Term insurance, also known as term life insurance, is a type of life insurance that provides coverage for a specific period, known as the "term." It is one of the simplest and most affordable forms of life insurance and is designed to offer financial protection to the insured's beneficiaries in case of their untimely death during the policy term.
Key features of term insurance:
- Death Benefit: The primary purpose of term insurance is to provide a death benefit to the nominee or beneficiaries of the insured if the insured passes away during the policy term. The death benefit is the sum assured (coverage amount) chosen by the policyholder at the time of purchasing the policy.
- Policy Term: Term insurance policies come with a fixed duration or term, typically ranging from 5 to 30 years or more. The policyholder can choose the desired term based on their specific financial needs and requirements.
- No Cash Value or Surrender Value: Unlike some other types of life insurance (such as whole life or endowment policies), term insurance does not build cash value or offer a surrender value. If the insured survives the policy term, there is no payout or maturity benefit.
- Premiums: Term insurance premiums are generally more affordable compared to other types of life insurance policies. The premium amount is based on factors such as the insured's age, health, coverage amount, policy term, and any additional riders or add-ons chosen.
- Renewable and Convertible: Some term insurance policies offer renewal and conversion options. Renewable term policies allow the insured to renew the coverage at the end of the term without undergoing a medical examination. Convertible term policies allow the insured to convert the policy into a permanent life insurance policy within a specified period, without providing evidence of insurability.
A traditional policy, in the context of life insurance, refers to a type of life insurance policy that offers a combination of insurance protection and savings or investment component. Traditional policies are also known as participating policies or with-profit policies, and they have been prevalent in the insurance industry for many years.
There are two primary types of traditional policies:
- Whole Life Insurance: Whole life insurance provides coverage for the entire life of the insured as long as the premiums are paid. It offers a guaranteed death benefit to the beneficiaries upon the insured's death. Additionally, a portion of the premium goes towards building cash value, which grows over time on a tax-deferred basis. The policyholder may have the option to withdraw or borrow against the cash value during the policy's lifetime.
- Endowment Insurance: Endowment insurance is a policy that provides both a death benefit and a maturity benefit. If the insured survives the policy term, they receive the maturity benefit, which is the sum assured plus the accumulated cash value. If the insured dies during the policy term, the death benefit is paid to the beneficiaries.
ULIP stands for Unit Linked Insurance Plan. It is a type of life insurance product that combines insurance coverage with investment opportunities. ULIPs offer the dual benefit of life protection and investment growth, making them a popular choice among investors seeking both insurance coverage and potential wealth creation.
Here are the key features of ULIPs:
- Insurance Coverage: Like traditional life insurance policies, ULIPs provide life insurance coverage, ensuring that the beneficiaries receive a death benefit in case of the policyholder's demise during the policy term. The death benefit is usually a sum assured, which is the guaranteed minimum amount payable to the nominee.
- Investment Component: A portion of the premium paid for the ULIP is invested in various market-linked funds, such as equity funds, debt funds, or a combination of both. Policyholders have the flexibility to choose the investment funds based on their risk appetite and investment goals.
- Unit Allocation: The premium paid by the policyholder is used to purchase units in the chosen investment funds. The value of these units fluctuates based on the performance of the underlying fund assets. The number of units held by the policyholder determines their investment value.
- Transparency and Control: ULIPs provide transparency as policyholders can track the value of their investments and understand how their funds are performing. Additionally, policyholders have the flexibility to switch between different funds as per their changing investment preferences.
- Lock-in Period: ULIPs come with a lock-in period, typically five years, during which policyholders cannot withdraw or surrender the policy without incurring penalties. This lock-in period ensures that investors maintain their investment discipline and benefit from long-term market movements.
