Life insurance plans are plenty. Pension, endowment, ULIP or term, the list is exhaustive and making a choice may often be perplexing. With the wide range of options available in the market today, how do you know what’s the right kind for you? Here’s a roundup of it, and how you should go about making a choice.
Know Your Options First
A life insurance policy pays your dependent a pre-determined sum of money in the event of your unexpected death. It is financial tool securing your family in your absence. Available in different variants, we could classify them into broad categories for easy understanding. Here is a look.
|Type of Plan||Key Characteristics|
|Pure protection plan||Also known as term plans
Protection in the form of sum assured, paid out only if death occurs during term of plan. Term ranges between 5 to 25 years
No survival/maturity benefit.
Characterised by low premiums
|Endowment plan||Combination of savings and insurance
In case of death during tenure of policy, policy benefits paid out to dependents.
In case of survival of policy holder, maturity benefits paid out.
Policy holder is also entitled to bonus
|Whole life plan||Insurance cover throughout life of policy holder
No survival benefit
Entire corpus is paid to the family on death of policy holder.
|Unit linked plan||Combines investment plus insurance.
Part of the premium paid is invested in equities or bonds and another part is used towards life insurance.
Involves a risk element, on the basis of the underlying funds invested in.
Additional expenses such as fund management charges are incurred
|Money back plan||Pays back a certain percentage of the sum assured at pre-determined intervals- after 5 10 & 15 years.
Typically a savings – investment plan
Pay-outs are times at important life events such as children’s higher education, marriage or retirement.
|Pension Plan||Designed to provide a regular source of income post retirement.
Premium is paid during working years to get annuity in later years.
Option to Commute 1/3 on retirement.
Which Policy to Choose?
Having looked at the options, let’s get back to our primary question- which policy would suit you best?To answer this question, we must understand a very basic principle. Each of the broad categories of life insurance policies have been designed to fulfil a unique need. From purely protection based to concentrating on wealth creation, each policy is suited to meet a different purpose. Thus, making a choice primarily depends on your needs, preferences and the life stage you are in. In different life stages, your requirements, and financial commitments may be different. Thus look into your individual portfolio, assets and liabilities, and family commitments before deciding.
Unmarried and single (24 to 35 years): This is that stage in life when family responsibilities are at a minimal. At this stage, you could get a higher risk cover at low premiums. Opt for a longer duration term plan of say 15 years. Remember to also simultaneously start investing early in life. The earlier you start the more are your gains from investment due to the power of compounding. An endowment plan for the long term may also be considered to incorporate savings and insurance together.
Married with small kids (35 to 45 years): With responsibilities and financial goals shaping up, this is the phase where a comprehensive life cover is a must. It is also the time when savings for future financial goals need to be prioritised. Opt for an endowment plan concentrating on meeting long term financial goals.
For those with a reasonable to high risk appetite ULIPs may also be considered. Do make provisions for partial withdrawals in case of emergencies. Riders may be additionally opted for to enhance protection.This is also the time when your retirement plan should be in place. You could opt for deferred annuity plans to provide for a regular source of income post retirement.
Middle age till retirement (45 to 60 years): A time when kids are much older and you are almost on the verge of meeting your financial goals. Having a life insurance is still a necessity at this stage. However, the nature of the plan depends on your financial position, your savings and investments made. For those with steady investments in alternate avenues, a simple term plan should do. Remember, a life insurance policy may get to be expensive at this later stage. Thus term plans may work out far effective on the pocket.
Final Points to Ponder
- The need for insurance cannot be undermined. With plans offering added benefits of wealth creation and retirement annuities, one should not ignore its primary role- of financial protection in case of an unforeseen event.
- Start early- The earlier you get started the lower are your premiums. You also would be able to build substantial wealth for your retirement.
- Your insurance policy must ensure your family is able to maintain the same standard of living in case of your untimely death.
- Assess your insurance portfolio periodically, to ensure you are adequately covered, and they are in tune with your priorities in life.
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