Concept Of Life Insurance Policy
Life insurance policy is also known as life assurance, because the event insured against is definite to take place though the time of occurrence is uncertain. The life insurance policy combines the elements of protection and investment. It provides financial protection to the insured and his family members. Besides, it also provides investment benefits to the insured when he survives through the insured period.
Thus, life insurance policy is a contract between the insurer and the insured in which the former receives the premium from the insured either in lump-sum or in periodical installments, and the later receives certain sum of money either upon his death or upon the maturity of the policy.
Types Of Life Insurance Policy
There are several types of life insurance policies. These can be classified on several bases as follows:
1. Types of life insurance policy on the basis of duration
On the basis of duration of policy , life insurance policy can be of following types:
i. Whole life policy
Under whole life policy, the assured sum becomes due for payment to the successor or the nominee only after his death. The rate of premium is usually lower, because the assured is required to pay the amount of premium throughout the life.
ii. Term insurance policy
The term life insurance policy is offered to cover the risk of loss of life for a short period of time usually from 3 months to 7 years. Under this policy, the assured sum is payable to the nominee of the assured, if he dies during the term assured. The assurance comes to an end, if the assured survives through the term insured. This policy has the cheapest rate of premium and is usually paid throughout the insured term.
iii. Endowment policy
A life insurance policy is an endowment policy when a fixed sum of money becomes payable to the assured himself when he reaches the particular age, i.e, as agreed or on the death of assured party, if it takes place earlier before maturity. This policy is the most popular type of life insurance policy. In this policy, only a limited number of premiums are payable. However, it has higher rates of premium payable in fixed installments, but offers both investment and protection advantages.
iv. Survivor-ship policy
Two persons are involved in this type of life insurance policy. One is the person assured and another is a named or counter-life. The sum assured is payable to the counter-life, if the life assured dies before him. But if the counter-life dies before the life assured, nothing is payable to the life insured. For example, as a counter-life, a creditor may insure the life of debtor(the life assured).
2. Types of life insurance policy on the basis of premium paid
On the basis of premium payment, life insurance policies can be classified into the following types:
i. Single premium policy
In this policy, the whole amount of premium is paid in a single installment. Under this scheme, the total premium is paid in lump-sum in the beginning. As such, the policy holder is entitled to receive certain rebates on the payment of premium.
ii. Regular premium policy
Under this policy, premiums of equal amount are payable at regular intervals (monthly, quarterly, half-yearly or annually) as agreed upon by the insurer and insured.
iii. Limited premium policy
In limited premium policy, the obligation of paying premium is limited to a certain period of time only (5,7,10 or 12 years). However, the assured amount is payable upon the death of the policyholder. In case when the assured dies during the premium term, the premium payment obligation does not exist, yet the assured amount is payable to the nominee.
3. Types of life insurance policies on the basis of participation in profit
In this category, there are two types of life insurance policies as follows:
i. With profit or participative policy
A life insurance policy with profit is also called participative life insurance policy. As per the contract, if the policyholder has the right to participate in the profit earned by the insurance company, the policy is called with profit policy or participative policy.
ii. Without profit or non-participative policy
If the policyholder does not have the right to share the profit earned by the insurance company according to the agreement, this type of policy is called non-participative policy in which only the assured sum is payable to the policyholder at the time of maturity.
4. Types of life insurance policies on the basis of persons covered
The life insurance policy can be classified into the following two types based on the insured persons covered by the policy.
i. Single life policy
A single life policy covers the risk of life of only one person.If someone is taking it for himself, the insurance contract will be directly between insured and insurer with the nominee as the beneficiary.
ii. Joint life policy
In this policy, two or more lives are assured under one policy and hence, is called a joint life policy. Under this policy, the sum assured is payable to the survivor when one of the assured persons dies. Therefore, it is also called survivor-ship policy.
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5. Types of life insurance policies on the basis of method of payment of assured amount
On this basis, a life insurance policy can be divided into the following two types:
i. Lump-sum policy
A limp-sum life insurance policy is one in which the amount assured is payable in lump-sum in one installment either to the policyholder or his nominee upon his death depending on the type of policy.
ii. Annuity plan
An annuity plan is one in which the sum assured is paid to the policyholder himself in the form of annuties (fixed periodical installments) for a fixed numbers of years or till his death whatever agreed upon
