| Publication: The Economic Times Mumbai; | Date: Sep 15, 2010; | Section: Personal Finance; | Page: 16 |
THERE is a lot of hue and cry from life insurance companies that unit- linked insurance plans (Ulips) are set to lose their charm. I don’t think so, as Ulips will still continue to pay lucrative commissions for the first five years. However, competition seems to be forcing insurance companies to launch traditional life insurance products, as there is no cap on the cost of these products and it will allow life insurance companies to pay very high commissions. Yet again, the life insurance industry seems to be missing the point and the focus will be on products where there will be a higher commission payout.
So what are traditional plans? There are six types of traditional plans: endowment plan, money-back plan, whole-life plan, pension plan, children’s plan and term plan. Except for the term plan, the others are available in Ulips as well. Traditional plans are insurance policies where the policyholder has no control or choice over where the investments will be made, whereas in a Ulip a policyholder has around five to six choices based on different combinations of equity, debt and cash.
Typically, returns from traditional policies are given in the form of bonuses and are dependent on the returns generated by life insurance companies. However, traditional policies have to invest, according to Insurance Regulatory and Development Authority’s prescribed guidelines, and so a major portion of your investments will be in bonds. You can expect a return of 4-6% from money-back, endowment and whole-life policies, unless they are guaranteed for higher amounts. Many private life insurance companies have yet to make profits, so there is no question of a bonus payout unless there are guaranteed payouts in the scheme.
Traditional plans are expensive products and the worst part is that you do not even know how much you have paid as costs. How many people would buy an investment that would cost them at least 35% in the first year and a minimum of 5% from the second year onwards but will only give them returns of 4-6% only? How many of you will actually do it? Not many sane people would take such a step. Yet people continue to buy such traditional insurance policies.
The best form of traditional insurance is a term plan. Here is how it is better than most insurance plans available: Let’s calculate the cost of an insurance cover of 1 crore for a 30-year-old male. He can buy a traditional plan or a Ulip and pay a premium of 3,00,000 to 5,00,000 p.a. However, he just has to pay 20,000 to 35,000 p.a for an equivalent term cover. So, you are much better off buying a term plan and investing the rest in a risk-free offering such as PPF, FDs, stocks, and mutual funds, depending on your tolerance to risk.
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