Life insurance policies can be classified into two categories – protection and investment. There are several sub categories as well, and you should consider your age, life expectancy, health, lifestyle, and financial situation while deciding which kind of life insurance you need.
Term Life Insurance
Policies that only offer life coverage are mostly term policies. These are no frills policies which guarantee a lump sum pay back in the event of death of the insured person. They are typically simple, cheap and easy to manage when compared to the more complex investment based insurance products. Usually, the policy holds good for a pre-determined number of years. This kind of insurance, which pays out only in the event of death, is often called ‘pure’ insurance.
Investment Based Policies
Investment policies combine the advantages of investment with providing cash in the event of death. These policies remain in force until the policy matures or lapses due to non payment of premium. The pay out from these policies depends on the gains recorded by the investments made by the insurer on your behalf. Investment policies can be of different kinds – whole life, universal, and variable life insurance.
Whole Life Insurance policies are generally considered very secure because they remain in force until the death of the insurer or cancellation of the policy. A pre determined lump sum payment will be paid on death of the insured person. A part of your premium goes towards investments structured and managed by the insurer. Although there is an element of investment here, the rate of return does not match the market in most cases. You can also borrow against the existing cash value in your policy, but any borrowings will be recovered from your lump sum payback before the sum assured is given to the beneficiaries.
Universal Life policies are more flexible insurance products, as they offer adjustable premiums. Of course, there may be minimum and maximum limits but you can easily modify your premium payments within these limits. While a specified rate of return is not guaranteed to you, the investments generally perform on par with the market.
Variable policies also do not give you any returns guarantee. These policies bank heavily on the gains in your choice of funds to give you paybacks. The final amount that your beneficiaries get depends on how well your funds have performed over the years.
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