Based on the benefit patterns the traditional Life Insurance products can be categorised into the following types:
- Term Insurance
- Whole Life Insurance
- Endowment Insurance
As the name implies, this provides protection for selected term only. You can take term insurance for a number of years as per your requirement. This is called pure insurance product. The benefit is only paid if the insured person dies. If nothing happens till the term of the insurance, nothing is paid. Term insurance is very misunderstood product because of two reasons. One, insurance agents do not market it well because it doesn’t have good commission structure and two, because the very idea of not receiving anything in the end (if the insured person is all well) is not liked by people.
Pros: The advantage of term insurance is very small premium. You can get a life cover of 1 crore by paying just 15000 to 30000 an year. For life cover of 30 lakhs or 50 lakhs, the premium will be about 10,000 to 15,000 per year.
Cons: There is no benefit if the insurance holder survives.
All insurance companies provide term insurance and the premium varies widely. Insurance seeker must do their own research to get the best available.
Suggestion: Everyone must take it. This is pure insurance.
Whole of Life Assurance
This type of life insurance is to cover the whole life. The protection is provided over one’s lifetime. This is of two types: Participating and non-participating. Participating types involve participation of beneficiary in the return of the investment. The beneficiary gets higher or lower shares on profit based on the performance of the fund while non-participating ones get the same benefit over the life.
Pros: The best part of this insurance is that the named beneficiary gets the death benefit and whatever accrues as bonus at the time of death of the insurance holder. The purpose of this policy is to create a corpus for the heirs and ensure that their dependents do not suffer in case of sudden eventuality.
Cons: The insurance holder doesn’t get anything. There is no benefit on survival of insurance holder.
There are variants of this insurance type available in the market.
Suggestion: Do it only if you are very risk averse and do not intend to devote time and money in other investments and want to save a corpus for your family.
Endowment insurance is combination of term and whole life insurance. The benefit is provided on the death of the insurance holder within the term or at the end of the term if the insurance holder survives. While this is a good way to generate lumpsum cash, this is not the most efficient way. This also has variants like participating and non-participating types.
Pros: The insurance holder is certain to get the sum assured and bonus at the end of the term if he or she survives and the beneficiary gets the benefit of the insurance holder dies.
Cons: The returns on investment in endowment policies are very low in the range of 4% to 6%.
Suggestion: A combination of term insurance with rest of the premium in good mutual fund would beat this product.
Annuity is nothing but a series of payments that insurance holder gets after retirement for a fixed period. Annuity is also known as pension plan. The policy holder deposits certain premium over a fixed time and the accumulated sum is used to pay regular pension for the term. The annuity can be paid for the life or for certain years after the pension or annuity commences.
Pros: It is a very good way to ensure you get income when you are no more able to work and earn.
Cons: The returns are low but this should not be taken as disadvantage. It is better to buy annuity insurance for risk-free certain income and invest in a stable mutual fund for returns.
There are products like ULIPs in the market. They invest in market and provide better returns but investors have to be ready for long term. Do not expect your money to give you returns immediately. After all, if you can pay insurance premium for 20 years without making any noise, why can’t you invest for 20 years in a SIP model which will beat insurance returns any day?
The other important point is not to confuse insurance with investment. The purposes of both are different. Insurance provides a support in case of any eventuality and hence their returns are bound to be much lower. Investment, on the other hand, provides you returns in long term but may not even give you the “assured amount” as promised by insurance companies.