The main purpose of life insurance policy is to alleviate the financial loss in the event of the death of the insured person. Choosing the right one based on one’s requirement is not easy with the availability of the wide variety of insurance policies in the market. Read this ‘ArthaYantra post to understand the basic types of life insurance policies.
Life insurance is paid out to nominees when the named i.e. insured person dies. The purpose is to secure the dependents’ financial life. Life insurance is basically divided into 2 basic types:
- Term insurance or pure life insurance
- Whole life insurance
Term insurance will pay out the death benefit only when the insured dies within the policy period / mutually agreed period. In the case of no death, no premiums are returned. Most term insurances are convertible and renewable. The term insurance is generally available for the period between 1 to 30 years.
Pros of term insurance:
- Meets coverage needs
- Maximum coverage for every premium
Cons of term insurance:
- No lifetime cover
- No savings
Whole life insurance does not have any predefined term. The death benefit is provided for entire life, as long as the insured pays the premiums. This policy combines both investment/ savings component and the insurance component. Thus, a cash value gets accumulated and the insurer can borrow or withdraw against the same, over the policy period.
With traditional whole life insurance, the cash value account is guaranteed. The cash is held in the insurance company’s general portfolio, where the insured does not get to choose where the investments should grow. If the insured survives till the policy maturity date, the policy will ‘endow’ and the insured will receive the accumulated cash value.
Pros of whole life insurance
- The claim amount received is tax-free
- Lifetime coverage
Cons of whole life insurance
- Rigid premiums
- Surrender charges
- Lower rate of returns
NOTE: A policy loan or partial surrender of the whole life insurance reduces the death benefit. A complete surrender terminates coverage altogether.
What Is A Joint Or Survivorship Life For Married Couples
Couples can choose to buy insurance together with a single policy either in the form of a joint first-to-die or a joint second-to-die design. In the case of the first-to-die form, the death benefit is paid at the death of the first one. With second-to-die, no death benefit is paid until both are death. It is a type of permanent life insurance.
In conclusion, understand different types of life insurance policies and the way they work to buy the one that best suits you.