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Life Insurance = Confusion? Not Anymore!

If you want to ensure that your family is taken care of even if you are no longer here to help them, you should consider purchasing a life insurance policy.

Purchasing life insurance can provide you with peace of mind.

With life insurance, you pay into a policy, and if something unfortunate happens to you, such as death or critical illness, the policy will payout to a designated person or people.

Because life is complicated and unpredictable, various types of life insurance policy have been developed to meet your specific needs.

Life Insurance = Confusion? Not Anymore!
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Choosing the right type of life insurance can be difficult, but it is a critical decision.

There are many different types of life insurance policies available, so we've created an easy-to-understand guide to the various types of life insurance you can buy to help you decide which one is best for you.

What Are The Different Types Of Life Insurance?

Let's take a quick look at the various types of life insurance policy to see if there's one that's right for you.

Term Life Insurance Plans

Term life insurance plans are the purest form of life insurance because they provide life insurance without any savings or profit components.

Term life insurance policies are the most affordable type of life insurance policy because the premiums are lower in comparison to other types of life insurance policies.

Term life insurance protects you for a set period, such as 30 years. This is the policy's ‘term.'

This type of insurance is frequently purchased to cover a loan, such as a mortgage, or to cover an ongoing financial obligation, such as raising children, and it can even be used to cover funeral expenses.

So, if you have 20 years left on your mortgage, you can get a term life insurance policy that will cover you for that amount of time.

Pros

  • Term life insurance is typically less expensive to purchase than permanent life insurance.
  • One benefit of term life insurance is that you can specify how long you want to be covered.
  • Beneficiaries will receive higher death benefits.

Cons

  • It is only temporary coverage.
  • When you take out a new term, your premiums may increase.
  • Term life insurance does not have a cash value and thus has no investment component.

Unit linked insurance plan (ULIP)

A unit-linked insurance plan, which is one of the most unique types of life insurance, is a comprehensive combination of investment (market-linked returns) and insurance.

According to the definition of life insurance, the premium paid for the ULIP plan is partially used as a risk (insurance) cover and partially invested in various funds.

The policyholder can invest in various funds offered by the insurance provider based on their risk tolerance.

The collected funds are then invested by the insurance company in various money-market instruments such as stocks and equities.

Pros

  • Because they invest in market instruments such as equity stocks or debt instruments, ULIPs provide high returns.
  • ULIPs give investors the flexibility to switch between funds based on market conditions.
  • If the policyholder dies, the ULIP pays the nominees a monetary death benefit.

Cons

  • The premiums paid for insurance through ULIPs are significantly higher than the premiums paid for term insurance plans.
  • ULIPs are more expensive in their early stages due to the charges levied on the investor.
  • Investors in ULIPs must agree to a lock-in period, such as 5 years. During this time, no partial withdrawals from the fund are permitted.
Life Insurance = Confusion? Not Anymore!

Endowment Plan

The endowment plan is a type of traditional life insurance policy that combines insurance and savings.

When it comes to life insurance, such as an endowment plan, if the life assured lives longer than the policy period, the insurance company pays the policyholder a maturity benefit.

Furthermore, some endowment plans may provide periodic bonuses, which are either paid upon maturity or to the beneficiary in the event of the policyholder's untimely death.

Pros

  • Endowment plans are marketed as low-risk investments, making them suitable for investors with a low-risk tolerance.
  • These plans provide both savings and insurance coverage to the policyholder's family.
  • If the policyholder survives the maturity term, the sum promised plus any earned bonuses is guaranteed.

Cons

  • Although receiving a large sum of money at the end of the maturity term appears to be an added benefit, the return is extremely mediocre.
  • The premium is higher than that of a term plan.
  • The surrender value is less than the paid premium.

Whole Life Insurance

Whole life insurance policies are a type of life insurance that covers the life insured for a lifetime, or in some cases, up to the age of 100.

The sum assured is determined when a whole life insurance policy is purchased.

A nominee is mentioned during the purchase.

According to the definition of whole life insurance, they are paid with the death claim and any bonuses, if any, in the event of an unfortunate event.

However, if the life assured lives for more than 100 years, the insurance provider pays a maturity benefit equal to the endowment corpus to the life insured.

Pros

  • A whole life insurance policy can last you for the rest of your life if you pay your premiums on time.
  • Your premiums and death benefit remain constant with a whole life policy.
  • The cash value in a whole life policy, like the cash value in other types of permanent insurance, grows tax-deferred.

Cons

  • Whole life insurance is significantly more expensive than term life insurance, which means it may not be a good choice unless you take advantage of all of the potential benefits.
  • While the cash value of the policy is guaranteed to grow at a certain rate, it may be lower than that of other investment vehicles, and you must determine what fees are applied.
  • Whole life insurance is a complex product with many features and potential benefits, which can be difficult to fully utilise without the assistance of a professional.
Life Insurance = Confusion? Not Anymore!

The Bottom Line

The best insurance for you is determined by your circumstances as well as what you want your payout to cover.

Your financial situation may also play a significant role in deciding on life insurance.

Your employer may provide death in service benefits, which can supplement the value of a life insurance policy.

Or you may be aware that you can only responsibly commit a certain amount each month to a life insurance policy, which can affect the size of a payout.

And you might simply know that you want a certain amount of money from your policy payout.

In this scenario, you can consider which types of policies will provide this and what conditions may be imposed on such a policy.

Keep in mind that payments may be subject to inheritance tax.

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