Considering buying a life insurance policy?

7 MinsJune 5, 2022

Life insurance is integral to your financial planning. If you are the primary earning member in your family, their future needs are your responsibility. Hence, buy the right insurance plan that will help your loved ones meet their goals in your absence.

There are a variety of life insurance plans that cater to the various needs of an individual. Some offer pure protection, while some offer a mix of savings and protection. Let us understand them in detail: 

All the Types of Life Insurance Policies You Can Choose From

(1) Term Insurance -
If your goal is only protection, Term Insurance Plan will work the best. The premium is based on the insurance coverage, your age and the term of the plan. You will not get any payouts during the policy term or at maturity if you survive the policy term. Your nominee will receive the sum assured only in case of your death during the policy term. But, today, there are term life insurance policies with a Total Return Of Premium (TROP) option. However, the premium for such policies is higher than on a regular term insurance plan.

(2) Endowment Plan –This kind of plan offers guaranteed benefits at maturity as well as a Sum Assured in case of the insured's death during the policy term. So, there is a Death Benefit + Survival Benefit.
The insurance company invests the money mainly in debt securities and other low-risk investments. The Survival Benefit is paid out of the returns generated from the invested portion.
Some endowment plans are known as participating plans. In this case, if the insurance company earns a profit, the insured has a chance of earning a bonus.
If you are a risk-averse individual who wishes to build a corpus safely, you could consider an Endowment Plan.

(3) Money-back Plan –This type of insurance plan offers you guaranteed fixed income (as a percentage of the sum assured) at regular specified intervals –– usually after every 4-5 years. This is referred to as structured pay-outs that are a percentage of (20-25%, varying as per every policy) of the Sum Assured (SA). So, you get a regular cash flow during the term of the policy to help you meet your needs.
The balance of the SA and the bonuses, if any, (revisionary bonus, final additional bonus, and additional loyalty bonus) are paid at the end of the policy term. And in the case of the policyholder’s death, the entire SA is paid to the nominee irrespective of the survival benefit already being paid.
If you are risk-averse, looking at structure liquidity after every 4-5 years to help you address certain expenses, a Money Back Policy could be suitable for you.

[Also Read: Buying a life insurance plan? Avoid these mistakes]

(4) Unit Linked Insurance Policies –
If you are a risk-taker and are comfortable with earning market-linked returns, you may consider Unit Linked Insurance Policies or ULIPs.  Just like in mutual funds, the money is pooled and units are allotted to you, the policyholder, at a certain Net Asset Value (NAV) for investments done. Out of the premium paid some portion goes towards insurance, while a major portion is invested in market-linked instruments.
You can choose the type of fund to invest in—equity-oriented, debt-oriented, or a mix of both (hybrid)––and the investment is made at the respective NAV and units are allotted to you.
If your objective is wealth creation, have a high-risk appetite, and want to address long-term financial goals, an equity fund is an appropriate choice. In this option, the money is deployed in equity and equity-related instruments.
Whereas, if you are a moderate risk-taker, then the hybrid fund option may be a sensible choice. The Hybrid Fund of most ULIPs invests around 50-55% of the investment amount in equity & equity-related instrument and the remaining (approximately 45-50%) in debt and money market instruments.
In the debt fund option, the money is invested in bonds, debenture, and other debt & money market instruments. It is suitable for a conservative investor having a low-risk appetite.
Hence, always take into consideration your risk profile when you are buying ULIPs. Also, since ULIPs come with a lock-in period of 5 years, make sure you are ready for it.
ULIPs do not require you to pay a premium for the entire term of the policy. You get an option to pay single premium, limited payment option or for the entire tenure, thus providing a flexibility as per your convenience.
In case of death of the insured during the term of the ULIP, the nominee will receive the higher of Sum Assured (i.e. the Death Benefit) or fund value. But if the insured survives the policy term, the survival benefit provided is paid as the fund value of the policy.Check the proportion of the premium that would be invested after deduction of charges and also the ratio of the insurance cover to the premium paid
Past returns of a ULIP are not indicative of future returns. Consider the risk, the risk-adjusted returns, the performance across market cycles/phases, and the portfolio characteristics.

(5) Solution-oriented insurance plans –These can be either Children's Insurance Plans or Retirement Plans. Children’s Insurance Plans come in the form of endowment plans (without market risk) and ULIPs (with market risk). They mainly address the need of securing a child’s financial future, particularly higher education and wedding expenses.
Depending on your risk appetite, investment objective, and the time horizon for the goal, you may choose a suitable Child Insurance Plan.
Pension Plans can help you plan your retirement needs. These plans offer benefits at the vesting age, when you surrender the policy, and on death. If you buy a Pension Plan early in your career and contribute regularly, you can build a sizeable corpus by the time of retirement. This corpus is then invested in an annuity which pays a regular pension during your post-retirement period.

For your life insurance policies, you may add suitable riders viz. personal accident, critical illness, etc. as per your need. Plus, you can pay the premium monthly, bi-annual, annual, or even a one-time lump sum, depending on what suits you.

Make sure you have an optimal life insurance coverWhen buying a life insurance policy, take into account your Human Life Value (HLV). This considers your age, monthly expenses, your savings and investments, outstanding loans, the amount needed for your goals, and your existing life insurance coverage. 

Use Axis Bank’s online Life Insurance Calculator that helps estimate your life insurance coverage almost instantaneously. Axis Bank offers life insurance plans from leading life insurance companies such as Max Life InsuranceBajaj Allianz Life Insurance, and LIC of India. Buy the right product now based on your needs.

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision