Life insurance can be described as a binding contract between an individual, who is the policy buyer, and an insurance company. Under the deal, in exchange for regular payments, known as insurance premiums, the insurer agrees to pay a death benefit, which is a sum of money, to the insured’s nominee or beneficiaries upon their sudden death. A life insurance plan is designed to protect individuals from impending financial hardship they may face in the event of their sudden death. The death benefit availed through the policy can help the insured’s dependants pay off outstanding debts, cover funeral or legal expenses, fund the child’s higher education, or provide essential financial support to the surviving family members. This makes the policy an imperative addition to individuals’ financial planning, so we must know more than what is insurance and find out how to maximize its utility.
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Types of Popular Insurance Policies
Pure protection insurance policies are designed to provide comprehensive coverage against the risks of death, disability, or chronic illness. These insurance plans usually do not come with a savings or investment component and are relatively the most affordable type of life insurance plan.
Protection and Savings
These types of insurance plans are designed to offer the benefit of insurance cover and savings/investment perks. While the insurance plans are considered to be more expensive than the pure protection insurance plans, they are a good choice for those individuals who are keen on building wealth and protecting their family members at the same time.
These are the most popular types of insurance plans –
- Term Life Insurance: Term life insurance is a popular type of life insurance that extends financial protection to the policyholder’s nominee or beneficiary in the event of their untimely death during an active policy term. After the insured’s sudden death, the policy nominee has to file a death claim with the insurance provider. However, if the insured survives the insurance policy term, the nominee or the policyholder cannot file a death claim, and the insurance coverage will cease to exist. Notably, the policyholder can add riders to their term plans to extend the scope of their coverage, by including an accidental death rider or critical illness rider to their existing policy.
- Endowment Policies: Endowment insurance plans offer the insured or their nominee with guaranteed returns, comprehensive insurance coverage, and a substantial death benefit, all in one policy. Once the insurance policy reaches maturity, the policyholder gets a lump sum payment from the insurer. However, in the event of the insured’s sudden death, their nominee or beneficiary can file a policy claim to avail of the death benefit, which is often more than the amount of the cover.
- Pension or Annuity Plans: This wealth-building means for retirement planning also offers financial stability to the insured’s family members. The policy offers the policyholders flexible withdrawal options, including a regular flow of income or lump sum payout.
- Children’s Life Insurance Policy: Child life insurance is designed to offer the dual benefits of savings and investment facilities to help policyholders build a safe and financially secure future for their children. Typically, such insurance plans allow partial withdrawals from the paid premiums once the child in question reaches specific milestones in life.
- Unit Linked Insurance Plans: Unit Linked Insurance Plans (ULIPs) is a popular insurance that offers the best of investing and insurance policy into a single product. The policy buyer has the flexibility to put their money into different types of funds, such as debt, equity, and hybrid funds, based on their risk appetite and financial goals. ULIPs are popular among investors for their potential to offer investors market-linked returns on investments. However, these plan comes with notable market-linked risks, making it crucial for individuals to study the market before allocating resources to different funds and investment instruments through the scheme. Notably, ULIPs have a five-year lock-in period, but they offer policyholders the choice to make partial withdrawals or switch between investment funds. This feature makes them a suitable pick for many for long-term financial planning.
- Whole Life Policy: This type of insurance plan offers policy buyers lifelong coverage for themselves and their kids, making the plan a viable option for those with multiple dependents.
- Money Bank Policies: This type of insurance plan pays a part of the sum assured to the insured at regular intervals and the rest of the sum plus a bonus, at policy maturity. However, if the insured dies when the policy term is active, the entire sum assured is paid to the nominee or beneficiaries. Also, money-back insurance plans provide the policy buyer with maturity benefits as lump sum payments.
That said, when looking for a life insurance plan, it is crucial to consider the insurer’s claim settlement ratio (CSR). The ratio is essentially the percentage of insurance claims that a company has settled in a given year. A higher ratio demonstrates the company’s strong likelihood to approve insurance claims. Additionally, individuals must know what is insurance exclusions are to make a smart choice.
Exclusions of Life Insurance Policy
Some of the most common exclusions across life insurance policies include these –
- Death while engaged in unlawful activities
- Death caused by man-made disasters like civil unrest or war
- Death due to sexually transmitted infections (STIs)
- Death due to HIV/AIDS
- Fatal injuries resulting from the use of illegal drugs or alcohol
- Self-inflicted injuries
- Death while participating in hazardous activities, including bungee jumping, rock climbing, diving, mountaineering, etc.
Life insurance policies come with a waiting period, during which the insured will not be covered for death. This means if the policyholder dies during the waiting period, their beneficiaries will not get the death benefit from the insured. Notably, the duration of the waiting period varies among insurers, but it is often within the range of 30-90 days. Hence, check the waiting period and pick a policy with a shorter duration and an affordable life insurance quotes for peace of mind.
Regardless of the type of life insurance plan one picks, it is vital to review their exclusions and features to compare their scope and determine whether they will fit personal requirements or not.