LIFE INSURANCE PLANS

Life Insurance companies offer a variety of schemes or ‘plans’ to suit the needs of customers. These plans may be broadly classified into traditional plans, and market-linked plans. In the traditional plans the collected premium is utilized by the company to generate income, part of which it distributes to policy holders as bonus, while in market –linked plans the premium is invested in the stock market as per the wishes of policy holders and generally yield better returns to them. Under these two categories there are different types of plans. These are; 1) pure life insurance plans, 2) children’s plans, 3) retirement plans, and 4) health & hospitalization plans. Some of these plans may have both traditional and market-linked policies.

Traditional plans
Life insurance plans have two basic elements, ‘death cover’ and ‘survival benefit’. Under death cover, benefits are paid on the death of the insured person within a specified period, called the ‘term’. Under survival benefit, sums are paid on survival of the insured over the term. Plans which provide only death cover are called ‘term assurance’ plans. No payment is made if the insured does not die within the period. Plans that provide only survival benefits are called ‘pure endowment’ plans, under which no payment is made if the insured dies within the specified period. In both these plans no payment is made if the specified contingency does not happen. All traditional plans are combinations of these two basic plans. Some of these are listed below;

1) Term assurance plan. An amount specified as the ‘sum assured’ is paid on the death of the insured within the term. If death does not occur, no payment is made. The sum assured (SA) may be kept constant throughout the period or may be made to increase/decrease during the period. It is the cheapest of all insurance plans.

2) Endowment plan. The SA is paid on survival to the end of the term or on death earlier.

3) Whole life policy. The SA is paid on the death of the insured, whenever it happens. It is a term assurance plan plus an endowment plan with an unspecified period.
In both endowment plan and whole life policy, the premium is generally payable throughout the term. Premium may also be made payable for a shorter period. Such policies are called limited payment policies. If the limited period is only one year, then a single premium is paid at the start of the policy.

4) Convertible plans. Insurance policies which can be changed from the existing plan to another plan within its term. There may be restrictions on when such changes may be made. For example, a convertible whole life plan may be changed to an endowment plan. If the option is not used at the specified time, the original plan will continue.

5) Joint life policies. Plans where two or more lives are covered under one policy. Such policies are applicable to married couples or business partners. The SA is payable on the death of any of the insured persons during the term, or at the end of the term. It may also provide for payment of SA on death of one of the insured during the term, and coverage of the other person till maturity, without payment of further premium.

6) Money back policies. Policies where a part of the SA is paid at specified intervals within the term and the balance paid at maturity. For example, in a 20 years policy, 20 % of the SA may be paid at 5years intervals, and the remaining 40 % paid at maturity. This helps the insured to get periodic returns with full coverage throughout the entire term. This is actually a combination of a term assurance plan for the full term plus a number of endowment plans for the partial payment for the various time intervals.

7) Salary saving schemes (SSS). Employees may join such schemes wherein the premium is deducted from the salary of the employee by the employer and transferred to the insurance company every month. Because of less administrative expenses involved in the servicing of such policies, insurance companies charge a reduced premium than in a regular policy.
All these policies may be ‘with profit or without profit’. Policies with profit are entitled to receive the bonus declared by the company out of its profit every year. They are also called participating policies. Policies without profit are non-participating and are not eligible for bonus. The premium for such policies is somewhat lower than that for participating policies. With profit policies are popular because the bonus received is generally more than the extra premium paid.