Types of Life Insurance Policies

Life policies can be classified on several bases. The syllabus requires two: classification by duration/nature of benefit and by the number of lives covered.

A. Classification by duration and nature of benefit

• Whole-life policy. The sum assured is payable only on the death of the life assured, whenever it occurs; premiums are paid either throughout life or up to a fixed age. It gives the maximum protection for the lowest premium and is meant chiefly to leave money for the family, not for the policyholder's own use.

• Term (temporary) policy. Cover is taken for a fixed short period (say 5, 10 or 20 years). The sum assured is paid only if death occurs within the term; if the life assured survives, nothing is paid. The premium is very low because it is almost pure protection with no saving element — useful for covering a temporary need, such as a loan period.

• Endowment policy. The sum assured is paid on death during the term or on survival to the end of the term, whichever is earlier. It combines protection with saving, so the policyholder is sure to get money back, and is the most popular ordinary policy. The premium is higher than a term or whole-life plan because of the strong saving element.

• Money-back policy. A form of endowment in which a part of the sum assured is returned to the policyholder at regular intervals during the term (survival benefits), and the full sum assured is paid on death, with the balance on maturity. It suits those who want periodic returns as well as protection.

• With-profit and without-profit policies. A with-profit policy shares in the insurer's surplus through bonuses added to the sum assured (a higher premium); a without-profit policy pays only the fixed sum assured (a lower premium).

• Annuity (pension) policy. In return for a lump sum or a series of premiums, the insurer pays the policyholder a regular income for life or for a fixed period, usually after retirement. It protects against the risk of living too long without income (rather than dying too soon).

B. Classification by the number of lives covered

• Single-life policy. The policy covers one life only — the ordinary and most common form.

• Joint-life policy. Two or more lives (typically husband and wife, or business partners) are covered under one policy, and the sum assured is generally paid on the first death among them, giving protection to the survivors. …