Life insurance is an essential requirement in planning for your future. It forms one of the fundamental pillars of your financial plan, thereby making it hard to ignore. From planning for your life goals to planning your retirement plan, all of it can be secured using a life insurance policy. The right life insurance plans can not only be used to create a robust financial plan, but also a reliable safety net for the times in your absence.
A life insurance policy is a perfect product that provides more than one benefit. Income generation, risk cover, and tax benefits, all of it are possible using suitable life insurance policies. Further, depending on your risk appetite, investment is possible even in low-risk policies. These plans fit right if your risk appetite is low. Here’s everything you need to know about traditional life insurance policies.
What is traditional life insurance?
Traditional insurance is actually a category of life insurance plans that include whole life insurance, money back policies or endowment policies, and provide more than just protection for life. Here, policyholders can even earn fixed income along with receiving safety for the amount invested in addition to certain tax benefits. Considering their nature, they are also considered risk-free due to the fixed pay-out provided on the demise or their maturity.
Unlike a term insurance plan that provides a life cover only in the event of death, these plans also have some maturity benefits in addition to compensation in the event of the policyholder’s demise. Thus, along with death benefits, traditional policies also have guaranteed returns.
Who must consider opting for traditional life insurance plans?
Traditional life cover can be opted by individuals looking for –
- Long-term financial stability.
- Coverage for risk of death along with some form of returns for the premiums paid.
- A steady cash flow for future life events like child’s education, marriage and retirement.
- Tax-saving instruments.
What are the advantages of choosing traditional life insurance plans?
- Traditional life insurance policies work on the 90-10 rule; meaning the insurance company can retain only 1/10th of the profits whereas the rest must be shared with the policyholders.
- Your investments enjoy higher returns.
- Investment in traditional policies makes for a risk-free option as the investment risk is borne entirely by the insurance company.
- These traditional policies are closer to the objective of protection than their alternative insurance products like ULIPs. However, they aren’t as close as term plans that place entire emphasis on the protection objective.
- The chances of mis-selling are low since these policies have guaranteed benefits by way of maturity benefits.
What are the different types of traditional policies that can be purchased?
- Money-back plans
Money-back plans are life insurance policies that provide coverage to the policyholder for a specified policy tenure. In addition, these plans pay maturity benefits in instalments known as survival benefits in the policy. Thus, a percentage of the sum assured is paid to the insured policyholder at specified periodic intervals based on the policy terms.
Further, most money-back plans are eligible to receive a bonus which is declared by the insurance company. Long-term financial goals can be achieved using money-back policies.
- Endowment plans
Endowment plans are a combination of insurance and investment. Thus, protection and growing your money are two objectives of an endowment policy. In the case of an unfortunate demise of the policyholder or at the time of maturity, endowment policies pay a lump sum amount along with any accumulated bonus thereon.
The insurance companies, for these plans, allocate a certain proportion of the premium for life insurance coverage, whereas the balance is invested in low-risk products. Using a life insurance premium calculator, you can estimate how much returns shall be paid based on the returns that are promised by the insurance company.
- Whole-life policies
These policies are the ones that remain in force for the entire duration of the life of the insured; more commonly till 100 years. Thus, the insurance company offers protection for the entire lifetime of the policyholder. If the insured individual dies in an unfortunate event, the insurance company pays the compensation to the nominees of the policy. However, if the policyholder outlives the policy tenure, i.e., above 100 years, the insurer pays the maturity amount to such a policyholder.
Thus, depending on your requirement, you can purchase a suitable traditional insurance plan. When deciding which policy to choose, you can make use of a life insurance premium calculator that can help you know how much premium shall be charged for the coverage that is sought.