Key Takeaways
- Life insurance policies offer pure protection, protection with savings, or protection with market-linked investments.
- Term insurance provides substantial cover for a relatively low premium but generally has no maturity payout.
- Savings-linked policies may offer lower cover and modest returns because one premium serves two purposes.
- You can calculate your policy’s annual return using XIRR.
- Before surrendering an existing endowment policy, calculate its future return and ensure you have adequate term cover.
There are eight main types of life insurance policies in India, but they serve three basic purposes.
Term insurance provides pure protection. Endowment, money-back and whole life plans combine insurance with savings. ULIPs combine insurance with market-linked investing.
Understanding these differences helps you decide whether a policy is meeting your family’s needs.
How much is it actually earning, and how much would your family receive if something happened to you tomorrow? This guide will help you answer both questions.
What is a life insurance policy meant to do?
A life insurance policy is a contract under which you pay premiums and the insurance company pays the applicable benefit to your nominee if you pass away untimely while the policy is active.
Its main purpose is to protect your dependents financially.
The payout can help your family manage home loan EMIs, financial goals like school fees and everyday expenses. Your premium covers the cost of insurance.
In savings-linked policies, part of the premium also goes towards savings or investments. You pay for both protection and savings, which can affect how much life cover you receive.
How many types of life insurance policies are there in India?
A simple way to classify the policies is by how they use your money:
- Pure protection: Term insurance provides life cover without building a maturity corpus.
- Protection plus savings: Endowment, money-back and whole life plans combine insurance with savings or bonuses.
- Protection plus market-linked investing: ULIPs invest part of your premium in funds whose value changes with the market.
- Income generation: Annuity/ Pension policies provide a stream of monthly income to take care of post-retirement needs.
A child plan or pension plan may be based on an endowment, ULIP or annuity structure.
The 8 main types of life insurance policies explained
Term insurance
In term insurance you pay premiums for a fixed period, such as until age 60. If you pass away during the policy period, your nominee receives the applicable death benefit. If you survive the policy term, the policy generally pays nothing back.
Term insurance can provide a high insurance cover amount at a relatively low annual premium, depending on your age and health.
Term insurance with return of premium (TROP) refunds eligible base premiums if you survive the policy term. However, it costs more than regular term insurance, and the refund generally carries no interest.
Endowment plans
An endowment policy pays the applicable death benefit if you pass away during the policy term or a maturity benefit if you survive.
Participating plans may provide bonuses declared by the insurance company, while non-participating plans offer benefits specified in the policy, including guaranteed amounts where applicable.
Money-back policies
A money-back policy pays portions of the sum assured at specified intervals, with the remaining benefit payable at maturity. The death benefit depends on the policy terms.
These plans can suit people who want periodic payouts, but compare their total benefits and returns before buying.
Whole life insurance
Whole life insurance provides cover for an extended period, often until age 99 or 100. Many policies pay a death benefit to your heirs and may be useful for legacy planning.
Some allow you to pay premiums over a limited period while the cover continues. Check whether lifelong cover fits your needs.
Unit linked insurance plans (ULIPs)
ULIPs combine life insurance with market-linked investments. After applicable charges, part of your premium is invested in equity, debt or other available funds.
Returns depend on fund performance and are not guaranteed. ULIPs have a five-year lock-in period and allow you to switch between funds.
Compare premium allocation, policy administration, fund management and mortality charges before investing.
Child plans
Child plans help parents save for future expenses of children such as higher education. Many policies provide for future premiums to be waived if the insured parent passes away during the premium paying term.
Most child plans are based on endowment or ULIP structures. You should ensure that you have adequate life insurance cover as an earning parent before choosing a child plan.
Pension and annuity plans
Pension and annuity plans help you to convert a lump sum into regular income through an annuity.
A deferred annuity starts paying later, while an immediate annuity policy begins payments soon after purchase. You should check the payout options and liquidity restrictions before investing.
Group Life Insurance
Group life insurance is commonly provided by employers. It offers additional protection, but the cover may not be sufficient for your family’s needs and may also no longer be available when you leave your job.
You should treat it as additional cover rather than a replacement for individual term insurance.
8 Types of Life Insurance policies compared
Type | Built for | Paid if you survive? | Return on your money | Lock-in and liquidity | Cover for premium |
Term | Protection | No, unless TROP applies | None | Cover may lapse if premiums stop | Very high |
Endowment | Protection plus savings | Yes, lump sum | Guaranteed or bonus-linked | Surrender conditions apply | Low |
Money-back | Protection plus regular payouts | Yes, in instalments | Guaranteed or bonus-linked | Periodic payouts | Low |
Whole life | Lifelong cover and legacy | Depends on policy terms | Guaranteed or bonus-linked | Loans may be available | Low to moderate |
ULIP | Protection plus market investing | Applicable fund value or contractual benefit | Market-linked | Five-year lock-in | Low |
Child plan | Child’s goals | Benefits at specified milestones | Depends on structure | Often a long commitment | Low |
Pension or Annuity | Retirement income | Depends on payout option | Depends on structure | Often limited liquidity | Little or none |
Group | Employee cover | Generally no maturity benefit | None | May end when you leave | Employer-determined |
Is your life insurance policy an investment?
A term plan is designed for protection, not investment. Savings-linked policies build savings or provide market exposure, but they may offer lower life cover because the premium serves two purposes.
Anuj says, “Many people believe that insurance policy helps them make forced savings. Saving regularly matters, but you don’t have to combine it with insurance. An automatic SIP or a PPF deposit on a fixed date can build the same habit.”
How to find the real return on your policy?
Your policy’s benefit illustration shows the benefits you may receive under specified assumptions. You can use it, along with your premium history, to calculate the annual return.
For cash flows occurring on different dates, use XIRR in a spreadsheet.
- Enter each premium payment date in column A.
- Enter each premium as a negative amount in column B, such as -50000.
- Enter the maturity date and expected payout as positive cash flows.
- Use =XIRR(B1:B21,A1:A21), adjusting the range to match your data.
- Compare the result with suitable alternatives, such as PPF or fixed deposits, considering their returns, risks, liquidity and tax treatment.
Include any bonuses or money-back payouts on their actual payment dates. The result will help you judge the policy by its annual return rather than just its maturity amount.
Example: Endowment vs Term plan plus investing
Consider Rohan, a 35-year-old salaried professional in Pune earning ₹12 lakh annually. He has a home loan, a wife who works part-time and a six-year-old daughter.
He is offered an endowment policy with a ₹50,000 annual premium for 20 years, ₹5 lakh in life cover and an illustrated maturity benefit of ₹16 lakh.
He compares it with a ₹1.5 crore term plan costing an assumed ₹20,000 annually, with the remaining ₹30,000 invested in PPF or an equity mutual fund SIP.
Option | Annual outlay | Life cover | Value after 20 years | Annual return | Tax on maturity |
Endowment | ₹50,000 | ₹5 lakh | ₹16 lakh, illustrated | About 4.3% | Exempt if conditions are met |
Term plus PPF | ₹20,000 + ₹30,000 | ₹1.5 crore | About ₹13.3 lakh | 7.1%, assuming today’s PPF rate continues | PPF is tax-free |
Term plus equity SIP | ₹20,000 + ₹30,000 | ₹1.5 crore | About ₹18.9 lakh, assuming 10% returns | Not guaranteed | Capital gains tax applies |
All figures are illustrative. The PPF calculation assumes the current 7.1% rate remains unchanged for 20 years and that Rohan extends his account after the initial 15-year period. Equity returns are not guaranteed.
The endowment’s illustrated maturity amount is higher than the projected PPF value. However, the bigger difference is the life cover.
If Rohan passes away in the third year, his family would receive around ₹5 lakh under the endowment policy, plus applicable additional benefits.
Under the term insurance option, they would receive ₹1.5 crore in life cover, along with the accumulated PPF savings.
For a family with a home loan and a young child, this difference can be significant.
Not sure what your current policy is really earning, or whether your cover is enough? Our insurance planning team can work through the numbers with you.
When can a savings-linked policy still make sense?
Savings-linked policies may suit people who already have adequate term cover and prefer a specified payout over market-linked returns.
May suit you if | Usually doesn’t suit you if |
You have enough term cover and want a fixed payout | Your family’s life cover is inadequate |
You prefer certainty over market risk | You have dependants and a home loan but limited savings |
You want a lifelong payout for your heirs as part of estate planning | You are buying mainly to save tax |
You understand ULIP charges and can remain invested for 10 years or more | You may need the money within five years |
Choose based on your financial goals, existing cover, risk tolerance and liquidity needs rather than simply buying a product that combines insurance and savings.
How is life insurance taxed under the new Income-tax Act?
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the 1961 Act. The broad rules for life insurance remain similar in many respects, but the section references have changed.
What does it cover? | Old reference (1961 Act) | New reference (2025 Act) | Key condition |
Premium deductions within the overall ₹1.5 lakh limit | Section 80C | Section 123 read with Schedule XV | Premium generally cannot exceed 10% of the sum assured; a 20% limit applies to qualifying policies issued before April 2012 |
Tax-free maturity and death benefits | Section 10(10D) | Exemption depends on applicable conditions, including premium thresholds for certain ULIPs and other policies. Death benefits generally remain exempt | |
Reversal of deductions after early discontinuation | Section 80C(5) | Schedule XV, paragraph 4 | Early discontinuation may affect deductions claimed |
TDS on certain taxable payouts | Section 194DA | Applicable TDS rate is 2%, subject to the relevant provisions |
Premium deductions are generally relevant under the old tax regime. Under the new regime, section 202 does not allow most deductions of this kind.
For many salaried people using the new regime, the tax-saving argument may offer little benefit. You should check the rules applicable to your policy and treat tax benefits as an additional advantage, not the main reason to buy insurance.
Already hold an endowment or money-back policy? Continue, make it paid-up or surrender
If you have held a policy for several years, don’t surrender it without comparing your options.
- Put enough term cover in place. Protect your family before discontinuing your existing policy.
- Get the numbers from your insurance company. Ask for the current surrender and paid-up values. Since 1 October 2024, IRDAI’s revised rules have changed surrender value rules for eligible policies. Our guide to the new life insurance rules explains the different values.
- Calculate the return from today. Compare the surrender value and future premiums with the expected maturity benefit using XIRR.
- Compare three options. Continue paying, make the policy paid-up or surrender it and invest the money elsewhere.
- Check the tax effect. Early discontinuation may affect deductions claimed earlier.
- Consider a policy loan if you need short-term cash and your policy offers suitable terms.
Consider Meera, 43, from Lucknow. She has paid ₹50,000 annually for eight years. Her insurance company quotes a surrender value of ₹3.2 lakh, and her policy illustration shows ₹16 lakh at maturity in another 12 years.
Based on these illustrative figures, continuing the policy would earn approximately 6.5% annually on the money invested from today onwards. If Meera has enough term cover, continuing may be reasonable. Your figures may point towards a different decision, so calculate the return before acting.
Anuj says, “When someone has paid premiums for eight or ten years, they may want to quit out of frustration or continue because they have already invested so much. Neither is a plan. The money you have paid is already spent. What matters now is whether the premiums you still have to pay are worth the benefits you are likely to receive.”
Holding an old LIC or bank-sold policy and unsure what to do with it? A policy review with our team can help you decide calmly.
How to choose the right type of Life Insurance policy for you?
- List your dependants and liabilities. Include your spouse, children, parents, loans and major future expenses.
- Calculate your cover requirement. Ten to 15 times your annual income is a common starting point, but adjust it for your loans, assets and family goals.
- Buy term cover first, for as long as your family may depend on your income.
- Add only the riders you need, such as critical illness, accidental death or waiver of premium. Check their costs and exclusions.
- Invest separately for your goals through PPF, EPF, NPS or mutual funds.
- Review your cover after major life changes, such as marriage, having a child, taking a new loan or moving back to India.
Will your family actually get the claim?
Life insurance companies settled 98.32% of individual death claims by number in 2024-25, according to IRDAI’s Handbook on Indian Insurance Statistics, as reported by Insurance Business.
This does not guarantee every claim will be paid. Disclose your health conditions, smoking habits and other requested information honestly. Check the insurance company’s claim record and make sure your family knows the policy exists.
Anuj says, “The best thing you can do for your family’s claim starts when you apply. Disclose everything, even if it raises your premium. Then tell your family that the policy exists, where the documents are kept and who the nominee is. A claim cannot be made if your family doesn’t know about the policy.”
Common mistakes people make with Life Insurance
- Buying a policy in March mainly to save tax.
- Insuring a child instead of adequately covering the earning parent.
- Choosing cover based on the premium rather than the family’s needs.
- Relying only on employer-provided group cover.
- Hiding a health condition or smoking habit on the proposal form.
- Assuming TROP or an endowment policy will automatically provide sufficient protection and good returns.
- Not telling the family about the policy.
Want a second opinion on how much cover your family actually needs? Talk to our term life insurance team.
Also read: How to Protect Your Wealth: Essential Risk Management Strategies
How can Zenith Finserve help you?
At Zenith Finserve, we explain your options before making recommendations. We can:
- Review your existing policies and calculate their actual returns.
- Calculate your family’s cover needs and include them in your goal-based financial plan.
- Help you separate protection from investing through term life cover and investments matched to your goals.
- Help you plan whether you live in India or abroad, without pressuring you to buy a particular product.
Conclusion
Understand whether your policy provides pure protection, guaranteed savings or market-linked investments. Ensure your family has adequate term cover first, then judge savings-linked policies by their actual annual return rather than the maturity amount alone.
Start by finding your policy documents and calculating the XIRR. The result will help you decide whether to continue, make the policy paid-up or surrender it based on the numbers rather than assumptions.
FAQs
Is life insurance an investment or an expense?
Term insurance is an expense, like the insurance on your car or home: you pay for protection, not returns.
Endowment, money-back, whole life and ULIP policies include an investment part, but their returns are usually modest because part of every premium pays for cover and costs.
Which is better, life insurance or a SIP?
They do different jobs, so you usually need both. A term plan protects your family if you die early; a SIP builds wealth over time.
A SIP started this year can’t pay your family ₹1 crore next year. A term plan can. Buy enough term cover first, then invest through SIPs.
What happens after 10 years of paying life insurance premiums?
It depends on the type. A term plan simply continues until its end date, with no cash value.
An endowment or whole life policy will have built up a surrender value and possibly bonuses, which you can check with your insurance company.
A ULIP will have a fund value that moves with the market.
Will my family really get the claim amount?
In most cases, yes. Life insurance companies settled 98.32% of individual death claims by number in 2024-25. You can improve your own family’s odds.
Be fully honest on the proposal form about your health, smoking and other policies, and make sure your family knows about the policy and the nominee.
Can I keep my LIC policy and also buy a term plan?
Yes. You can hold any number of life insurance policies, and you must declare existing ones when you apply for a new one. Many people keep an old savings policy and add a term plan for the cover their family actually needs.
Which type of life insurance policy builds cash value you can borrow against?
Endowment, money-back and whole life policies usually build a surrender value, and many let you take a loan against it.
Term plans have no cash value. ULIPs build a fund value, and you can make partial withdrawals after the five-year lock-in.
