Types Of Insurance Policies In India
As one of the largest populations and fastest-growing economies, the popularity of insurance policies in India (life and general) has been constantly rising. With better coverage, improved regulations, and the collaboration of insurance with technology (Insurtech), the insurance sector in India is estimated to easily surpass the anticipated 7.10% growth estimate in the next five years1. There is a significant opportunity as almost 87% of the population faces a protection gap in life insurance, and 7% do not have any kind of health insurance coverage2.
Insurance is not just a security blanket against possible mishaps; it can also be an excellent financial planning tool. Since you are secure from any contingencies, your investment journey is simplified. There are insurance policies that offer a fair bit of returns without taking too much risk, thereby being the perfect choice for a risk-averse investor.
However, you must understand the type of insurance and different common policies offered by companies that can suit your financial goals, business needs, and personal requirements.
Types Of Insurance Policies In India
Here is a table depicting the different types of insurance policies in India:
Life Insurance Policy
As the name suggests, a life insurance policy protects the policyholder’s legal survivors in case of the holder's death. It is a contract under which the insurance company pays a lump sum amount called a ‘death benefit’ to the nominees in case of a mishap.
Beneficiaries can use such amounts for different purposes, including pursuing long and short-term goals. The consideration that the policyholder needs to pay to the insurance company for such an arrangement is known as a ‘premium.’ Depending on the policy terms, it could be monthly, quarterly or annually.
Atul Singh is a 29-year-old holding an MBA and has gotten married recently. He is a bit confused about which life insurance policy is best suited, considering his wife’s future security. Here are the different types of options he has:
1. Term Insurance Policy
It is one of the most popular forms of life insurance. It is an expense for the policyholder. If the policyholder dies during the policy period, the beneficiary receives a pre-decided sum of money. The insurance company will not repay the policyholder if the policyholder survives until the end of the policy tenure, with one exception: the ROP (Return of Premium) rider. As per this rider, the policyholder is entitled to receive the sum of all premiums at the plan maturity.
In Atul’s case, here is what term insurance would look like:
Type of Insurance | Death Benefit | Policy Period | ROP Opted | Premium Amount | Taxability of Death Benefit | Maturity Benefit (If Atul Survives the Policy Period) |
Term Insurance (Life) | INR 1 Crore | 45 years | No | Moderate | Exempt u/s 10 | None |
Term Insurance (Life) | INR 1 Crore | 45 years | Yes | Higher | Exempt u/s 10 | Total of All Premiums |
*Subject to Income Tax Regulations, please refer to Section 10 (10D) in detail
2. Endowment Policy
Under an endowment policy, the policyholder is entitled to receive guaranteed maturity proceeds besides the life coverage. Such distributions are payable if the holder outlasts the policy tenure and can be paid in lump sum, periodic or combination.
Coming back to our example, here is how an endowment policy differs from a typical term life policy for Atul:
Type of Insurance | Death Benefit | Policy Period | Premium Amount | Taxability of Death Benefit | Maturity Benefit (If Atul Survives the Policy Period) |
Term Insurance | INR 1 Crore | 45 years | Low | Exempt u/s 10 | None |
Term Insurance (Life) | INR 1 Crore | 15 years | Significantly Higher | Exempt u/s 10 | Around 5.5-6.5% Returns; generally tax-free |
The Difference: The premium of term insurance is significantly lower. To receive a similar death benefit, Atul will need to spend almost thrice the premium in an endowment plan. However, such premiums grow at a given rate, and there will be maturity benefits in the latter case. In the end, it depends on an individual's financial goals and risk appetite.
3. Whole Life Policy
These policies are similar to endowment plans, the biggest difference being the coverage tenure or applicability of policies. Endowment plans are generally applicable for a given tenure (10-15-20 years or more) or up to a specific age of the policyholder. On the other hand, whole-life policies are active until the policyholder reaches 99 or 100 years of age.
4. ULIPs (Unit Linked Insurance Plans)
Conventional insurance is often criticiszed due to limited ROI, especially compared with equity-based instruments. ULIPs are usually dubbed as its solution wherein the insurance company invests a part of the premium in a mutual fund (of the holder’s choice). At maturity, the ROI can be higher than the traditional plans.
However, there is a downside to this, as market returns are subject to volatility, and there can be negative returns in short-term periods and bearish market conditions.
5. Children’s Policy
This policy serves the dual purpose of providing a security blanket through life coverage and a guaranteed maturity amount. The lump sum maturity amount can be used for different purposes, including higher education, marriage or other life goals of the child.
6. Retirement Plans
As suggested before, insurance policies can be an excellent financial planning tool. Retirement plans (annuity plans) provide regular payouts after a given tenure, thereby providing pension benefits to the policyholders.
After life insurance, different types of insurance policies in India include various general insurance options. Here is a brief description of the different categories:
General Insurance
Unlike life insurance, general insurance aims to safeguard assets against accidents, incidents or unforeseen contingencies. In case of such mishaps, the policyholder receives a specific sum of money to cover the loss. Here are the categories:
1. Health Insurance Policy
This policy intends to cover medical care and treatment costs, including emergencies. Adequate health insurance coverage is critical for personal financial planning and protects an individual against possible bankruptcy during critical illnesses requiring intensive care.
2. Home Insurance Policy
As the name suggests, home insurance protects real estate property against any events that result in damages, including natural causes, riots, fire, and burglary. Despite its importance, it is often overlooked, and a report suggests that almost 93% of properties in the country were not insured at all3.
3. Motor Insurance Policy
This policy safeguards your car or two-wheeler in case of accident, theft or other disaster. A valid motor insurance policy is also mandatory, as per the MV Act, 1988. There are multiple sub-categories of motor insurance, including zero-depreciation, comprehensive insurance, and third-party-only coverage.
4. Travel Insurance Policy
There can be multiple issues and hassles during travel (especially international travel), such as lost baggage, delays, passport loss, and emergencies. This insurance covers a traveler against all such issues.
5. Fire Insurance Policy
It is a category of property insurance policy that provides financial protection against losses or damages caused by fire, including coverage for allied perils such as explosions, natural calamities, and man-made hazards.
Factors to Consider When Choosing Insurance Policy
Your insurance policy can be a key factor in attaining personal financial goals. It is critical that you take care of the following things before choosing an insurance policy:
Understand your coverage needs and choose a policy that adequately covers your needs, whether health or life insurance.
- Compare premium costs between different insurance companies without compromising on benefits.
- Always analyse the claim settlement ratio of your life insurance company; a number close to 100 is always preferred.
- Understand the riders and add-ons, depending on your policy.
- Consult an expert about the tax benefits applicable.
Conclusion
Insurance is not just meant for contingencies but is an excellent financial planning tool. It is critical for both individuals and businesses to ensure that the lack of cash flow does not affect survivors or stakeholders in case of any mishaps. We tried to cover different types of insurance policies and categories currently popular in India. However, you must always consult your insurance advisor/company before finalising the policy, as there are numerous tailored benefits that you can avail of according to your personal financial goals.
Frequently Asked Questions On Types Of Insurance Policies In India
1. Is it possible to switch from one life insurance policy to another?
Yes, policyholders can switch by surrendering their current policy and opting for a new one, but this may involve costs and should be carefully evaluated.
2. Are life insurance maturity proceeds taxable?
Maturity proceeds are generally tax-exempt under Section 10(10D) of the Income Tax Act, subject to compliance with policy terms.
3. What is Zero Depreciation Cover?
Zero Depreciation Cover is an add-on motor insurance feature that ensures full claim settlement without accounting for vehicle part depreciation.
4. Is jewelry covered under home insurance policies?
Yes, jewelry is covered under home insurance policies, but it often requires additional coverage or riders.
5. Are floods and earthquakes covered under standard home insurance policies?
Standard home insurance policies generally include coverage for floods and earthquakes, though specific coverage may vary based on terms and add-ons.
References
1. Business Standard, Accessed from India insurance sector growth pegged at 7.1% in 2024-28: Swiss Re | Insurance - Business Standard.
2. Business Standard, Accessed from India's 95% population uninsured, 73% lack health coverage: Report | India News - Business Standard.
3. The Indian Express, Accessed from https://indianexpress.com/article/business/uninsured-losses-of-32-94-billion-in-india-due-to-natural-disasters-in-five-years-swiss-re-9113197/.
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