Life Insurance

Term

Life is uncertain and the risk of untimely death is quite relevant. If the breadwinner of the family dies suddenly, the family loses its source of income and faces a major financial crisis. Savings may not prove sufficient to meet all financial needs. A term insurance plan promises financial security in such times of distress and helps the family deal with financial loss in the unfortunate event of the premature demise of the primary bread-earner. What is Term Insurance plan? A term insurance policy is a type of life insurance plan that can be purchased by an individual for a specific duration. The policy also offers a specified sum assured. If the insured dies during the term of the plan, the sum assured chosen is paid by the insurance company as a lump sum to the family of the deceased. This helps the family deal with the sudden financial loss. The term of the policy generally starts from the age at which the policy was purchased and ends when the policyholder achieves the age specified in the plan. Considering the high risk involved in term insurance, policyholders are allowed the option of choosing a high sum assured to cover that risk.

Key features and benefits –

1. Better financial security with affordable premiums.
2. No limit on coverage availed with protection up to old age.
3. If you stop paying the premium, the policy will lapse and you won’t avail any benefits.
4. In case of death, only the guaranteed sum assured is paid.
5. A wide range of riders are available for the term insurance plans and add-on benefits to enhance policy coverage.
6. Free look period is available for 15-30 days, where customers may cancel the purchased policy and avail the full refund.
7. A grace period of 15-30 days is offered by the insurer in case of delayed premiums on the policy purchased.
8. Premiums payable on term life insurance plans are eligible for tax benefits under Section 80C of the Income Tax Act, 1961. You may receive deductions in your income tax up to Rs. 150,000 on premiums payable for term insurance purchased for yourself, as well as your spouse and dependent children.
9. No other financial investment promises financial security like term insurance.

ULIP’s

ULIPs are Unit Linked Insurance Plans which come with the dual benefit of Insurance combined with investments. ULIPs provide flexibility to the policyholders to choose their investment fund as per their risk appetite. So, if you wish to invest in the Equity Market or in the Debt Market along with an Insurance Coverage, ULIP is the answer to your needs. It provides the best of both worlds.

What is a ULIP?

ULIPs are life insurance plans which provide policyholders dual benefits of investment returns as well as life insurance coverage. The premiums paid under the plan are invested in the capital market. Thereafter, the premiums grow with the growth of the market. The invested premiums along with the growth they have earned reflect the Fund Value of the plan. If the insured dies during the term of the plan, higher of the Sum Assured or the Fund Value is paid. In case of maturity, the available Fund Value is paid and the plan is terminated.

Key features and benefits of ULIP’s -

1. The amount of premium payable depends on the policyholder. The policyholder can decide what amount of money he wants to invest in the plan. However, the plan has a minimum premium criterion.
2. The sum assured under the plan depends on the premium paid. It is usually expressed as a multiple of the annual premium paid by the policyholder.
3. There are different funds provided by a unit linked plan. These funds are basically the following:
   • Equity funds, which invest primarily in equity-oriented securities. These funds have high risk and promise high returns.
   • Debt funds, which invest primarily in fixed-income bearing instruments. The funds, therefore, have very low risks and low returns.
   • Balanced funds, which invest in a combination of equity and debt. Thus, there is moderate risk and moderate return under the funds.
4. There is a lock-in period of 5 years under the plan. After the lock-in period is over, the policyholder can withdraw funds from the Fund Value partially. This facility is called partial withdrawals.

Difference between ULIPs, Mutual Funds, and Traditional Life Insurance Plans

Since ULIPs also provide market-linked returns like mutual funds, they are compared to mutual funds. However, mutual funds and ULIPs differ on the following parameters:

1. Lock-in Period: ULIPs have a higher lock-in period of 5 years. In case of mutual funds, a lock-in period is applicable only for Equity Linked Savings Scheme (ELSS), where the period is 3 years. Other mutual fund schemes do not have any lock-in period.
2. Life Insurance Coverage: ULIPs provide life insurance coverage, which is distinctly absent in mutual funds.
3. Tax Implications on Fund Switch: In ULIPs, when there is a fund switch, no tax is applicable. However, in case of mutual funds, when there is a fund change, taxes are applicable depending on the fund selected.
4. Tax Benefits: The benefits under ULIPs are completely tax-free. Mutual fund returns are taxable.
5. Charges: Charges under ULIPs are slightly higher than charges under mutual funds.

Endowment or Savings Plan

An endowment insurance plan is a savings-oriented life insurance plan that helps in building up a secured financial corpus. The plan promises guaranteed benefits and pays either a death benefit or a maturity benefit.

Features of Endowment Policy –

1. The policy is usually offered for long tenures, going up as high as 30 years. In some endowment plans, lifelong coverage might also be available.
2. The policies are issued either as participating policies or as non-participating policies. In participating plans, bonuses are declared, while in non-participating plans, bonuses are not declared.
3. Guaranteed additions and loyalty additions might be added under some endowment plans.
4. These plans pay the sum assured on death or maturity. Along with the sum assured, any type of additions that accrued during the term and any bonus added to the plan are also paid.
5. Optional riders are also available under endowment plans.
6. Loans are available under endowment plans, wherein the policyholder can avail up to 90% of the surrender value as a loan.

Why Endowment Policy Is a Good Choice –

1. The benefits provided under the plans are guaranteed. Thus, there is no risk in the returns promised by endowment plans. For risk-averse investors, endowment plans make a good choice.
2. In participating endowment plans, bonus declarations enhance the benefits payable. This gives a good return to the policyholder. Even in case of non-participating plans, guaranteed or loyalty additions increase the benefits payable on death or maturity.
3. The plan provides insurance coverage as well as creates a corpus for the savings needs of the policyholder.
4. The premiums paid are allowed as a tax deduction under Section 80C, while the benefits received are tax-exempt under Section 10 (10D). Thus, endowment plans provide dual tax benefits not only on the investments but also on the returns generated from the plan.
5. The loan facility allowed under the plan provides policyholders with funds when needed.

Pension Plans

Pension plans are annuity plans designed to create a steady flow of income after retirement. Annuities are a series of regular incomes paid throughout the lifetime of an individual. Pension plans help policyholders build up a retirement corpus from which annuity payments are made. Pension plans are different from other life insurance plans as they pay the maturity proceeds in the form of annuities, rather than in a lump sum.

Types of Pension Plans in India

1. Deferred Annuity Plans:Under deferred pension plans, the payment of the annuity is deferred up to a certain period. In these plans, the policyholder first builds up a corpus by paying premiums. The term of the plan is called the deferment period, as the annuity is not paid during that period. After the deferment period ends, the policyholder receives annuity pay-outs for life.
2. Immediate Annuity Plans:Under immediate annuity plans, annuity pay-outs start immediately after a lump sum corpus is paid to the insurance company. The policyholder pays a single premium, and the company pays annuity pay-outs starting from the next month, quarter, half-year, or year, as chosen by the policyholder.

Features of Pension Plans

1. There is no death benefit when annuity pay-outs start. Under deferred annuity plans, when the premiums are being paid, the plan has a death benefit. But under immediate annuity plans, where annuity pay-outs start immediately, no benefit is usually paid on death. The annuity pay-outs stop when the policyholder dies. In some cases, the single premium paid at the time of buying the immediate annuity plan is returned.
2. Deferred pension plans come in traditional as well as unit-linked variants.
3. The date on which the annuity pay-outs start and the policy matures is called the vesting date.
4. In the case of immediate annuity plans, there are multiple annuity payment options. The policyholder can choose to include the spouse as the second annuitant, in which case annuity is paid till either of them is alive. Similarly, the annuity pay-outs can be chosen to increase every year. There is an option to receive the purchase price back if the annuitant dies, etc.
5. The annuities paid under the plan are taxable. Only the commuted part of the pension is tax-free under Section 10 (10A). Moreover, the premiums paid for the plan qualify for tax deduction under Section 80CC.