How to Choose the Correct Life Insurance Plan

Introduction

Life insurance is a crucial financial tool that ensures your family's financial security in case of an unforeseen event. However, selecting the right life insurance plan can be confusing due to the wide range of options available.

Should you opt for a term plan, a whole life policy, or an investment-linked insurance plan? The right choice depends on your financial goals, life stage, and budget. In this guide, we’ll break down different types of life insurance, compare their costs and benefits, discuss taxation aspects, and suggest the best insurance providers in India.

1. Types of Life Insurance Plans (With Examples)

A. Term Insurance – Best for Pure Protection

Term insurance provides high coverage at an affordable premium. It offers a payout only if the policyholder passes away during the policy tenure. If the insured survives, there is no maturity benefit.

✅ Best for: Young professionals, individuals looking for cost-effective high coverage.

✅ Key Benefit: Low premium, high sum assured, financial security for family.

Example:

Ravi, 30, buys a term insurance policy with a ₹1 crore sum assured for 30 years at a yearly premium of ₹10,000. If he passes away, his family gets ₹1 crore. If he survives, there is no payout.

B. Whole Life Insurance – Best for Lifetime Coverage & Wealth Creation

Whole life insurance provides lifelong coverage (up to 99 or 100 years) and a cash value component that grows over time.

✅ Best for: Individuals looking for lifetime coverage and wealth creation.

✅ Key Benefit: Lifetime protection + savings + potential dividends.

Example:

Seema, 35, buys a whole life policy with a ₹50 lakh sum assured and an annual premium of ₹50,000. The policy accumulates cash value, and at 65, she can withdraw funds for retirement. If she passes away, her nominee gets ₹50 lakh.

C. ULIP (Unit Linked Insurance Plan) – Best for Investment + Insurance

ULIPs combine life insurance with market-linked investments. Part of the premium is invested in equity or debt funds.

✅ Best for: Investors seeking insurance plus long-term wealth creation.

✅ Key Benefit: Market-linked returns, tax-free maturity, flexibility to switch funds.

Example:

Amit, 28, invests ₹1 lakh annually in a ULIP with a ₹10 lakh sum assured. His fund value depends on market performance. If he survives the term, he gets the accumulated fund value. If he passes away, his nominee gets ₹10 lakh.

D. Endowment Plan – Best for Guaranteed Maturity Benefit

Endowment policies offer life coverage along with guaranteed maturity benefits. If the policyholder survives, they receive a lump sum payout.

✅ Best for: Risk-averse individuals looking for insurance + savings.

✅ Key Benefit: Guaranteed payout at maturity, plus bonuses.

Example:

Sunita, 40, buys an endowment plan with a ₹20 lakh sum assured. She pays ₹80,000 per year for 20 years. At the end of the term, she gets ₹20 lakh plus bonuses. If she passes away, her nominee gets the payout.

E. Money-Back Policy – Best for Regular Payouts

Money-back policies provide periodic payouts instead of a lump sum at the end of the term.

✅ Best for: Individuals looking for liquidity at regular intervals.

✅ Key Benefit: Periodic payouts, maturity benefits, and death benefits.

Example:

Rajesh, 45, buys a money-back policy with a ₹15 lakh sum assured for 20 years. Every five years, he receives 20% of the sum assured. At the end, he gets the remaining balance plus bonuses. If he passes away, his nominee gets the full sum assured.

2. Expenses Involved in Life Insurance

Before purchasing a life insurance plan, it’s important to consider the various costs involved:

Premium Payments – Regular payments to keep the policy active.

Mortality Charges – Fees deducted for life cover (higher for older individuals).

Administrative Charges – Policy servicing, documentation, and management fees.

Fund Management Charges (For ULIPs) – Typically 1.35% per annum of the fund value.

Surrender Charges – Penalty if you exit the policy early.

GST on Premiums – 18% GST on most insurance policies (lower for term insurance).

3. Taxation of Life Insurance Policies

A. Tax Benefits on Premiums (Under Section 80C)

Premiums up to ₹1.5 lakh per year are deductible under Section 80C.

For ULIPs and other plans, the annual premium must not exceed 10% of the sum assured to qualify for deductions.

B. Tax-Free Maturity Benefits (Under Section 10(10D))

Maturity proceeds are tax-free if the sum assured is at least 10 times the annual premium.

If the premium exceeds this, the maturity amount becomes taxable.

C. Taxation on Surrender and Partial Withdrawals

ULIPs: Surrender before 5 years = Fully taxable payout.

Endowment/Money-Back Plans: Early surrender results in taxable payout.

D. TDS (Tax Deducted at Source) on Maturity Payouts

If the policy does not qualify under Section 10(10D), insurers deduct TDS at 5% on the maturity amount.

4. Best Life Insurance Companies in India (2025)

Insurance Provider        Claim Settlement Ratio (CSR) Best for

LIC of India                                     98.50% Traditional term & endowment plans

HDFC Life                                     99.30% ULIPs, term insurance

ICICI Prudential Life                     98.70% Investment-linked policies

SBI Life Insurance                             98.60% Whole life & money-back policies

Max Life Insurance                     99.51% High claim settlement, term plans

Bajaj Allianz Life                             99.02% Affordable term & savings plans

5. Conclusion – Which Life Insurance Plan Should You Choose?

Choosing the right life insurance depends on your needs:

If you only need protection, choose Term Insurance.

If you want lifelong coverage, opt for a Whole Life Policy.

If you seek investment + insurance, consider a ULIP.

If you prefer guaranteed savings, an Endowment Plan is ideal.

If you need regular payouts, a Money-Back Policy works best.

Before buying, compare policies, check claim settlement ratios, and consult a financial advisor if needed. A well-chosen life insurance plan secures your family’s future while helping you achieve long-term financial goals.