Guide to the Types of Life Insurance & How to Choose

Life insurance policies vary considerably, so knowing the different types would ensure that you may select one that corresponds to your present life stage, budget, and goals. 

Just like shoe shopping, hiking boots would never be worn to a wedding, and it would be unthinkable to wear heels for a trek. Let's get into the types of life insurance available today.

What Is Life Insurance?

Life insurance can be imagined as a financial safety net. You are to pay a premium regularly to the insurance company; in exchange, if you happen to pass away during the policy and contract period, your nominated beneficiaries would be paid a capital sum. 

Example: Rahul buys a term plan of ₹25 lakh for 20 years, charging an annual premium of ₹12,000. In case Rahul passes away anytime over these 20 years, his family gets ₹25 lakh, tax-free. On the flip side, if he is alive after 20 years, the policy ceases to exist, and there is no payout (unless it is with maturity benefits).

Types of Life Insurance Policies You Should Know About

1. Term Insurance

The insurance covers a specific time period, generally 10, 20, or 30 years. In case the insured passes away  within this term, the family will have to be paid the claim amount by the policy. If the insured survives the entire term, then no money is paid by way of claims.

Why People Like It:

• Cheap premium and high cover
• Good for young families or persons with huge financial commitments, like loans
• Riders can be added for critical illness or accidental death

2. Whole Life Insurance

Think of this one as a lifetime membership. The policyholder is covered throughout his or her entire life up to 99 or 100 years of age, so long as the premiums continue to be paid. If the policyholder passes away before reaching the maximum maturity age (99 or 100), the policy pays out a death benefit to the nominee. If the policyholder survives beyond this age and the coverage period ends, some insurers MAY pay out a maturity benefit.

Whole life policies create a cash value, which gradually builds up over time. This cash value MAY be borrowed against or withdrawn, subject to insurer rules.

Why People Like It:

• Lifetime coverage means your family is always protected
• Cash value grows over time
• It can double as a way to leave behind a guaranteed inheritance

Example: Meena buys a ₹15 lakh whole life policy at 35. At 60, she uses the cash value to fund her daughter’s wedding, but her family still gets the death benefit when she passes away years later.

3. Unit Linked Insurance Plan (ULIP)

Think of ULIPs to be the two-in-one shampoo of insurance. A part of your premium goes towards life cover, and part is invested in market-linked funds (equity, debt, or a mix).

Why It Is Liked:

• Money is brought forth as a shelter against the uncertainties of life
• Conversion of funds depending on market performance
• Possible high returns on investments in the long run

ULIPs are great if you have a medium to long-term goal, like your child’s education or early retirement, and don’t mind some market risk.

4. Endowment Plans

These are basically very stringent savings plans with insurance backing. If the policyholder passes away within the policy term, the family is paid the sum assured. If the policyholder lives that period, he gets the sum assured plus bonus (if any). 

Why People Like It:

• Develops the habit of saving regularly
• Good for planned goals like weddings, property down payments, or higher education
• The principal amount, along with any interest or bonus, whichever is greater, gets paid either on maturity or on death

Example: Amit takes a 15-year endowment plan to save for his son’s college. He knows that whether he’s there or not, the funds will be ready when the time comes.

5. Retirement Plans

A retirement plan is designed to ensure a regular stream of income in the retired life. One pays premiums during their working years, and after retirement, one receives payouts in the form of pensions for a specified time duration.

Why People Like It:

• Guaranteed post-retirement income
• Option to choose a lump sum + regular income combo
• Ensures you’re financially independent in your later years

Your Next Step in Choosing the Right Policy

There might be a few curveballs thrown your way from time to time. Why should your household's financial well-being be used as one? By getting to know the different types of life insurance, you are taking the first step toward ensuring what flies highest on your list of priorities. A single type or a combination of the kinds of life insurance policy options can be chosen; the choice that would matter for you gives you peace of mind, beyond measure. 

Disclaimer: This information provided is intended for general informational purposes only. For personalised recommendations, please consult a certified insurance professional.