Indians have been using Life insurance as a means of savings since the last 62 years, ever since LIC was established as a sole provider of life insurance in 1956. The Life Insurance market was opened to private players in 1999 and several private participants including HDFC Standard Life and ICICI Prudential Life Insurance entered the fray along with LIC. The returns provided by traditional Life Insurance products like Endowment policies and Money Back policies are relatively low but guaranteed. This guarantee and simplicity of such products attracted and still attracts a lot of Investors towards Insurance policies. But the fact remains that Life Insurance is not a tool of savings or investments, it is a means of protection of Income in case the primary bread earner was to expire before the dependents were capable of taking up employment. Even a Fixed deposit pays as much returns as an endowment or money back policy without the long commitment to payment of premiums and the loss of principal if the premium were stopped before maturity. Having stated the above facts let us see what are the common options available in life insurance today, and what are their advantages and disadvantages.
- Term Insurance: This is the only true life insurance in the real sense. In term Insurance we pay a fixed premium every month/ year for a particular number of years, generally till retirement. There is nothing that we get back if we survive the term of the insurance, but if we die before the term of the policy ends, our dependents are given a large amount of money, which is the sum assured, the insurance cover that we have chosen. The insurance cover we choose should be in line with our annual income, generally 20 times of annual income and this cover can be increased every 5 years or so as our income increases. To give an example of how low the premium can be, the premium for a 30 year old non- smoker male, for a term of 30 years can be as low as Rs. 10,000/- to Rs 15,000/- per annum, depending on the Insurance provider you choose, for a cover of Rs. 1 crore.
- Endowment Policy: This is an insurance policy which combines savings with insurance, which is not at all a good idea. It is much better to opt for a term insurance for protection of income and invest the rest of the money in mutual funds or shares or fixed deposits for that matter. The endowment policy typically gives a return of 6% to 7% per annum depending on the Insurer. A large part of the premium is allocated to insurance premium and the savings component is highly reduced. Reasons such as bonus etc. are used to glorify the low returns and present an image of profitability to the client. Another negative aspect is that, if the premium are stopped mid-way, you may not even get your principal back. There will be some deductions from the amount already paid, in such cases. The positive aspect being that the returns of 6% to 7% are guaranteed, if you complete the term of the policy. But then such returns can also be obtained by investing in bank deposits or PPF. The premium is very high. Just to compare with term insurance, a 1 crore cover for endowment for a 30 year old nonsmoker healthy male could be as high as Rs. 250,000/- per annum or more for a term of 30 years.
- Money Back Policy: A money back policy is similar to an endowment policy but it pays back a fixed amount every 4 to 5 years. Thus the returns of the money back policy are slightly lower than the endowment policy for the same tenure, age, health condition and sum assured, as compared to an endowment policy.
- Whole Life Policy: A whole life policy is also similar to an endowment policy with the difference that after payment of bonus and accumulations at the end of the term of the policy, the sum assured is paid as an endowment to the nominee at the time of death of the policy holder. The objective is to leave a certain amount for the nominee even if he is not dependent on the policyholder for income at the time of his death.
- Unit Linked Insurance Plans (ULIP): A ULIP is an insurance policy which allocates a certain amount of the premium paid to insurance and invests the rest in equity and debt instruments as per a preset allocation offered to the insured by the insurer. The ratio of equity and debt allocation can be changed by the insured at regular intervals, with a maximum number of changes allowed every year or for a specific period. The service charges of ULIPs are least among all the types of insurance stated herein. It is the closest insurance product which can be compared with mutual funds.
All Insurance products carry high service charges, most of which are paid to the agent, especially during the initial term of the policy. These charges can be several times the expense ratio charged by mutual funds.
Mungekar Wealth 