Types of Life Insurance in India – Insurance is a legal paper offering a kind of protection from financial loss. It is a type of risk management, which is primarily used to hedge against the risk of a possible or uncertain loss. An entity or body which provides insurance is known as an insurer, such can be an insurance company, insurance carrier or underwriter or the state. It is often alternatively described as an arrangement in which an approved company or the state pledges to provide monetary compensation for any specified loss, damage, illness, or death in return for a payment of a specified fee called a premium.
Types of life insurance in India
- 1. Term insurance policies (Expires with a tenure)
- 2. Money-back policies (similar to Whole Life Insurance)
- 3. Whole life policies (As found in other countries)
- 4. Unit-linked investment policies (also known as ULIP)
- 5. Pension policies (Savings and Investments)
- Foreign direct investment (FDI) policy in the Indian insurance sector
- Initial public offer (IPO) rules and regulations for Indian life insurance companies
- Overview of the Current State of the Indian Insurance Sector
- Commission for the Agencies and other Insurance Players in India (intermediation fees)
Life insurance policies come in a variety of names and brands catering to the investment needs and objectives of different kinds of investors. Following below is the list of broad categories of life insurance policies:
Details on each of the life insurance in India types:
1. Term Insurance Policies
The basic idea and promise of a term insurance policy is to secure the immediate needs of nominees or beneficiaries in the event of the sudden or unfortunate demise of the policy holder. The policyholder is not a beneficiary, and so does not get any monetary benefit at the end of the policy term except for the tax benefits he or she can choose to avail of throughout the tenure of the policy. In the event of the death of the policyholder, the sum assured is paid to his or her beneficiaries. Term insurance policies are also relatively cheaper to acquire as compared to other insurance policies.
2. Money-Back Policies
Money-back policies are basically a spinoff of endowment plans in which the policyholder receives a fixed amount of money as payment at specific intervals throughout the duration of the policy. In the event of the death of the insured (policyholder), the full sum assured is paid to the beneficiaries in a single payment. The terms, however, might slightly vary from one insurance company (insurer) to another.Types of life insurance in India
3. Whole life policies
A whole life insurance plan usually covers the insured over his lifetime. The primary feature of this particular insurance product is that the validity of the policy is not usually defined so the insured (policyholder) enjoys the life cover throughout his life.
4. Unit-Linked Investment Policies (ULIP)
Unit-linked insurance policies as well belong to the insurance/investment category where one gets to enjoy the benefits and rewards of both insurance and investment. While a part of the monthly premium paid to the insurer goes towards the insurance cover, the rest of the money is invested in various types of schemes and funds that purchase debt and equity instruments. ULIP plans are more or less similar to mutual funds except for the only difference that ULIPs also offer the additional benefit of insurance cover.
5. Pension Policies
Pension policies are a kind of ‘life insurance’ that let individuals determine a fixed stream of income after retirement. This is just a retirement planning investment program in which the sum assured or the monthly pay-out after the retirement of the policy holder entirely depends on the capital he has invested, and the investment timeframe, and also the age at which one wishes to retire from active employment. There are however several types of pension plans that cater to different specific investment needs. It is strictly speaking an investment product, but Now it is recognized as an insurance product and is regulated by IRDA which is the Indian government establishment in charge of monitoring insurance.
Foreign Direct Investment (FDI) Policy In Insurance Sector
Seeking more investment in the insurance market, on March 18, 2016, the government of India allowed Foreign Direct Investment (FDI) in the domestic insurance market up to 49%, which is up from 26%, although without the prior approval. Previously, the 26% FDI was approved through what has been described as the ‘automatic route.’ In order to get FDI up to 49 percent, the approval of the Foreign Investment Promotion Board is required, and then subject to the verification of the insurance regularity authority of India (IRAI). There are 57 insurance companies in India, and out of that figure 24 are life insurance companies. 33 others are general insurance companies which also offer life insurance.
Initial Public Offer (IPO) Regulations For Indian Life Insurance Companies
A key piece of legal regulation that is impacting on the Life Insurance companies capital building abilities is the lock-in maturity period of 10 years for the investment to be limited to promoter group equity investments. Under the current Insurance Guidelines, Indian Life Insurance companies can pursue a public listing through the issue of equity via an Initial Public Offer (IPO) after 10 years of operations in the Indian market.
By October 2010, the securities market regulator of India, which is the Securities and Exchange Board of India (SEBI), issued disclosure rules for Indian Life Insurance Companies who are seeking to make an initial public offer to the public for sale of equity shares to the Indian public.
An overview of the Indian Life Insurance Market
All life insurance companies operating in India have to comply with the regulations laid out by the Insurance Regulatory and Development Authority of India (IRDAI) which is the government agency in charge of all things insurance.
Life Insurance Corporation of India (LIC), the state-owned industrial giant, remains by far the largest player in the Indian market. The private companies have now come out with policies called Unit Linked Investment Plans (ULIPs) which offer both life insurance cover as well as savings or investments, coming in different options as the customer desires. These ULIPs offer both services in a single policy. These types of plans are usually subject to a minimum lock-in period of about five years in which the company receives premiums from the insured without making any payouts. This is said to be done to prevent misuse of the significant tax benefits usually offered to such plans under the Income Tax Act of India. These plans are very similar to Mutual Funds, although they should not be mistaken for the other.
Commission/intermediation fees paid to middlemen and agencies working with Insurance Companies:
The maximum commission limits as per statutory law provisions are:
Agency commission for retail life insurance agency businesses:
- 7- 25% for 1st-year premium if the premium paying tenure is more than 20 years
- 7- 10% for 1st-year premium if the premium paying tenure is more than 15 years
- 7- 10% for 1st-year premium if the premium paying tenure is less than 10 years
- 7% – yr 2 and 3rd year and 3.5% – thereafter for all other premium paying terms.
In the case of mutual fund related – unit-linked policies, it usually varies between 1.5% to 6% on the premium paid to the insurer.
Agency commission in the case of retail pension plans or policies:
- 7.5% for 1st-year premium received, and 2.5% thereafter
- Maximum payable broker commission is 30%
- Referral fees payable to banks – max 55% for regular premium and 10% for the single premium. However, in any case, this fee must not be more than the agency commission as filed under the product.
However, the above-stated commission may still be further subject to the product-wise limits specified by IRDA before approving the particular product.
Life Insurance is a sub-sector of Insurance. It is a policy in which the Insurer pledges to pay a specified fee to the family or other nominated beneficiaries upon the death of the policy holder. The policy holder must regularly pay the premium in order to qualify for this policy. In some arrangements, the policy holder must have been enlisted with the insurer for a stipulated time, before his death in order for the policy to be binding.
Life Insurance in India
Life insurance is one of the fastest-growing sectors of Insurance in India since the year 2000 as Government welcomed Private players and Foreign Direct Investment (FDI) went up to 26% and more recently Cabinet approved a proposal to increase it to 49% of the Indian Insurance Market. What that means is that more operating licenses will be granted to foreign insurance companies who are interested in expanding their operations into the Indian Market.
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