuals to select premium amounts based on their financial goals. Life Insurance is an efficient method of life stage planning that promotes savings in earning days to secure a good future in retirement days.