Meaning and Types of policies in insurance

Policies in insurance

The term policy of insurance is derived from the Italian word 'disecuranza' which signifies a bill of security or indemnity. The policy is always considered as the security for the payment of the premium. It contains only the promise of the underwriters without anything in nature of counter promise on the part of the insured.

(FARLEX)

Generally, an insurance policy is assembled with a combination of various standard forms. It includes a declarations page, coverage form, and endorsements. Sometimes a cause of loss form is also required. In order to protect the property, we can contact an insurance carrier to acquire an insurance policy which can protect things from damages.

An insurance policy is a legally binding contract between an insurance company and the person who buys the policy, known as "policyholder", who is also the person insured. The insurance company agrees to pay for the certain types of loss or damage as specified by the contract. The term insurance policy refers specifically to the written contract.

Types of policies of insurance

The different types of life insurance include the following policies.

1. Term Life Insurance

Term insurance provides protection for a specified period of time. This period can be for one year or provide coverage for a specific number of years such as 5, 10, 20 years. In some cases, life insurance mortality table lasts up to the oldest age. Policies are sold with various premium guarantees. It refers longer the guarantee, the higher the initial premium. If a person dies during the term period, the company will pay the face amount of the policy to his beneficiary. If he lives beyond the term period he had selected, no benefit is payable. According to the rule, the term policies offer a death benefit with no saving element or cash value. This policy has some basic features, which are given as follows:

a) Temporary protection
The temporary protection of this policy may be 1 year, 5 years, 10 years or 20 years. The protection expires at the end of the period unless the policy is renewed.

b) Convertible
Most of the policy can be convertible which means the term policy can be exchanged. The policies may be exchanged for a cash- value policy without evidence of insurability.

c) Renewal
The policy can be renewed for the additional period without evidence of insurability. Most of the term policies are renewal.

d) No cash surrender value
The term policy provides protection after the death of insured in a specified time period. It does not provide amount after the period expired.

2. Whole life policy

The Whole life policy is a type of permanent insurance. It is a combine life coverage with an investment fund. It provides for the payment of the fresh amount of the policy. A whole life insurance policy covers a life of policyholder. The main feature of a whole life policy is that the validity of the policy will not be defined. The individual enjoys the life cover throughout his life. The policyholder pays the regular premium until his death and the corpus is paid out to the family. Generally, this policy is a policy purchased by the person to protect the family or dependence. The amount of premium of this policy is lower as compared to other policies.
There are three types of whole life insurance which are as follows:

a) Ordinary whole life policy
Ordinary whole life policy provides lifetime protection to a certain age and claim is certain. This policy is useful to provide lump sum continuing income to beneficiaries.

b) Limited payment whole life insurance
Whole life insurance provides lifetime protection with the single premium. This policy is a single premium. If the company provides lifetime protection but the amount of premium is paid for a certain period of time is known as limited payment whole life insurance.

c) Convertible whole life insurance
The main purpose of convertible whole life policy is to provide maximum protection at minimum cost. It brings flexibility in life insurance.

3. Endowment plans

An endowment policy is insurance contract designed to pay a lump sum after a specific term or on death. Here, the maturities are ten, fifteen or twenty years up to a certain age limit. Some policies also pay out in the case of critical illness. The insurance protection provided by endowment policies is usually small so that the protection needs are sufficiently covered by the policy. This type of life insurance policy is often carried out by the Nepalese insurance companies. Premium is generally payable from the date of issue till the date of maturity. Endowment policies are basically of two types. They are with profit and without profit. The many variations of endowment plans are structured to meet the need of child education, whole life protection, and pension, among others.

a) Ordinary endowment policy
This policy is purchased for a fixed period of time. The insured pays the amount of premium for the specified time period and the insurer provides compensation to the dependents.

b) Double endowment policy
In this policy, insurance company compensates the amount if the insured dies within the period.

c) Joint life endowment policy
In this policy, the amount is paid to the survivor after the death of the person. If both of them are alive until the policy period, the amount is refunded. It is generally purchased by the married couple.

d) Pure endowment policy
This policy will be refunded if the insured is alive until the expiry period. No one will compensate if the insured dies.

e) Deferred endowment policy
In this policy, the amount of policy is paid after the expiry of the policy period.

4. Unit Linked Insurance Plans

A unit-linked insurance plan is a type of insurance vehicle in which net asset values are purchased by the policyholder. It helps in the contributions towards another investment vehicle. Unit linked insurance plans allow for the coverage of an insurance policy. It helps to provide an option to invest in any number of qualified investments, such as stock, bonds or mutual funds. In certain areas, ULIPs differ from traditional endowment plans. As the name suggests, the performance of ULIP is linked to markets. Individuals can choose the allocation for investments in stock or debt markets. The value of the investment portfolio is captured by the net asset value. ( HDFC life)

5. Money Back Policy

In a money back plan, the insured person gets a percentage of sum assured at regular intervals. The person will not get the lump sum amount at the end of the term. In this Policy , the sum assured by the company will be paid in installments at periodic intervals. However, the full sum of assured is payable without any deduction in the event of death. The bonus additions to the policy will be reckoned and they are payable at the end of the selected term of years or at the Life Assured's death. (LIC life insurance corporation)

Bibliography

HDFC life. n.d. Electronic. 15 06 2016 http://www.hdfclife.com/insurance-knowledge-centre/about-life-insurance/type-of-insurance/

FARLEX. The Free Dictionary. n.d. Electronic. 15 06 2016.http://legal-dictionary.thefreedictionary.com/policy+of+insurance

LIC life insurance corporation. n.d. Electronic. 15 06 2016. http://www.licnepal.com.np/moneyback.php