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Different types of life insurance cover
Though the common purpose of life insurance remains the same, insurance companies, in a bid to differentiate their products bring in many nuances that often make it difficult for the consumer to compare various products and decide which one suits her the best.
Life insurance policies broadly fall under two categories- protection-only and investment-type.
A protection-only or term life insurance, in simple terms, pays out a specified amount if you die within a selected period of time. If you survive, there will be no payout. It is the cheapest way to buy the insurance cover you need. On the other hand, investment type policies are hybrid products that combine insurance cover and investment. Most of the products falling under this category pay you either if you die within the term of the insurance or, upon your survival, on a specified date. Investment-type policies are more expensive compared to protection-only policies.
The different types of protection-only or term insurance are:
- Level term insurance: This pays a sum of money if the policy holder should die during the term of the policy. The payout amount is guaranteed and remains constant through the term of the policy.
- Decreasing term insurance or mortgage protection cover: Here the payout decreases progressively as the term advances. It is primarily meant to protect principal and interest payments on a mortgage loan.
- Renewable term insurance: Offers the option to continue the policy upon its expiry without a health review.
- Convertible term insurance: This is a level term insurance with the option to convert to an investment-type policy like whole life.
- Increasing term insurance: Here the sum assured progressively increases as the term of the policy advances. This type of policy helps guard against the loss in value of money due to inflation.
- Index linked term insurance: This type of insurance takes account of the Retail Price Index and provides the option to increase the premium. This helps the buyer take care of the decrease in value of money due to inflation.
Endowment life insurance products combine investment with insurance. Here you or the insurance provider will specify a time period for the insurance policy, usually a minimum of ten years. In the event of the insured's death within the specified time limit, the policy will pay out like term life insurance. Should you live beyond this period, the policy pays out a lump sum known as the maturity value of the policy instead.
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