Insurance at a Glance

A little bit about the Insurance:

I guess you all know what an Insurance is! If you have taken insurance for your car by paying premiums and unfortunately your vehicle meets with an accident, then you will get a reimbursement for the car repair costs. As simple as that!

The same applies to your Life too. Life insurance provides your family with a financial safety net if anything happens to your Life.

Different types of life insurance policies.

Term Life Insurance:

The policyholder will get insured for his/her life for a fixed term, which usually lies in between 20 to 40 policy years. If the policyholder dies during that term, his/her family will get the corpus amount. If the policyholder survives the policy term, he/she won’t get anything.

e.g. LIC Tech Term, LIC Jeevan Amar, variety of plans by private insurers

Whole-Life Insurance:

The policyholder has to pay regular premiums until his/her death, upon which corpus paid to the family. There is a saving component also involved here, which will pay mostly when he/she attain the age of 80+ years. After paying out the saving component even, life cover remains the same.

e.g. LIC Jeevan Umang Plan

Endowment Policy:

It’s a combination of protection and savings. These policies are usually for shorter periods (usually 20 years), where if policyholder dies during that period, his/her family will get the insured amount and if policyholder survives the period, he/she will still get some maturity amount.

e.g. LIC New Jeevan Anand, LIC New Endowment Plan

Moneyback policy:

It’s also a combination of protection and savings along with extra liquidity. The critical feature is policyholders will get paid out an assured amount at regular intervals—the remaining amount, along with bonus paid at maturity. If the policyholder dies during the policy term, his/her family will get the maturity amount.

e.g. LIC New Moneyback Plan

Unit Linked Insurance Plans (ULIP):

The investment component adds protection under ULIPs. There is a fixed amount payable as a death benefit during the ULIP tenure, similar to other life insurance types. Along with that, the policyholder can allocate the part of his/her premium to stock/debt markets. As the name suggests, maturity benefit at the end of tenure is market-linked. ULIP do have NAV similar to Mutual funds. But the latter only concentrates on the investment part, while the former is a combination of investment and insurance.

Why I am asking to keep Insurance separate from Investment?

In India, people are fond of traditional insurance products (Traditional refers to all life insurance policy types except term life insurance). The maturity clause associated with it, meaning if the policyholder survives the policy period, they will still get some amount. Insurance agents also recommend taking the traditional plans as they will earn higher commissions (as much as 35%!) for selling those.

But there is a catch! Traditional plans do not offer an adequate death benefit. For a 30-year old with a conventional policy period of 30 years with an annual premium of roughly 6000, you will have an assured death benefit of 2 lakh rupees. That’s not enough; you must have a life insurance cover of 10X of your annual income.

In the case of term life insurance, for the same annual premium, a 30-year old can have a death benefit of Rs.50 lakhs. You must have noticed the difference. It’s huge. Only the flip side is you won’t get any amount if you survive the policy term, which is 30 years here. But I would say, that’s okay. The annual premium of Rs.6000 translates into 500 rupees monthly premiums. Just think of the cash you spend on a movie ticket with popcorn once in a month. Also, think about the annual premium you have to pay if you won’t go for a traditional policy with Rs.50 lakh as a death benefit. I will do maths for you; it’s roughly 3 lakh rupees per annum premium for you.

Moreover, traditional plans are too complex to understand. There is no apparent breakup of your premium amount like what goes for savings/investments and what goes for actual protection cover. In the case of ULIPs, agents make you believe that it’s an investment product with a complimentary life insurance cover. But it’s not. Nothing comes for free! A significant part of your premium goes for insurance in the case of ULIPs too. Also, if you calculate correctly, these traditional plans do not generate returns more than 6%, while the Government’s PPF scheme generates more than 7% returns.

The purpose of insurance is to give financial protection against any losses or unforeseen events, while the purpose of Investment is to generate profit to achieve future goals. You can see the notable difference between the two terms. So keep them separate. Take a low-cost term life insurance policy in case any unfortunate event occurs to you while having equities, mutual funds, debt investments to achieve your financial goals.

Disclaimer: This information is only for educational purposes. Please consult your own financial advisor before investing.

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