Types of Life Insurance Policies
What a life insurance contract promises, how the main types of policy differ, three rules that apply across policies — the free-look period, section 45 and the suicide clause — and how Human Life Value estimates the cover a person needs.
The contract
Life insurance is a contract in which the insurer, in return for premiums, promises to pay a stated amount if the insured person dies during the cover or, in savings-type plans, when the policy matures. In India it is regulated by the Insurance Regulatory and Development Authority of India (IRDAI) under the Insurance Act, 1938. Third-party liability, by contrast, is a general-insurance concept, best known from motor insurance.
The main types
Term insurance is pure risk cover: it pays on death during the term and normally has no maturity benefit. Because it has no savings component, the same premium generally buys a much larger cover than under a savings-type plan. Whole life insurance continues the cover for the insured's lifetime instead of a fixed term.
An endowment plan combines cover with savings and pays a lump sum at maturity or on earlier death. A money-back plan pays set percentages of the sum assured as survival benefits at stated intervals during the term, with the balance and any bonuses at maturity; the percentages and intervals differ by product. A unit-linked plan (ULIP) combines cover with market-linked investment. Pension and annuity plans provide retirement income, and child plans build savings for a child's future needs.
Three rules that run across policies
Free-look: the policyholder has 30 days from receipt of the policy document to return it and get the premium back, less the deductions the rules allow. For a ULIP the refund is based on the value of the units on the date of cancellation, so market movement can change the amount. The period used to be 15 days; products on the old terms could be sold only until 30 September 2024.
Section 45 of the Insurance Act, as amended with effect from 26 December 2014, bars an insurer from calling a life policy in question on any ground after three years from the latest of the policy's issue, the start of risk, its revival or the date of a rider. Within three years it may do so only for fraud or material misstatement, giving its grounds in writing.
The suicide clause is an IRDAI product condition, not part of section 45. If the life assured dies by suicide within 12 months of the start of risk or of a revival, a non-linked policy pays at least 80% of the premiums paid or the surrender value, whichever is higher, and a ULIP pays the fund value with certain charges added back. After 12 months the clause no longer applies.
How much cover: Human Life Value
Human Life Value (HLV) is the present value of the income a person is expected to earn over the remaining working years, usually after deducting what they would spend on themselves. It is one common way of estimating the cover needed; needs-based analysis is another. The answer depends on the income and discount-rate assumptions used.
Rules at a glance
Counting the free-look days
Illustration: Meera, 34, a teacher in Pune, receives her policy document on 3 March. Thirty days from that date end on 2 April, so she can return the policy up to then. Her refund would be the premium less the proportionate risk premium for the days she was covered, the cost of her medical examination and stamp duty.
A Human Life Value estimate
- Assumptions, for arithmetic only: annual income ₹10,00,000; spent on self ₹3,00,000; 20 working years left; income taken as level; discount rate 6% a year, an assumed rate.
- Income available to the family each year = ₹10,00,000 − ₹3,00,000 = ₹7,00,000.
- Present-value factor for 20 yearly amounts at 6%: 1.06 multiplied by itself 20 times is 3.2071, and 1 ÷ 3.2071 = 0.3118. Factor = (1 − 0.3118) ÷ 0.06 = 11.47 (rounded).
- HLV = ₹7,00,000 × 11.47 = ₹80,29,000 (rounded), about ₹80.3 lakh.
Result. On these assumptions the HLV is about ₹80.3 lakh, against an undiscounted total of 20 × ₹7,00,000 = ₹1.4 crore. A different discount rate or income path gives a different figure.
Key points
- Term insurance is pure risk cover and generally gives the largest cover for a given premium.
- Endowment pays at maturity or earlier death; money-back pays part of the sum assured at intervals during the term.
- The free-look period is 30 days from receipt of the policy document.
- After three years, section 45 bars any challenge to a life policy; the 12-month suicide clause is a separate IRDAI product condition.
Common misunderstandings
- A term plan normally pays nothing at maturity: the premium buys risk cover only.
- The suicide clause is not in section 45: it is a product condition under IRDAI's rules.
- The heading of section 45 still mentions two years, but the text of the section says three.
Questions people ask
How is a money-back plan different from an endowment plan?
A money-back plan pays part of the sum assured at stated intervals during the term and the balance at maturity. A standard endowment plan pays a lump sum at maturity or on earlier death.
Can an insurer question a policy four years after issue?
No. After three years from the latest of issue, start of risk, revival or a rider, section 45 bars a challenge on any ground.
Does everyone of the same age pay the same term premium?
No. It depends on the insurer and on the person's age, health, smoking status and the policy term.
What this lesson relies on
- Insurance Act, 1938 — section 45 (as amended with effect from 26 December 2014)
- IRDAI Master Circular on Life Insurance Products (12 June 2024) — free-look period and suicide clause
- IRDAI (Insurance Products) Regulations, 2024
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.