Let’s get real, you don’t have to be Shah Rukh Khan to be worth a crore or win ‘Kaun Banega Crorepati’ to be rich! You don’t have to be old and wrinkled to swim in money, and neither do you have to inherit a lump sum or await a mail from a benevolent Nigerian gifting you his wealth. And no, this is not a lecture on disciplining your financial habits. Being worth a crore is actually quite simple! All it requires is a not so large sum of money – monthly layouts – that will make sure that your family is not left in a lurch or that you have a handsome sum in your hand as you grow older. Choosing the right instrument to insure your present and future may not be a 2+2 = 4 math problem, but it is definitely not Trigonometry!
So, how do you go about it? Most of us hate the long paperwork and have seen our parents struggle with it in our growing years. But what use is technology if it can’t help cut the clutter a bit? Insurance plans are now just a click away and e-insuring yourself is a child’s play! The essential question however, is what plan is best suited for you?
What do life insurance companies have in their bouquet of offerings? The life insurance umbrella can be a very wide one. Whether it is pure insurance that you are looking at or varied investment options to help your money grow rapidly, there is something for everyone.
If you want an insurance plan that would cover untimely death, you can avail a ‘term plan’, also referred to as ‘Pure Protection’ plan. On the other hand, if you want insurance protection along with growth of your investments, there are endowment plans and unit-linked insurance plans (ULIPs) that are designed serve your different investment needs.
“A term plan gives you a higher insurance cover. Thus at the time of the policyholder’s death, the nominee will get a higher lump-sum amount as compared to ULIPs or traditional life insurance plans. For instance, if a 35 year old male buys a traditional life insurance cover for a 30-year time period, it would cost him an annual premium of Rs 50,000. In this case, he will get an insurance cover of roughly Rs 20 lakh. However, if he opts for a term plan of R s 1 crore for a similar time period, it can come at an annual premium of Rs 10,000 only,” Yashish Dahiya, co-founder and CEO, Policybazaar.com, explains.
Here’s quick guide on Term Plans, ULIPs and Endowment Plans that will help you make an instant decision:
Term Plans are available for a certain term agreed upon between the insured and the insurance company. These are pure insurance policies which provide the insured a high cover against a comparatively lower premium compared to other types of insurance plans. The purpose of a term plan is to secure the future of the family members in the event of untimely death of the insured during the term of the policy.
In case of death, the insurance company pays the sum assured (referred to as death benefit) to the nominee mentioned in the policy or the dependents. The amount of premium is treated as expenditure. A term insurance plan does not give any returns or money back. That is, if the insured outlives the policy period, no money will be paid back since the entire premium goes into covering the life risk.
“Term Insurance is the most affordable form of life insurance. It provides you high risk cover by paying out lesser premium. Term Plans can be taken for a period ranging from 5 to 40 years and are best suited for individuals who want overall safety rather than returns,” says Naval Goel, founder and CEO, PolicyX.com.
However, there are variants available in the market called Term Return of Premium (TROP), where the contract would stipulate that at the end of the policy term, the insured person will be given back the premium paid till maturity. The maximum age of buying a Term Plan would depend on the tenure of the plan.
A person who is 18 years and above is eligible for buying a Term Plan. The maximum age at the time of maturity varies between insurance companies, but is generally fixed at 75 years.
Premium payment on Term Plans is eligible for income tax benefits under Section 80C of the Income Tax Act.
Varied features that Term Plans offer
Term plan’s features vary not just between companies but within a company’s various offerings as well. You can choose what you feel is best suited for you.
*There could be protection plans that offer monthly income payout for your family in the event of your untimely death. This is besides a lump-sum payout based on the monthly income plan chosen. This safeguards your family against sudden stoppage of monthly income.
*You can also opt for increasing the monthly income payout for your family.
*If you are a women you can avail the lower premium payout.
*There are other plans that reward you with lower premium payout for maintaining a healthy lifestyle, such as being a non-smoker and someone who does not consume alcohol.
*There are product offerings that include accidental death benefits with a level cover or an increasing cover. Hence you can customize your choice.
How to avail a Term Plan:
Step 1: You have to choose the amount of cover you need.
Step 2: Compare the various plan features offered by different insurance companies and the premium against each plan
Step 3: Choose the insurance plan you find most suited to your needs and pocket. Premium will primarily depend on the sum-assured and your age. You might get a discount if you maintain a healthy lifestyle, such as being a non-smoker.
Step 4: Decide on the premium payment plan – it could be monthly, quarterly, half-yearly or yearly
Step 5: You may have to undergo a medical test depending on your age and the company policies.
Step 6: Purchase the policy online or get in touch with the insurance company, a broker or an aggregator to purchase the cover.
While buying a Term Plan, as with all insurance products, the customer should look at the claims settlement record of the insurance company. A high claim settlement ratio means that the nominee would face less difficulty in getting the sum assured, compared to those companies with low claims settlement ratio.
You should also carefully study the exclusions in the policy since your nominee might not be able to get the claim in case mishaps occur due to the clauses mentioned. This includes participating in dangerous sports. The policy cannot be invoked in case the insured person commits suicide.
UNIT-LINKED INSURANCE PLANS (ULIPs)
ULIPs have been one of the most talked about insurance products during recent years. These plans combine insurance along with investment. However, the investment component is linked to the capital market, which makes the product a high-risk, high-return play among insurance products.
ULIPs should be seen as long-term investment options that will help the investor ride out market cycles. Also they can be used to create a corpus for meeting life-goals such as children’s education and your own retirement, while at the same time retaining a life cover for the benefit of the family in case of untimely death. ULIPs also cater to emergency needs since you can partially encash investments midway to bolster your finances.
Under ULIPs, the premium paid is separated into two portions – one for risk cover and the other for investment. The portion of premium allocated towards investment is pooled in a fund after deducting the applicable charges against which units are allotted to the policyholder.
Insurance companies offer a wide range of ULIP products to suit the investment and protection needs of customers. However, these can be clubbed under three broad categories: equity funds, debt funds and balanced funds.
While equity funds have high exposure to equity, debt funds (income, fixed interest and bond funds) have a bias towards debt investment. Balanced funds are those which give more or less equal weight to equity and debt investment. Cash funds, which are often referred to as Money Market Funds, invest in cash, bank deposits and money market instruments.
By their very nature, equity funds are higher risk funds that have potential to generate higher returns. On the other hand, debt funds offer higher safety, but the returns are linked to prevalent coupon rates offered by fixed income instruments. Balanced funds are somewhere in between and try to mitigate risk while generating higher returns than debt funds. Cash funds too are low-risk, low-return funds.
While deciding on a ULIP plan it is advisable to consider your risk-taking ability and choose the appropriate plan. For this, you must do your homework or consult a financial planner to understand what best suits your needs.
ULIPs payout for death benefits can be the sum assured or the value of your investment. The payout can also be the higher of the two amounts. However, if the policyholder outlives the policy term, the company will pay out the fund value along with bonuses accrued, if any.
Versatility of ULIPs: Multiple options on offer
Unit-linked Plans are one of the most versatile investment options among insurance plans. You can choose between growth and balanced options or automatic asset allocation. There is also the option of one-shot single premium payment or payment over the entire policy term or for a limited period. You can also switch between these options. Here is a list of features on offer under ULIPs:
*Some plans do not impose charges such as premium allocation and policy administration fees
*Provide liquidity through partial withdrawal after a few initial years
*You can increase or decrease your sum-assured after a specified number of years
*One policy can offer several fund options to switch
*Policies can offer a guaranteed addition or loyalty additions subject to conditions
*Plans can be customised through buying accidental death benefits
*If the ULIP has been bought for your child’s future, who aims to be a scholar, the plan will not leave him or her stranded in case of your untimely death. The policy will pay the sum assured immediately and also waive future premiums even as the policy remains in force till the agreed date.
*Some ULIP policies offer the option of increasing your cover at regular periods after the policy has been in force for a specified period
Charges and fees levied by ULIP products
You should also be fully aware of the portion of the premium paid by you that is going towards investment. Different ULIPs set aside different amounts of money towards purchase of units. This amount should be commensurate with your risk-taking ability. This investment amount will be arrived at after deductions including charges and fees from your premium. Units are allotted only after these deductions. Insurance companies update the net asset value (NAV) of the fund on a daily basis showing the latest value of your investments.
Mortality Charge: This is the amount deducted for providing insurance under the plan.
Premium Allocation Charge: This is deduced for expenses for issuing policy, such as distributor fees.
Fund Management Charge: This is levied for management of the fund.
Policy/Administration Charge: This is a fee for administering the policy.
Surrender Charges: This is deducted in the event of early encashment of units.
Switching Charge: A ‘switch’ refers to the facility to change your fund between those offered by the company depending on your preference at that point. Generally, switching charges are levied after the first few switches, which are permitted free of cost.
Things to check before buying ULIPs
ULIPs are among the most complex insurance products. Hence, it is likely that you might be left unaware of the benefits and other details. Here is a checklist of what you should be aware of before signing the dotted line:
*Charges and fees
*Exclusions mentioned in the policy details
*Benefits and penalties on premature surrender
*Consequences of policy lapsing
Endowment plans are policies that combine an investment element along with death benefits as provided under Term Plans. However, unlike Term Plans, under Endowment Plans, the insured individual is paid a lump-sum at the time of maturity.
“Unlike Term Plan, endowment plan pays out the sum assured along with the profits in both the cases – death and survival. This Plan charges higher premium which is invested in the asset market – Equity and Debt. These kinds of policies are typical and generate returns in the range of 4-7 per cent. They are suitable for people who do not want to take much risk and look for secured investments in government securities and debt instruments,” says Goel.
Key features of endowment plans are:
*Insurance cover provided during the term of the policy
*Provides investment component and creates long-term wealth
*Lump-sum is paid to insured at the maturity of policy
*Insured can avail of tax benefits under Section 80C of Income Tax Act
*Insured can avail of riders and add-on plans such as critical illness plans to enhance cover or features
*An endowment plan is ideally suited for a person who wants insurance along with an investment component but is risk-averse. Since most endowment plans invest in debt instruments, they are much less risky than ULIPs because there is limited market risk involved. However, endowment plans must be viewed principally as insurance products and less as an investment. It is, in fact, an insurance cover with an investment element attached to it and not vice-versa.
ENDOWMENT Vs ULIP
So, when you go shopping for an insurance product that also provides an investment element, which one should you choose – a traditional endowment plan or a ULIP? As we mentioned earlier, the choice would primarily depend on your risk-taking ability. Thus, if you want assured growth with low risk, you should go for an endowment plan. However, if you are looking at long-term wealth creation, ULIPs with a higher equity component would be a better bet.
Yashish Dahiya of Policybazaar.com explains the difference between ULIPs, endowment plans and term insurance with a simple example:
In case of term insurance for 15 years, a 30-year-old can get a life cover of as high as Rs 2.5 crore with a premium of Rs 25,000.
In case of a traditional endowment plan, the policy on maturity will give him a guaranteed return of around Rs 5.5 lakh.
Now, if he decides to buy the company’s equity-linked plan (we have avoided naming any company-specific product) then as per the insurance regulator’s mandate, the future returns would grow at 8 per cent. This would give a return of over Rs 6 lakh over 15 years.
However, Dahiya says, equity markets have given higher returns of about 12-14 per cent over the last five years. So, let us suppose your investment grows at the lower end of 12 per cent, then the fund value after 15 years would be close to Rs 10 lakh.
In terms of returns, ULIPs then stand out to be a better bet compared to the endowment policy.