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: Learn about the different types of policies available in the market to be able to make the right choice.
Last week we discussed why it is important for each one of us to have adequate insurance cover. This week let us talk about the various types of insurance plans available in the market, and which one serves what need.
Basically, two types of insurance plans exist: term plans and endowment plans. Insurance companies combine the different aspects of these two plans and offer them to prospects as new plans.
Term plans. These are pure insurance plans that provide death cover only. In other words, there is no payout on survival. The insurance cover is provided for a stipulated term on timely payment of premium. If you fail to pay the premium, after a point the policy lapses. These plans are good for protecting your family from financial distress in case of an eventuality. Those taking on a large amount of debt, say, for a home loan, should also buy a term cover in order to cover this liability and ensure that the family retains the asset even in case of the death of the breadwinner. Moreover, the low cost of such plans enables you to buy an adequate amount of cover.
Endowment plans. These plans offer both a death cover and an investment return at the end of the tenure. Many of these plans offer minimum assured returns and bonuses. Most insurance companies also offer various riders. For an extra charge, the riders provide additional benefits. Examples of riders include double accident benefit (additional sum assured is received in case of an accidental death), premium waiver (future premiums are waived off in case of death of the policy holder).
Ulips. These are also investment cum insurance plans but they are market-linked products. A small portion of the premium paid goes towards buying an insurance cover, while the balance is invested in the market in debt or equity instruments, or a combination of these instruments in the percentage stipulated by the buyer.
Here, the insurance company never assures any returns. The returns are subject entirely to market risks. Buyers need to study these products carefully before buying them. Specifically, they should check out the charges levied by these products. In particular, look at the allocation charge, which is generally collected upfront and has a big impact on the fund value in the long...
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