By Nirjhar Majumdar
In unit-linked life insurance plans (Ulips), a high proportion of the premium is invested in debt and equity markets.Those who buy such a policy mostly prefer growth funds because 60-80% of the fund is invested in stock market, promising high return. In non-linked products, however, not more than 15% is invested in equities and the rest in various debt instruments.
There has to be life insurance cover in both linked and non-linked insurance products. However, it is important to understand how much that insurance cover is.
In Ulips, an individual gets a risk cover of 10 times the annualised premium. So, if you pay Rs 50,000 annually, you get a risk cover of Rs 5 lakh. In contrast, an individual (age around 30) who pays 50,000 towards a pure protection plan, can get a risk cover of at least2 crore. Even if one buys a traditional endowment plan (with profits), he can get an insurance cover of at least Rs 15 lakh. At the end of the term of 20-25 years, the maturity value of the policy will be no less than `40 lakh at the present rate of bonuses declared by leading insurers.
Thin slice of insurance
Now, it should be obvious to the insured public that Ulips offer very little insurance cover as compared to the premiums that they collect. The same amount of premium can buy far more insurance cover under non-linked products. Since the primary objective of life insurance is to offer as much financial protection as possible at the minimum possible premium, it makes sense to go for non-linked products first and consider buying Ulips when adequate insurance cover has already been purchased. If an individual has the capacity of paying Rs 50,000 annually as life insurance premium, she deserves much more than a paltry Rs 5 lakh insurance cover.
While there is no harm buying a Ulip and expecting a ‘high return’ from the product in near term, the fact is that life insurance is primarily designed to provide reasonable insurance cover to the people according to their Human Life Value. Buying only Ulips and giving other conventional products a miss is not a prudent financial decision.
Life insurance products help in financial planning at various life stages. When the income is low and liabilities are high, term insurance can be the best option. When income increases substantially in the later years, one should be in a position to start saving enough for the post-retirement days and endowment/whole life plans can provide various living benefits.
Deferred annuity plans can enable a person to get a series of passive incomes in post-retirement days. If an individual ignores these products and buys only Ulips, he is inviting further risks in a life already replete with increasing risks and uncertainties.
TAKING COVER
- In Ulips, risk cover is 10 times the annualised premium. But in a pure protection plan, it is at least 400 times
- Go for non-linked products first and think of buying Ulips when adequate risk cover has already been purchased
The writer is an insurance industry analyst