It happened to me also.
I had just joined my first job.
One evening, my neighbourhood uncle came looking for me.
I was puzzled! He had never asked about me before! However, I went to meet him. My father alongside me.
The matter became clear within a few minutes.
His wife was an agent of LIC India. And he wanted me to buy a life insurance policy from her.
I had no idea about all the different types of life insurance policies then.
My father had already taken 2-3 policies from her. So, after a short discussion on the sum assured etc., I took the policy. It was LIC's NEW BIMA GOLD policy.
This is how I bought my first life insurance policy.
I think something like this must have happened to you too. The person selling the policy may be different. He may be a colleague, friend or a relative etc.
Do you still buy your life insurance policy like that? If you do, then you must be careful.
Let me explain by an example.
Imagine that you are going to buy your next smartphone.
How do you do it?
You start by roughly estimating a budget. Say,₹10000 or ₹20000.
You select the features that you want most. Like-
- Good Camera.
- Full HD display etc.
You shortlist 3-4 models with these features.Then you ask your friends for suggestions. You seek opinions from friends who have used it already.
You read reviews on Flipkart or Amazon. You may even visit some store and try out the phone yourself. And finally, you buy it.
You buy the phone only if you are satisfied that you are getting a good deal.
You select your smartphone carefully because you are spending your money on it. You want to make sure that the money is well spent.
Why don't you choose your life insurance with such care?
According to Kotak Life Insurance, the aim of life insurance is to provide financial protection to your family in the unfortunate event of your death."
The future of your family depends on how prudently you act now. It is your responsibility to see that your family does not suffer if anything unfortunate happens to you.
You should , therefore, build a solid life insurance cover early on in your life.
To build a solid cover, you need to know all the various types of life insurance policies that are available today.
Today I am going to show you just that.
Let me show you...
Types of life insurance policies
There are six main types of life insurance policies in India. I have shown here how you can identify each of them by analysing their features and benefits.
Since each of these six types of life insurance policies offer different benefits, I have also discussed when you should buy each of them.
I have also added quick navigation links for you below. Use it find out which one you want easily.
The first one is ...
Life insurance type : Endowment policy
Endowment policies work like this -
- You select a sum assured, the tenure of the policy, pay the premium. Your family gets the financial protection.
- In the unfortunate event of your death during policy tenure, your family will get the full sum assured. If you survive the tenure, you get the sum assured plus a bonus amount.
The premium you pay gets divided into three parts. The first part is used to provide for the insurance cover. The second and third parts are used for paying the bonus and administering the policy expenses of the insurer.
Endowment policies are one of the most popular type of life insurance in India.
When should you buy endowment policy?
You must have noticed that endowment plans work as an investment option in addition to insurance.
That's why endowment policies can be suitable choice as top up life insurance. If you have a big enough basic term insurance, you can increase that cover by taking good endowment policies.
Now, let us look at the next type -
Life insurance type : Whole Life policy
A whole life insurance policy gives you protection for your entire life. And pays out the benefits to your nominee after your death.
There is no defined tenure of the policy. So you have to keep paying premium till you tern old and expire. Then the insurer will payout the corpus to your family.
You can easily think of whole life policies as one kind of inheritance gift to your children. In any case, you'll never get any return from a whole life policy. This is why they are not very popular.
When Should you buy a whole life policy?
These policies are good choice if you are employed in hazardous jobs.
People in the armed forces, engineers at construction sites, news reporters etc. work in high risk jobs. For them, whole life policies can be a good option to protect their family.
But again, I would recommend that you must first build a strong cover by taking a basic term insurance. Then you can increase that with other types of life insurance policies.
Life insurance type : Money back policy
Money back policy is a special type of endowment policy. Here, you don't get the maturity benefit at one go. Instead, you get part of the maturity benefit after preset time period.
For example, for a 15 year policy, you can select to get money back after5, 10 years. After 15 years you get the remaining maturity benefit plus the applicable bonus.
when should you buy moneyback policy?
Money back policies can support your planned future expenses. Let me show you with an example-
Imagine that you have a daughter who studies in VIII standard. She would be appearing in her XII-th board exam, JEE, PMT etc. in only 4 years. Then she would complete her graduation in another 3-4 years. Then you'd need to marry her off in another 4-5 years.
Naturally, you'd be worried that you must start arranging money to meet these expenses. This is where a money back life insurance policy can help.
If you take a money back policy now, it can return back a part of your investment at the right time to help you meet these expenses. Besides, it will also provide you a insurance cover.
Life insurance type : Unit linked policy (ULIP)
Unit Linked Insurance Policy or ULIPs are a mix of insurance and mutual fund concept. In ULIPs a part of your money gets invested into stock or bond market.
This is the part that generates the return that you get. You receive units with a NAV (Net Asset Value).
Since the ULIPs are directly linked to the market, the NAV of your units changes everyday. You can track the NAV value anytime through the website of the insurer.
This makes it very convenient to see the total valuation of your investment. But, this convenience can be harmful too.
Say, you have taken an ULIP policy with a cover of ₹20,00,000/-. You pay a premium of ₹15000/- every 3 months. So, after 2 years, you would have paid ₹1,20,000/-.
The market, in the meantime, has hit a rough patch and is down 20%. So when you go to check the value of your investment, you find it to be only ₹96000/-. A loss of ₹24000/-.
What would you do then?
You would most likely withdraw all your money from the policy and close it.
But that will be the biggest mistake.
If you want good returns from an ULIP, you must be ready to give it time.
If you want good returns from an ULIP, you must be ready to give it time.
Don't check the value of your ULIP frequently. Give it 5-10 years, or even more. Then you will get a good return on your investment.
when should you buy ULIP?
Personally, I don't like hybrid products. ULIP is a cross of mutual fund and insurance.
I would recommend that you don't invest in ULIPs. If you want to try mutual funds. Go and invest in them directly.
Life insurance type : Annuities and Pension policies
Annuity plans are not very popular but they are very useful. They are different from the other types of life insurance plans above.
Because they provide you an additional source of income every month. While others only give you a lump sum at the end.
You can select various aspects of the annuity policy before buying. Like, premium paying term, annuity starting time, with or without life cover etc.
When should you buy an annuity policy?
These policies were designed for people nearing their retirement. To provide them a source of regular income after retirement.
These policies are an alternative to popular MIS schemes like Post Office MIS, Bank MIS etc. But, they can also be used by younger people to create regular additional income.
Clearly, if you want a steady source of additional income, you can try annuity policies.
Life insurance type : Term life insurance policies
I've kept Term Policies for the last. Because, they are the most important.
Term policies are very simple. Suppose, you have a term policy for, say, 35 years. Your family will get the sum assured if you die within these 35 years. But, if you survive these 35 years?
You get nothing!
Why then is it so important?
Because they are very cheap. You can get a Rs.50 lakh cover by paying only about Rs.8000/- per year.
You must take a term life insurance policy to form the foundation of a strong financial plan. And you must do it early, when you are young.
When Should You Buy a term policy?
Anytime when you find out that your insurance cover is low.
Have you already taken a few policies? Perhaps some of the other types of life insurance I discussed above? Do you already pay hefty premium every year?
Then you should look to stop policies that has high premium but offer low cover. And take a good term life insurance policy instead.
If you are young and single then you should buy a large term policy immediately. You'll need it when you grow old and have family, kids etc.
Would you take a headache pill if you have got stomach pain?
Just like that, you should not take an endowment plan if you need periodic cash-flows in future. You must buy a money back policy for that.
Now you know about all the different types of life insurance policies. So, next time when your friend, colleague or relative asks to buy an insurance policy, you'll be prepared.Choose the right life insurance policy and build a solid financial foundation.
Do you have any question? Feel free to ask me by using the comment form below. Also if you liked this article, please help me to spread the word by sharing it.