When looking for an investment-cum-insurance plan, how do I choose between a traditional and unit-linked plan (Ulip)?
While choosing to buy a traditional insurance plan or Ulip, it is important to analyse financial needs, goals and objectives before deciding on the type of plan. For example, if a customer is planning for his child’s education, then he could look for a plan with guaranteed returns. Hence, he may buy a traditional plan with guaranteed returns for the benefit of the child. On the other hand, if the person is single and has few liabilities or has an objective of wealth creation, then he may aspire for higher returns. He can choose to invest in market-linked products, offering equity funds. Both, traditional plans and Ulips have their own merits.
Traditional plans are important to ensure basic protection for one’s family in case of an unfortunate demise. Ulips, on the other hand, can help save and create wealth over a period of time, while also offering insurance cover. In summary, one has to match the specific needs of the customer with what features or benefits are offered by various life insurance plans before choosing the right product(s).
SOME KEY POINTS ONE MAY KEEP IN MIND WHILE MAKING THE CHOICE: |
Traditional plans: |
* Is an ideal choice for individuals with a low risk appetite |
* Some plans participate in the profits of the insurers and provide bonuses |
* If a plan is non-participating, then it provides for guaranteed benefits |
Ulips: |
* Is an ideal choice for individuals with a medium to high risk appetite |
* Are market-linked products and their returns depend on the performance of the markets |
* Only few market-linked products provide for guaranteed returns/benefits. |
What changes have been brought about in pension plans? Will the existing plans also undergo changes?
The insurance regulator, Irda, has asked all insurers to declare a non-negative guarantee on pension products, replacing the 4.5 per cent guaranteed return clause. Irda has made it mandatory for customers to buy annuities from the same insurer from whom a deferred annuity was taken. All pension products will have an explicitly defined assured benefit applicable on death, surrender and on vesting, which is disclosed at the time of sale. The maturity benefit illustration shown to the customer should be done at four and eight per cent, respectively. Over and above this, the customer should be made aware of the annuity benefits available at maturity. All the existing plans which do not meet these new guidelines have to be withdrawn with effect from January 1, 2012.
Why do experts say one should prefer term insurance plans under life insurance policies over Ulips?
Like I mentioned in the earlier response, this choice will depend on the specific need/priority of the customer.
Term insurance plan is a pure risk cover plan which does not have any saving/ growth component. It is the cheapest form of insurance and does not provide any maturity benefits. Ulip is an investment-cum-insurance plan. That is, it has a combination of protection and investment.
If you are looking to cover the risk of an early demise, then term plans are best. These are the cheapest option to cover the risk of an early demise. Ulips are ideal vehicles that combine insurance protection and also help plan for future financial needs that need to factor in inflation. If one intends to invest long term (15 years and above), Ulips have potential to provide better returns.
The writer is the MD & CEO of Future Generali Life Insurance. The views expressed are his own. Send your queries to yourmoney@bsmail.in