As a smart investor one needs to understand the pros and cons of traditional insurance plans before one decides to invest in one. Traditional policies mostly invest in bonds and are low-risk investment products. Customers get a guarantee, which might be partial or complete, on the cash flows they will receive over the policy term. Traditional insurance policies are of two types — participating and non-participating.
Participating policies are partially guaranteed policies that have some uncertainties. They offer guaranteed maturity proceeds along with declared bonuses. Endowment and money-back plans are examples of traditional life insurance policies.
In a non-participating plan, the benefits are clearly guaranteed at the outset. For bonus, one should opt for a participating policy. Those who prioritize certainty should opt for a non-participating policy. In a participating policy, policyholders are given a share of profits of the insurer. Profits are shared in the form of bonuses or dividends. Bonuses and dividends are paid out annually. The bonus given is not guaranteed.
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In a non-participating policy, profits are not shared and no dividends are paid to the policyholders. There are no payments on non-participating policies because the profits are not shared. Also, the premiums are a little lower than the participating policies.
These traditional insurance products are suited to those who have a very low-risk appetite. The return from a traditional insurance product ranges between 3-5 per cent. For people who are afraid of their investments being a subject of market gyrations, investing in traditional products is more suited. Also, traditional insurance doesn’t offer much liquidity. Hence, it is suitable for people with a tendency to spend a lot of money. The return from the traditional insurance policy is low. However, at the time of maturity, a policyholder gets fund value which is tax-free, plus bonuses.
Financially-inclined investors looking for triple benefits of insurance, the tax benefit and higher returns should opt for other products. A combination of term plan and the public provident fund can be invested in. PPF offers a rate of 7.6 per cent currently, which is tax-free. An investor with a little more risk appetite can invest in ELSS and term plan. ELSS schemes are market-linked and have given an average return of 18.15 per cent over the past five years.
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Non-traditional products like unit-linked insurance plans are there in the market which serve as both an investment and insurance. “ULIPs (Unit-Linked Insurance Products) are investment products where a part of the premium is directed into different types of funds (equity, debt, money market, hybrid etc.). ULIP products offer higher returns in the range of 12-15% for equity investments & are a safer bet with 8-9% returns for debt investments,” Says Santosh Agarwal- Associate director and cluster head, life insurance, Policybazaar.com. The cost of Ulips is as low as that of a combination of a direct mutual fund and a term plan. Ulips are a viable option, if you don’t mind the five-year lock-in all ULIPs are subject to. Now-a-days, ULIPs are available in the market with zero premium allocation charge, zero policy admin charge and the return of mortality rate is also returned at the end of the policy term which makes them highly competitive with mutual funds both in terms of returns and charges.
Some features of both the plans illustrated below
|Features||Traditional Plans||Non-Traditional Plans (ULIPs)|
|Flexibility||No information about funds invested in||Provides investment option based on your risk profile|
|Transparency||One cannot track portfolio as an investment premium is common with the fund.||ULIPS allow tracking portfolio. Individuals are informed about funds on regular basis.|
|Withdrawal||3 year lock-in period but there will be surrender charges||5 year lock-in period with no surrender charges|
|Switching||Investors do not have any information about the funds, therefore no switching ability||Investors have the flexibility to switch between funds|
|Maturity||Fixed maturity proceeds||Returns on maturity are usually higher as per the prevailing unit prices (12-15% after 15 years, as per past performance)|