Types of Insurance

Insurance plans help secure your financial future and protect your assets. They provide financial protection in adverse situations and help you overcome financial losses related to life or property. Understanding the different types of insurance and their specific benefits is crucial for selecting the right type of policy that best meets your needs.

Insurance Types You Should Know

There are two main types of insurance - general and life. General insurance covers your assets, such as your house, car, jewellery, etc. It also includes health insurance and travel insurance. On the other hand, life insurance plans provide coverage in the unfortunate event of death during the policy term. These two categories can further be divided into multiple types of policies.

Different Types of Insurance Policies Available in India

Life Insurance

Here are some types of the life insurance plans available in India:

Term Life Insurance Plans

life insurance is the most basic form of life insurance. It provides life coverage to the policyholder for a predetermined policy tenure. In the unfortunate event of the policyholder's premature demise during the term, the nominee of the plan is given a sum assured. This sum assured can be decided when purchasing the plan, based on your future financial needs and the financial requirements of your loved ones.
Typically, term life insurance plans do not offer any maturity benefits, and there is no payout if the policyholder survives the term. However, there is an exception with term insurance with a return of premium. This type of plan refunds a percentage of the premiums paid during the term. If you survive the term, you can claim this refund, receive a lump sum at maturity, and enjoy an additional savings benefit.
The term insurance plan also has certain optional or/additional clauses or privileges known as riders, which boost the coverage of the basic plan. Some riders include the critical illness rider, under which the company pays if you are diagnosed with a specified critical illness; the accidental death benefit rider, under which the company offers an extra amount if the insured dies from an accident; and the total and permanent disability benefit rider under which the company pays if you are unable to work due to total and permanent disability. These riders can be bought to avail of extra coverage over and above the basic provision of the term plan for an additional amount charged over the base premium.
Term life insurance can be ideal if you are looking for affordable life coverage to secure your loved ones financially.

Whole Life Insurance Plans

Whole life insurance plans are life insurance policies that offer financial protection for the entire lifetime of the policyholder. Unlike term insurance, which provides coverage for a fixed term, whole life insurance plans continue to provide financial security as long as the policyholder lives. This ensures that the plan’s beneficiaries receive the death benefit irrespective of when the policyholder passes away. Whole life insurance plans may also offer riders like term plans.
Whole life insurance plans can be categorised into participating and non-participating plans. Participating plans allow policyholders to share in the profits of the insurance company. These profits are typically distributed in the form of dividends. On the other hand, non-participating whole-life insurance plans do not offer any profit-sharing benefits. They only provide a guaranteed death benefit. It is important to note that because of the added benefit of dividends, the premiums for participating plans are generally higher compared to non-participating plans. Since non-participating plans lack the potential for dividends, they tend to have lower premiums, making them a more affordable option.
Whole life insurance plans can be ideal if you are seeking lifelong coverage with the added potential of earning a dividend.

Child Plans

As the name suggests, child plans are designed for parents to help them plan for their child’s future financial needs. Child plans provide a life cover that is paid to the child in the event of the parent's demise. Additionally, these plans have an investment and savings component that helps you save for your child’s future goals.
You can use a child plan to save for higher education, a child’s marriage, healthcare, or any other significant financial need. These plans make certain that your child is financially secured when you are no longer alive and does ensure that your child has the basic means to carry on with the intended life and the desires you have for them in your absence.
Child plans can be availed by all parents, or may actually be especially useful for single mothers and fathers due to the flexibility of the product. Because single parents are responsible of being the breadwinners for their child, they have to make sure their child is financially secure in case the parent is no longer alive. Thus, a child plan guarantees the existence of such amount of money needed to raise and educate a child.
Child plans offer flexible payouts, such as a lump sum or regular payments to ensure the child has adequate financial liquidity at various stages of life.

Pension Plans

One can discover several functions of life insurance plans apart from offering financial security for the dependents. These plans can also assist you in saving for a time in your future such as when you wish to retire. A pension plan is a type of life insurance plan designed for your retirement period only. They are also called annuity plans; they stipulate either immediate or deferred income so that you can be financially secure when you are old.
Immediate annuity retirement plans provide income promptly and are useful if you are planning for retirement soon. The benefits of these plans start within moments of buying the policy and constantly offer income to supplement in covering necessary purchases, other wants, some medical expenses, and every retirement requirement.
Deferred annuity plans, on the other hand, offer an income after a deferred period, such as ten years. Your investment grows until you start making withdrawals in retirement. These plans are suitable if you are planning to retire in a few years and want to build a substantial fund before you start receiving payouts.
Retirement plans can address various needs, including essential and non-essential expenses, healthcare, and other retirement goals like travel. They offer financial security and peace of mind and ensure that you have the necessary resources to maintain your lifestyle and cover any planned and unplanned expenses in retirement.

Unit-Linked Insurance Plan (ULIP)

A Unit-Linked Insurance Plan (ULIP) is an investment-cum-insurance product that provides both life cover and investment opportunities. ULIPs use a part of the premium you pay towards your life cover and ensure that your loved ones are financially protected after you. The other portion of the premium is invested in funds of your choice and can help you achieve various financial goals.
ULIPs also come in different types, including equity funds, debt funds and finally hybrid funds. Equity funds mostly deal with stocks; thus, these are highly risky, but in the same prospect, you stand a chance to reap handsome profits. Debt funds are comparatively less risky and give slightly lower returns because they finance fixed-income tools. Hybrid funds provide diversified risk and reward which invests in the equity and debt securities.
The returns on a ULIP, therefore, depend on the funds that have been chosen; thus choice of the funds should be guided by your risk and financial goals. However, they can be simple and complex and thus can suit any financial need and risk tolerance of an investor.
One important feature that has to be understood about ULIPs is that they carry five-year lock in, thus it does not allow any early withdrawal of investments.

Endowment Plans

An endowment plan offers both savings and insurance within a single policy. The plan provides a death benefit to the beneficiaries in the unfortunate event of the policyholder’s demise during the policy term. It also promises a lump sum payment to the policyholder at the end of the policy tenure if they survive the term, provided no claims have been made during the policy period.
There are several types of endowment plans to cater for different peoples’ financial requirements. Some of these are the unit-linked endowment plans, full endowment plans guarantee endowment plans, and full profit endowment plans. Depending on the type and its capabilities, it provides specific functions that can meet certain needs.
Endowment plans as a rule are not very sensitive to risks and therefore are suitable for accumulating long term risk-averse capital. They foster fundamentally discipline the spending of policyholders and allow policyholders to build up their assets gradually over the long-term. This corpus can be utilized for a wide variety of financial needs: for education, to acquire a house, or any other purpose.

General Insurance

General insurance in India can be categorised into the following types of policies:

Motor Insurance

Motor insurance is insurance coverage for your vehicle and can be purchased for a four and two-wheeler. This type of insurance provides financial protection against damages caused by fire, vandalism, natural disasters, theft, and robberies. There are three main types of motor insurance - third-party insurance, own-damage insurance, and comprehensive insurance.
Third-party motor insurance deals with damages or injuries caused to another person, their car, or any other property. This is the simplest kind of motor insurance and is compulsory as per the provisions of the Motor Vehicles Act in this country. Every owner of a car is required by law to obtain at least third-party cover to be legally able to operate a car. Own damage insurance, on the other hand, is coverage that pays out for damage to your own car in case of an accident or instances of theft, fire, and natural calamities. Finally, Comprehensive insurance is a package that protects you from claims of yearly repairs and also compensates third parties for the damages they have suffered.
The motor insurance also has some optional accessories such as key replacement, zero depreciation, passenger cover, tyre protection, roadside assistance, engine protection and many others, which are available at a reasonable price if the motor insured wants better coverage. Furthermore, these plans also cover damage for the medical cost of the owner/driver of the vehicle in case of an accident.

Home Insurance

Home insurance provides financial coverage for theft or damage caused to your house by a variety of events, such as natural disasters like earthquakes, landslides, and floods, as well as incidents like strikes, riots, burglary, fire, vandalism, and terrorism. A home is one of the most expensive assets a person can own. In the event of a natural disaster, man made event, or theft, the costs of renovation and repairs can be astronomical. A home insurance policy helps cover these costs without depleting your savings and investments.
This type of insurance covers not only the physical structure of the house but also the possessions inside, such as electronics, furniture, utensils, and other valuables, in case of damage or loss from the events listed above.
The coverage and premium of a home insurance policy are decided based on several factors, including the type and size of the property and its location. For example, homes situated in areas that are prone to natural disasters might have a higher premium due to the increased risk of damage. Similarly, bigger houses will require higher coverage and, consequently, have a higher premium.

Fire Insurance

Fire insurance covers damage and losses caused by fire. It covers fire accidents caused by both manmade and natural disasters, as well as electrical malfunctions. This type of insurance specifically covers property as well as any contents inside the concerned property. Fire insurance can be purchased by both businesses and individuals to protect their personal assets and business inventory.
There are different types of fire insurance policies in India, such as valued, average, specific, and comprehensive fire policies. In a valued policy, the insurance company determines the value of an item or property and offers a claim as per the agreed-upon value, regardless of the current market value of the property or possessions. In the average policy, the insured amount can be less than the actual value of the property. In the specific policy, the compensation amount is fixed and specified in the policy at the time of purchase. Lastly, in the comprehensive policy, policyholders enjoy financial protection against damage caused by fire arising from both natural and manmade calamities.

Travel Insurance

Travel insurance offers financial protection against travel-related mishaps, losses, damages, and health expenses. This type of insurance can be purchased for both domestic and international travel. In fact, some countries require travel insurance to obtain a visa.
Travel insurance can provide high coverage for medical expenses, including hospitalisation, surgeries, medicines, dental treatment and more. It also covers the costs of emergency medical evacuation back to the home country if necessary. Additionally, in the unfortunate event of death while travelling, travel insurance covers the repatriation of remains.
Travel insurance also covers loss or damage to your luggage and offers compensation for it. In case of delayed luggage, it can provide reimbursement for essential items, such as clothing. You can also use travel insurance in case of a stolen or lost passport. Travel insurance also encompasses different travel mishaps including injuries or accidents, flight cancellations, bounced bookings of hotels or airlines, and so on.
It is necessary to remember that sometimes there can be certain obligations for insurance defined by the country you’re visiting, so before getting the necessary travel insurance, check the minimal required level of coverage.

Tax Benefits of Various Types of Insurance in India

While not all, some types of insurance plans can offer tax benefits under the Income Tax Act, 1961. Let’s understand this in detail:

• General insurance: Health insurance is the only type of general insurance that offers tax benefits. The premium you pay for your health insurance plan is eligible for a tax deduction under Section 80D of the Income Tax Act, 1961. The maximum deductible limit is Rs 25,000 per financial year for a policy bought for yourself, your spouse, or your children. The limit increases to Rs 50,000 if you are a senior citizen and above the age of 60 years. The overall maximum deduction can go up to Rs 1 lakh per annum. Other types, like motor, home, fire, and travel insurance, do not qualify for tax deductions.
• Life insurance: You can claim a tax deduction of Rs 1.5 lakh on the premium paid towards a life insurance policy under Section 80C of the Income Tax Act, 1961. This deduction applies to all types of life insurance, including ULIPs, endowment plans, retirement plans, term life, and whole life insurance. Additionally, the death benefit received under all these plans is tax-free under Section 10(10D) when given to the nominee in case of the policyholder’s demise.

 

Factors Defining Your Life Insurance Coverage

Life insurance coverage must be tailored to your needs to ensure comprehensive financial protection. Your plan’s coverage can be decided based on several different factors, as explained below:

1. Your age plays a pivotal role in insurance as it influences the duration of your policy tenure. Younger individuals typically opt for longer terms, while older policyholders may prefer shorter tenures.
2. Your health condition is used to assess the coverage amount required to safeguard you and your loved ones adequately. For instance, if you have pre-existing health issues or a history of medical conditions, you may need higher coverage. You can also consider adding a critical illness rider for added security.
3. Lifestyle habits such as smoking, vaping, chewing tobacco, and drinking also impact your health as well as life expectancy. People with such habits may require higher coverage amounts.
4. Your occupation significantly shapes your coverage needs, especially if engaged in high-risk professions like mining or defence forces. In such cases, you may need enhanced coverage to ensure comprehensive financial protection against daily risks.
5. Lastly, the type of insurance policy you select impacts your coverage requirements. Different policies offer varying levels of protection, riders, and additional benefits. A comprehensive understanding of these features is essential to choose the most suitable coverage for your individual needs.

 

Frequently Asked Questions (FAQs)

What is Insurance?

Insurance is a financial tool that protects you against loss and damage in various situations. It provides a safety net that provides you with peace of mind and financial security, and mitigates the impact of unexpected events on your life and assets. Insurance can be used to safeguard your belongings, such as a home, vehicle, jewellery, your health, experiences like travel, or your life. Insurance can also provide protection against specific kinds of damages, such as fire.
Insurance can be purchased by paying a premium. The plan lasts for a fixed term, during which the listed mishaps in your policy are covered. In case of an untoward incident, the policy provider pays you the pre-decided sum assured to help cover your losses.
While general insurance needs vary based on the possessions you hold, life insurance is typically recommended for everyone. It can be helpful for breadwinners, parents, homemakers, and others to ensure financial support for their loved ones in their absence.
Understanding insurance and types of insurance can help you select a suitable plan for your needs.

Should you Consider the Claim Settlement Ratio before buying Insurance and choosing an insurance company?

Yes, you should consider the claim settlement ratio before buying an insurance plan and choosing an insurance company. Insurance companies do not issue payouts for every claim they receive. Claims can be rejected if they are invalid, the policyholder has provided false information on the application, or if the terms and conditions of the policy are not met. Additionally, if an insurance company lacks sufficient funds, it may delay or fail to release the claim.
The claim settlement ratio signifies the number of claims an insurance company receives in a year versus the number of claims it settles. A higher claim settlement ratio establishes trust and reliability, indicating that the company is more likely to pay out claims in the future. This can offer peace of mind and secure you and your loved ones in your hour of need. Therefore, make sure to consider this ratio to ensure you choose a company with a strong track record of timely claims settlements.