Saturday, January 24, 2009

TYPES OF INSURANCE POLICIES AS INVESTMENT TOOL


Okay , now let me tell you that I am here not going to tell you the textbook definition of what insurance is and what the dirrents types of classification of the same based on textbook stuff. You will get that in any random book on the subject. They will tell you tthe various types of insurance policies but they dont tell you which one actually neans what and should you invest it in them , and if yes then what should be your time horizon for the same? They mostly give you textbook knowledge which at the end of the day may not necessarily help you make a better informed decision .


Hence I am going to help you understand the broad types of the insurance polices based on their constitution and the purpose they servce.


There are broadly only 2 types of life insurance polices ( there are non life insurance policies as well.. more on that later). They are


1. Pure Term Insurance Plan


2. Endowment Plan




Now where does this leave the more popular ones like Money Back , ULIPs etc. Let me explain to you this. Lets first understand what exactly is a Pure Term Insuarnce Plan.




1. TERM PLAN AS INVESTMENT TOOL


A term plan is an investment option basically serving the need to offer financial protection to the policyholder against any unforseen circumstances/eventuality that may arise in future for the defined period of time ( called tenure) and for the defined limit of liability ( called sum assured) i.e. if something unfortunate were to happen to the policyholder during the tenor of the policy then the dependents fo the policyholder get the sum assured to take care of ll their financial needs. So it essentially serves to ring fence them from vagaries of life, financially. But if nothing were to happen to the policyholder then he wont get anything. Then why would anyone buy this plan if it does not pay anything on survival. the anser is that because it serves you protection only and no return or maturity benefit the premium ( money paid against this service) is ridiculously low as conpared to the normal endowment plans.




In India most of the life insurance companies have such plan, but they dont advertise this much coz since the premium is lesser here they dont make too much money by offering this service.




However I suggest you can try LIC's term plan, Even the Kotak Life Insurance term plan is quite competitive.




2. ENDOWMENT PLANS AS INVESTMENT TOOL




Endowment plans are those plans which will both life cover and also survival benefit or maturity benefits. Then isnt this better option , you might argue. The answer to that is an emphatic NO.Will explain it to you why. The reason is very simple, on first look it may sound tempting to invest in endowment because you will get both cover which will help you in case of any untoward incident happening to the policyholder and also the survival benefit if nothing happens. But you must understand that nothing comes free. What endowment plans dont tell you is that they neither give you enough life cover for the same money paid for term policy nor do they give decent returns. On top of that they charge huge charges unlike term plan where the charges are minimal. For instance any random endowment plan in the market will take away anywhere between 50%- 80% of your firdst year premium as charges. This continues for few more years though every year the charges keep coming down . Nonethe less they are still robbing you. So if you pay Rs 100 as premium they eat away 50 to Rs 80 as charges.. isnt it a daylight robbery. And they do this coz they ahve to pay huge commission to the agent who sells you this policy. So beware of those sweet talking agents. They cant see beyond their immediate commission paycheck.




Now these endowment policies are packaged and sold in various forms with minor changes here and there. They all have one underlying principle and that is they take huge premium offer relativley lesser life cover and also offer some survival benefit which may be paiad at maturity or at regular inetrvals like Money back from LIC etc.




ULIPS too are a form of endowment plan only. The only difference is that unlike traditional endowment plans they invest in equity markets /debt markets etc. Traditional plans mostly invest G Secs and Corporate bonds. So chances of you making money are higher in ULIps.






Lets do a comparative study between Term Plan and ENDOWMENT Plan




TERM PLAN
High Life cover at low premium.
No surival benefits.(some plans have that as well but then they charge extra premimum so avoidable.)
LOW premium
LOW upfront charges
Recommended for everyone
Offer Sec 80C benefit





ENDOWMENT PLAN
Low life cover at relatively high premium.
Survival benefits are there
HIGH premium
HIGH upfront charges
Not recommended. Rather go for term plan and FD/Mutual fund.
Offer Sec 80C benefit








Lets also do a comparative analysis between ULIP and traditional Endowment plan




TRADITIONAL ENDOWMENT PLAN


- Invests in G Secs and Bonds.


- Risk free intrument.


- Low returns.


- Survival benefits are fixed.






ULIPS


_ Invest in equity market.


- Relatively risky intrument since its exposed to the equity markets.


- Higher returns.


- Survival benefit is not fixed and is based on the market value of the investments.






So, in the end what should YOU buy?? If I were in you rposition I will definately buy myself a pure term insurance because its a very very useful product which will help me save myself andf my dependents from any financial uncertainlty that may arise in future at relatively lower rates.




And as far as returns are concerned I would invest in Mutual funds , sicne it does offerhigher returns over a long period.




So . TERM PLAN - A MUST for everyone.


Stay away from ENDOWMENT.

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