Life Insurance: How does one choose the right plan and what are the various types of policies?

The concept of Insurance has historical values in India. It is known to be mentioned in the texts of Arthashastra By Kautilya and also goes back to Manusmruti. Those concepts are closely related to the Marine Insurance.

Modern era of Life Insurance can be traced back to 1870 when the Bombay Mutual Life Assurance Society became the first Indian insurer. .Life insurance in India was completely nationalized on 19 January 1956, through the Life Insurance Corporation Act. LIC was formed after all 245 insurance companies were merged into a single entity.

Life insurance is like a blessing in distress. Loss of life at any point of time is the most sorrowful event. Financial damage caused due to this causes lot of pain to the dependants in case of loss of breadwinners. The life Insurance addresses this basic issue. It is almost a duty of every earning person to get a cover for his/her family to save them from any untimely disaster.

There are 2 ways of calculating your insurance requirement.
- Human life value and
- Expense protection

Human life value aims to determine the economic value of an individual. The economic value can be calculated by estimating the total income an individual will earn throughout his/her lifetime. Apply discounting method using a reasonable rate to arrive at a value which is the worth of the person. This approach gives a reasonably accurate estimate of the individual's economic worth to his or her family.

So human life value takes into account the income earning potential.

Now comes the most important thing that is the expense protection .This approach emphasises on what the family's expense level is. This is done by taking into account todays expenses and inflating them with an adequate rate of inflation growth %.

These are the basic things you need look into any life Insurance policy.
The amount of money that your family is supposed to get as insurance money is called as Sum Assured. The premium required is calculated by taking into account your age and your insurance requirement.

As we talk about life insurance they are mainly classified as follows

Term Insurance Policy
A term insurance policy is a pure risk cover policy that protects the person insured for a specific period of time. In such type of a life insurance policy, a fixed sum of money called the sum assured is paid to the family within the policy term. For instance, if a person buys a Rs 20 lakh policy for 15 years, his family is entitled to the sum of Rs 20 lakh if he dies within that 15-year period.
If the policy holder survives the 15-year period, the premiums paid are not returned back. The advantage, apart from the financial security for an individuals family is that the premiums paid are exempt from tax.

These insurance policies are designed to provide 100 per cent risk cover do not have any additional charges other than the basic ones. So the premiums are the lowest ones in this type.

Whole Life Policy

A whole life policy covers a policyholder against death, throughout his life term. The advantage that an individual gets when he / she opts for a whole life policy is that the validity of this life insurance policy is not defined
Under this life insurance policy, the policyholder pays regular premiums until his death. The policy does not expire till the time any unfortunate event occurs with the policyholder.
Increasingly, whole life policies are being combined with other insurance products to address a variety of needs such as retirement planning, etc.
Premiums paid under the whole life policies are tax exempt.

This kind of policy is suitable for: Individuals seeking complete risk cover during a specific term, with no element of saving or investment

Endowment Policy
Combining risk cover with financial savings, endowment policies are among the popular life insurance policies.
Policy holders benefit in two ways from a pure endowment insurance policy. In case of death during the tenure, the beneficiary gets the sum assured. If the individual survives the policy tenure, he gets back the premiums paid with other investment returns and benefits like bonuses.
The premiums paid and the returns accumulated through pure endowment policies and their ULIP variants are tax exempt.

Money Back Policy

This life insurance policy is favored by many people because it gives periodic payments during the term of policy. In other words, a portion of the sum assured is paid out at regular intervals. If the policy holder survives the term, he gets the balance sum assured.
In case of death during the policy term, the beneficiary gets the full sum assured.
New ULIP versions of money back policies are also being offered by various life insurers.
The premiums paid and the returns accumulated though a money back policy or its ULIP variants are tax exempt.

ULIPs
ULIPs are market-linked life insurance products that provide a combination of life cover and wealth creation options.
A part of the amount that people invest in a ULIP goes toward providing life cover, while the rest is invested in the equity and debt instruments for maximizing returns.
Like any other mutual fund ULIP can offer multiple options based on ones risk taking capacity. They can be Equity funds, Balanced funds or pure debt funds. They are not very popular for tax exempt oriented investments.

Here it would be wise on the part of the investor to check with the insurance company on the additional benefits offered, such as an accident rider, a critical illness rider or maybe an option later to convert an existing term plan to a whole life plan.

Annuities and Pension

In these types of life insurance policies, the insurer agrees to pay the insured a stipulated sum of money periodically. The purpose of an annuity is to protect against financial risks as well as provide money in the form of pension at regular intervals.

Even though it serves a noble cause, often the consumers fall victim of misselling of insurance policies. Sell is highly dependent on the agents and it is commission oriented. Structure is such that ULIPs and hybrid policies will fetch more commissions and pure term policies will have minimum commission benefits for the agents. So irrespective of the requirement, you may end up buying an unwanted plan.

To conclude we can say that, Insurance is a very effective tool to handle contingencies in our life if chosen properly.