A life insurance plan is the best way to secure your family and prepare them for the uncertainties in the future. However, it may be confusing to buy the right insurance policy with so many plans and types in the market. Let’s keep it simple and understand the basics of a life insurance plan.
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What Is a Life Insurance Policy?
A life insurance policy is a contract between the insurer and the insured where the insurer (the insurance company) promises to pay a specified amount to the beneficiary of the insured (the policyholder) in case of the policyholder’s death or maturity of the policy as per specified terms and conditions. In exchange, the policyholder pays premiums (lump-sum or in parts) to the insurer for a specified period.
Types of Benefit in a Life Insurance Policy
A life insurance plan comes with two major benefits, including
Death Benefit: In this, the insurance company pays a pre-decided amount to the policyholder’s beneficiary on his/her demise.
Maturity Benefit: In this, the policyholders or their nominee get a pre-decided amount once the policy matures.
Types of Life Insurance Policies
Whole Life Insurance: A whole life plan covers the policyholder throughout his/her life up to 100 years. It comes with both the death benefit and a maturity benefit. Thus, if the policyholder dies during this period, the beneficiary gets a certain amount. However, if the policyholder crosses 100, he/she gets a maturity benefit.
Term Insurance: This is the most affordable and simplest type of life insurance It comes with only a death benefit and no maturity benefit.
Investment and Insurance Plan: These plans come with the dual benefit of insurance and investment. A part of the amount goes towards providing life cover whereas the rest is invested to generate returns. There are two major types of Investment cum Insurance plans-
Unit Linked Insurance Plans: Here, a part of the money is invested in money market instruments and come with risks.
Endowment Plans: A part of the money goes towards saving instruments that provide guaranteed returns.
Retirement Plans: These plans provide you the dual benefit of investment and insurance. However, unlike ULIP or endowment where the money invested is only redeemable on maturity, these plans also aim to generate a monthly income for you in your retirement years.
Riders and Add-ons
Along with the insurance policy offered to you, you can also add riders to enhance the coverage. These riders can offer you coverage over and above the existing cover. Some of the noteworthy riders are.
Accidental Death Benefit Rider: This provides added coverage in case the policyholder dies in a sudden accident. The amount is over and above the existing cover.
Critical Illness Cover: This provides an extra lump-sum payment to the policyholders or their beneficiaries in case they are detected with a critical illness such as heart failure, kidney failure, cancer, etc.
Permanent Disability Rider: In case the policyholder suffers from permanent disability, the insurance company pays a specified amount either in lump-sum or in parts over the next few years to the beneficiary.
Select the Right Life Insurance Plan
While selecting the right life insurance plan, remember it is a life insurance plan first and an investment plan later. While ULIPs and endowment plans are great, they should only be treated as the icing on the cake and not the real cake. Talk to a professional insurance advisor to find the right insurance policy and the right cover for you and your family.